UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~June~~September 30, 2009

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 333-123747

KRATON POLYMERS LLC

(Exact name of Register as specified in its Charter)

Delaware

26-3739386

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

15710 John F. Kennedy Blvd. Suite 300, Houston, TX 77032

(Address of principal executive offices, including zip code)

281-504-4700

(Registrant’s telephone number, including area code)

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 x¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act. (Check one):


Large accelerated filer: ¨		Accelerated filer: ¨		Non-accelerated filer: x		Smaller reporting company: ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x

KRATON POLYMERS LLC

FORM 10-Q FOR THE QUARTER ENDED

~~June~~September 30, 2009

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	45
	Condensed Consolidated Balance Sheets as of June 30, 2009 and December 31, 2008	4
	Condensed Consolidated Balance Sheets as of September 30, 2009 and December 31, 2008	5
	Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008	5
	Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2009 and 2008	6
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2009 and 2008	6
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008	7
	Notes to Condensed Consolidated Financial Statements	78
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	3034
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	4045
Item 4.	Controls and Procedures	4146
PART II. OTHER INFORMATION
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	4247
Item 1A.	Risk Factors	4247
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	4247
Item 3.	Defaults Upon Senior Securities	4247
Item 4.	Submission of Matters to a Vote of Security Holders	4247
Item 5.	Other Information	4247
Item 6.	Exhibits	4348
	Signatures	4449

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Quarterly Report on Form 10-Q includes “forward-looking statements,” ~~within~~that ~~the~~reflect ~~meaning~~our ofplans, ~~the~~beliefs, ~~Private~~expectations ~~Securities~~and ~~Litigation~~current views ~~Reform~~with ~~Act~~respect ~~of 1995~~to, among other things, future events and financial performance. We may also make forward-looking statements in our Annual Reports on Form 10-K, other Quarterly Reports on Form 10-Q, and current reports on Form 8-K, in press releases and other written materials, and in oral statements made by our officers, directors or employees to third parties. All statements, other than statements of historical fact, included or incorporated in this Form 10-Q are forward-looking statements, particularly statements about our plans, strategies and prospects under the headings “Condensed Consolidated Financial Statements” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements are often characterized by the use of words such as “believes,” “estimates,” “expects,” “projects,” “may,” “~~will,” “~~intends,” “plans” or “anticipates,” or by discussions of strategy, plans or intentions. Such forward-looking statements involve known and unknown risks, uncertainties, and other important factors that could cause our actual results, performance or achievements, or industry results, to differ materially from historical results or any future results, performance or achievements expressed, ~~suggested~~ or implied by such forward-looking statements. Such risks and uncertainties include, but are not limited to:

• ~~a downturn in overall economic~~ conditions ~~or changes~~ in ~~levels~~the ofglobal ~~consumer~~economy ~~spending~~and orcapital ~~preferences~~markets,

• our dependence on LyondellBasell ~~Industries~~, Shell Chemicals and other suppliers to perform their obligations to us,

•

failure of our suppliers to perform their obligations under long-term supply agreements, or our inability to replace or renew these agreements when they expire, could increase our cost for these materials and interrupt production,

•

limited availability or increases in prices of raw materials used in our business,

• our substantial level of indebtedness and the operating and financial restrictions imposed by our debt instruments and related indentures,

•

competitive pressures in the specialty chemicals industry,

•

our ability to continue technological innovation and successful commercial introduction of new products,

•

our ability to protect intellectual property and other proprietary information,

•

losses due to lawsuits arising out of intellectual property infringement and product liability claims,

•

losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical manufacturing,

•

compliance with extensive environmental, health and safety laws, including regulation of our employees’ exposure to butadiene, could require material expenditures or changes in our operations,

•

the risk of accidents that could disrupt our operations or expose us to significant losses or liabilities,

• governmental regulations and trade restrictions, ~~including any changes thereto or enhanced enforcement thereof in the future~~

•

exposure to interest rate and currency fluctuations,

•

acts of war or terrorism in the United States or worldwide, political or financial instability in the countries where our goods are manufactured and sold, and

• other risks and uncertainties described in this report and ~~Kraton’s~~ other reports and documents.

These statements are based on current plans, estimates, beliefs and projections, and therefore you should not place undue reliance on them. Forward-looking statements speak only as of the date they are made, and we undertake no obligation to update them publicly in light of new information or future events.

You should carefully consider the “Risk Factors” described in our most recent Annual Report on Form 10-K and subsequent public statements, or reports filed with or furnished to the Securities and Exchange Commission, before making any investment decision with respect to our securities. If any of these trends, risks or uncertainties actually occurs or continues, our business, financial condition or operating results could be materially adversely affected, the trading prices of our securities could decline and you could lose all or part of your investment. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by this cautionary statement.

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements.

KRATON POLYMERS LLC

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(In thousands)

	June 30,2009		December 31,2008
	September 30,2009		December 31,2008
ASSETS
Current Assets
Cash and cash equivalents	$	1722,~~710~~365	$	101,396
Receivables, net of allowances of $1,945 and $2,512		126,447		95,443
Receivables, net of allowances of $1,832 and $2,512		132,756		95,443
Inventories of products, net		~~231~~252,~~355~~646		324,193
Inventories of materials and supplies, net		119,~~369~~712		11,055
Deferred income taxes		14,778		14,778
Other current assets		1224,~~574~~269		6,769
Total current assets		~~414~~456,~~233~~526		553,634
Property, plant and equipment, less accumulated depreciation of $202,490 and $182,252		376,720		372,008
Property, plant and equipment, less accumulated depreciation of $201,371 and $182,252		381,988		372,008
Identifiable intangible assets, less accumulated amortization of $39,456 and $36,169		63,765		67,051
Identifiable intangible assets, less accumulated amortization of $41,099 and $36,169		61,181		67,051
Investment in unconsolidated joint venture		11,~~550~~997		12,371
Deferred financing costs		6,~~602~~145		8,184
Other long-term assets		22,~~114~~043		18,626
Total Assets	$	~~894~~939,~~984~~880	$	1,031,874
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities
Current portion of long-term debt	$	3,343	$	3,343
Accounts payable-trade		7683,~~930~~510		75,177
Other payables and accruals		4968,~~879~~059		69,349
Due to related party		915,~~355~~601		25,585
Insurance note payable		3,019		—
Total current liabilities		170,513		173,454
Total current liabilities		142,526		173,454
Long-term debt, net of current portion		482,222		571,728
Long-term debt, net of current portion		483,057		571,728
Deferred income taxes		20,112		34,985
Deferred income taxes		30,604		34,985
Long-term liabilities		63,134		63,117
Long-term liabilities		62,916		63,117
Total Liabilities		735,981		843,284
Total Liabilities		719,103		843,284
Commitments and contingencies (note 11)
Member’s equity
Common equity		~~165~~188,~~860~~202		182,767
Accumulated other comprehensive income		1015,~~021~~697		5,823
Total member’s equity		~~175~~203,~~881~~899		188,590
Total Liabilities and Member’s Equity	$	~~894~~939,~~984~~880	$	1,031,874

See Notes to Condensed Consolidated Financial Statements

KRATON POLYMERS LLC

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands)

Three Months EndedJune 30,

Six Months EndedJune 30,

Three months endedSeptember 30,

Nine months endedSeptember 30,

2009

2008

2009

2008

Operating Revenues

Sales

~~233~~270,~~741~~454

~~328~~363,~~362~~275

~~411~~682,~~607~~061

~~584~~947,~~650~~925

Other

1018,~~080~~064

1718,~~007~~892

1735,~~172~~235

2746,~~580~~472

Total operating revenues

~~243~~288,~~821~~518

~~345~~382,~~369~~167

~~428~~717,~~779~~296

~~612~~994,~~230~~397

Cost of Goods Sold

~~208~~218,~~060~~549

~~282~~287,~~823~~719

~~384~~602,~~085~~633

~~500~~788,~~899~~618

Gross Profit

3569,~~761~~969

6294,~~546~~448

44114,~~694~~663

~~111~~205,~~331~~779

Operating Expenses

Research and development

5,~~071~~075

75,~~403~~808

1015,~~040~~115

1521,~~321~~129

Selling, general and administrative

1820,~~052~~282

1928,~~909~~214

3656,~~303~~585

4573,~~364~~578

Depreciation and amortization

1216,~~542~~477

13,~~110~~118

2541,~~106~~582

2740,~~762~~880

Total operating expenses

3541,~~665~~834

4047,~~422~~140

71113,~~449~~282

88135,~~447~~587

Gain on Extinguishment of Debt

~~4,340~~—

—

23,831

—

Equity in Earnings of Unconsolidated Joint Venture

~~102~~129

~~159~~94

~~176~~305

~~220~~314

Interest Expense, net

78,~~825~~044

97,~~418~~875

1624,~~733~~778

1927,~~803~~678

Income (Loss) Before Income Taxes

(320,~~287~~220

)

1239,~~865~~527

~~(19,481~~739

)

342,~~301~~828

Income Tax Expense

891

2,649

1,163

2,495

Income Tax Expense (Benefit)

(1,645

)

4,910

(482

)

7,405

Net Income (Loss)

(4,178

)

10,216

(20,644

)

806

Net Income

21,865

34,617

1,221

35,423

See Notes to Condensed Consolidated Financial Statements

KRATON POLYMERS LLC

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

	Six Months EndedJune 30,
	Nine months endedSeptember 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)	$	(20,644	)	$	806
Net Income	$	1,221		$	35,423
Adjustments to reconcile net loss to net cash used in operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		2541,~~106~~582			2740,~~762~~880
Lower-of-cost-or-market inventory adjustment		669			—
Gain on extinguishment of debt		(23,831	)		—
Amortization of deferred financing costs		12,~~582~~038			1,~~156~~648
Loss on disposal of property, plant and equipment		~~431~~411			(8192	)
Change in fair value of interest rate swaps		(~~842~~1,263	)		—(420	)
Earnings in unconsolidated joint venture		~~257~~128			~~821~~727
Deferred income tax benefit		(~~907~~8,306	)		(12,~~269~~813	)
Non-cash compensation related to equity awards		1,~~237~~714			~~749~~778
Decrease (increase) in
Accounts receivable		(2932,~~542~~417	)		(3046,~~194~~394	)
Inventories of products, materials and supplies		9094,~~670~~010			(1233,~~483~~133	)
Other assets		(113,~~112~~808	)		~~(2,729~~310	)
Increase (decrease) in
Accounts payable-trade, other payables and accruals, andother long-term liabilities		(23,817	)		9,263
Accounts payable-trade, other payables and accruals, and other long-term liabilities		(8,708	)		7,385
Due to related party		(1412,~~550~~291	)		(71,~~737~~198	)
Net cash provided by (used in) operating activities		4,707			(13,863	)
Net cash provided by operating activities		41,149			3,385
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property, plant and equipment		(2636,~~657~~146	)		(915,~~686~~338	)
Proceeds from sale of property, plant and equipment		3,~~833~~853			17
Net cash used in investing activities		(2232,~~824~~293	)		(915,~~669~~321	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from debt		53124,000			~~154~~316,~~750~~250
Repayment of debt		(~~115~~187,~~341~~177	)		(~~166~~278,~~472~~808	)
Cash contribution from member		—			10,000
Proceeds from (repayment of) insurance note payable		3,019			(494	)
Net cash provided by (used in) financing activities		(63,177	)		47,442
Net cash used in financing activities		(59,322	)		(2,216	)
Effect of exchange rate differences on cash and cash equivalents		(24,710	)		456
Effect of exchange rate differences on cash and cash equivalents		(6,247	)		(1,177	)
Net increase (decrease) in cash and cash equivalents		(79,031	)		35,962
Net decrease in cash and cash equivalents		(83,686	)		(26,925	)
Cash and cash equivalents, beginning of period		101,396			48,277
Cash and cash equivalents, end of period	$	1722,~~710~~365		$	2184,~~352~~239
Supplemental Disclosures
Cash paid during the period for income taxes, net of refunds received	$	78,~~455~~379		$	58,~~451~~030
Cash paid during the period for interest	$	1627,~~489~~652		$	2037,~~453~~239

See Notes to Condensed Consolidated Financial Statements

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. General

Organization and Description of Business. Kraton Polymers LLC, ~~together~~or ~~with~~“Kraton,” and its direct and indirect subsidiaries, are, unless the context requires otherwise, collectively referred to herein as “we,” “our,” “ours,” “us,” “our company” and/or “~~Kraton~~the Company.” Kraton Polymers LLC isdirectly ~~the~~or ~~parent~~indirectly owns 100% of the equity interests in (1) Elastomers Holdings LLC (holding company of Kraton’s United States (U.S.) operations), (2) K.P. Global Holdings C.V. (holding company of the remainder of our global operations), and (3) Kraton Polymers Capital Corporation (a company with no obligations). Polymer Holdings LLC, or “Polymer Holdings,” owns 100% of the equity interests of Kraton, either directly or indirectly. TJ Chemical Holdings LLC, or “TJ Chemical,” owns 100% of the equity interests ofin ~~Polymers~~Polymer Holdings. TJ Chemical is owned by TPG ~~Partners~~ III, ~~L.P.~~Polymer Holdings LLC, TPG ~~Partners~~ IV, ~~L.P.~~Polymer ~~and~~Holdings ~~certain~~LLC, ~~entities~~Kraton ~~affiliated~~Management ~~with~~LLC ~~said~~and ~~parties,~~certain entities affiliated with ~~or managed by~~ J.P. Morgan Partners, LLC~~, and affiliates, and Kraton Management LLC~~.

We ~~produce~~believe we are the world’s leading producer, as measured by 2008 sales revenues and volumes, of styrenic block copolymers, (or SBCs), a family of ~~specialty chemical~~performance polymer products whose chemistry we pioneered over 40 years ago. SBCs are highly -engineered synthetic elastomers, which enhance the performance of numerous products by delivering a variety of performance -enhancing characteristics, including greater flexibility, resilience, strength, durability and processability, and are a fast growing subset of the elastomers industry. Our ~~specialty~~ polymers are typically ~~processed~~formulated or compounded with other products to achieve improved, customer specific performance characteristics in a variety of applications. The ~~versatility~~majority of our ~~portfolio~~ of polymers isare ~~due~~highly customized to specific applications and thus are a ~~wide~~critical ~~range~~component to the performance of ~~distinctive~~our ~~molecular~~customers’ ~~structures~~products, yet ~~which~~each ~~can~~polymer berepresents ~~precisely~~a ~~controlled~~small ~~and~~fraction ~~tailored~~of tothe ~~unique~~overall ~~design~~cost ~~and~~of ~~performance~~a ~~characteristics~~customer’s finished product. Each polymer requires a significant amount of testing and certification, which, when combined with our proprietary chemistry, encourages strong customer loyalty.

We ~~operate~~believe ~~six~~that ~~plants~~our ~~globally~~superior technical expertise, strong customer relationships, track ~~including~~record of innovation, second-to-none service offering, diversity of customers and geographies, and history of continuous improvements, together with the recognized quality standard associated with our ~~flagship~~KRATON® ~~Belpre~~brand name have enabled us to maintain our leading global position in SBCs. We serve a large number of customers across a diverse set of end-use markets in many regions of the world. As a result, ~~Ohio~~we ~~plant~~believe our sales are less sensitive to conditions in any one particular end-use market or region. We currently offer approximately 800 products to more than 700 customers in over 60 countries worldwide. We are the ~~United~~only ~~States~~SBC producer with manufacturing and service capabilities on four continents, enabling us to meet the global needs of our multinational customers. We manufacture products at six plants globally, including our flagship plant in Belpre, Ohio, the largest by production volume and most diversified SBC plant in the world, as well as plants in Germany, France, ~~The~~the Netherlands, and Brazil, and ~~Japan.~~a ~~The~~joint ~~plant~~venture ~~in Japan is~~ operated byplant anin ~~unconsolidated manufacturing joint venture~~Japan.

WeBasis ~~generally~~of ~~sell~~Presentation. ~~our~~The ~~products~~accompanying toCondensed ~~customers~~Consolidated ~~for~~Financial ~~use~~Statements inpresented ~~industrial~~herein ~~and~~are ~~consumer~~for ~~applications.~~our ~~Based~~company on and our ~~management~~consolidated ~~approach~~subsidiaries, ~~we believe~~each ~~that all material operations revolve around the manufacturing and sales~~ of ~~SBCs~~which ~~and~~is ~~we currently report our operations, both internally and externally, as~~ a ~~single~~wholly-owned ~~business segment~~subsidiary.

~~Basis~~These interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, and reflect all normal recurring adjustments that are, in the opinion of ~~Presentation~~management, necessary to fairly present our results of operations and financial position. ~~The~~Amounts ~~accompanying~~reported in the Condensed Consolidated ~~Financial~~ Statements ~~presented~~of ~~herein~~Operations are not necessarily indicative of amounts expected for ~~Kraton~~the ~~and~~respective ~~its~~annual ~~consolidated subsidiaries,~~periods ~~each~~due to the effect of seasonal changes and weather conditions which istypically aaffect ~~wholly~~our polymer product sales into our Paving and Roofing end-~~owned~~use ~~subsidiary~~market.

~~These~~8 interim financial statements should be read in conjunction with the consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, and reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present Kraton’s results of operations and financial position. Amounts reported in the Condensed Consolidated Statements of Operations are not necessarily indicative of amounts expected for the respective annual periods due to the effect of seasonal changes and weather conditions which typically affect our polymer product sales into our Paving and Roofing end-use market.

Use of Estimates. To conform with generally accepted accounting principles (GAAP) in the U.S., management makes estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements. Although these estimates are based on management’s best available knowledge at the time, actual results could differ.

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Use of Estimates. To conform with generally accepted accounting principles (GAAP) in the United States, management makes estimates and assumptions that affect the amounts reported in the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements. Although these estimates are based on management’s best available knowledge at the time, actual results could differ.

Income Tax in Interim Periods. Our business operations are global in nature, and we are subject to taxes in numerous jurisdictions. Tax laws and tax rates vary substantially in these jurisdictions and are subject to change given the political and economic climate in those countries. We file our tax returns in accordance with our interpretations of each jurisdiction’s tax laws. We record our tax provision or benefit on an interim basis using the estimated annual effective tax rate. This rate is applied to the current period ordinary income or loss to determine the income tax provision or benefit allocated to the interim period. Losses from jurisdictions for which no benefit can be realized and the income tax effects of unusual and infrequent items are excluded from the estimated annual effective tax rate. Valuation allowances are provided against the future tax benefits that arise from the losses in jurisdictions for which no benefit can be realized. In addition, the effects of the unusual and infrequent items are recognized in the impacted interim period as discrete items. The estimated annual effective tax rate may be significantly impacted by nondeductible expenses and our projected earnings mix by tax jurisdiction. Adjustments to the estimated annual effective income tax rate are recognized in the period when such estimates are revised. Additionally, we have established valuation allowances against a variety of deferred tax assets, including net operating loss carry-forwards, foreign tax credits, and other income tax credits. Valuation allowances take into consideration our ability to use these deferred tax assets and reduce the value of such items to the amount that is deemed more likely than not to be recoverable. Our ability to utilize these deferred tax assets is dependent on achieving our forecast of future taxable operating income over an extended period of time. We review our forecast in relation to actual results and expected trends on a quarterly basis. Failure to achieve our operating income targets may change our assessment regarding the recoverability of our net deferred tax assets and such change could result in a valuation allowance being recorded against some or all of our net deferred tax assets. An increase in a valuation allowance would result in additional income tax expense, lower member’s equity and could have a significant impact on our earnings in future periods. The release of valuation allowances in periods when these tax attributes become realizable would reduce our effective tax rate.

Correction of immaterial errors. We have corrected immaterial errors in the accompanying Condensed Consolidated Statements of Operations related to cost of goods sold for the three months ended March 31, 2009. The correction increased cost of goods sold by $2.1 ~~million.~~Recently ~~The~~Issued ~~correction~~Accounting isStandards ~~not material to our Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009.~~

2.Adopted ~~New~~ Accounting ~~Pronouncements.~~ Standards

~~The~~In ~~following~~May 2009, the FASB issued new guidance for subsequent events. The new guidance, which is part of Accounting Standards Codification, (“ASC”), 855, Subsequent Events (formerly SFAS No. 165, Subsequent Events) is intended to establish general standards of accounting ~~pronouncements~~for ~~were~~and ~~adopted~~disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. Specifically, this guidance sets forth the period after the balance sheet date during which management of a reporting entity should evaluate events or transactions that may occur for potential recognition or disclosure in the ~~six~~financial ~~months~~statements, the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and the disclosures that an entity should make about events or transactions that occurred after the balance sheet date. The new guidance is effective for fiscal years and interim periods ended after June 3015, 2009: and will be applied prospectively. Our adoption of the new guidance did not have a material effect on our condensed consolidated financial statements.

~~Statement~~In ~~of Financial Accounting Standards (SFAS) No.~~April ~~141R~~2008, ~~“Business Combinations.” In December 2007,~~ the ~~Financial Accounting Standards Board (~~FASB) issued ~~SFAS~~FASB ~~No. 141R~~Staff ~~which~~Position ~~replaces SFAS No. 141,~~ (“~~Business Combinations.~~FSP”) ~~SFAS~~ No. ~~141R requires the acquiring entity in a business combination to recognize all and only the assets acquired and~~142-3, ~~liabilities~~“Determination assumed in the transaction, establishes the acquisition date fair value as the measurement objective for all assets acquired and liabilities assumed, and requires the acquirer to disclose to investors and other users all of the ~~information~~ ~~they~~Useful ~~need~~Life ~~to evaluate and understand the nature and financial effect~~ of ~~the~~Intangible ~~business~~Assets” ~~combination.~~(“FSP ~~SFAS~~ No. ~~141R~~142-3”), ~~applies~~included ~~prospectively~~in ~~to business combinations for which~~ the ~~acquisition~~Codification ~~date~~as isASC ~~on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and cannot be early adopted~~350-30-50-4. ~~Currently~~This ~~this~~topic ~~statement has had no impact to our financial position, results of operations or cash flows. A significant impact may, however be~~amends ~~realized on any future acquisitions by us. The amount of such impact will depend on the nature and terms of such future acquisition, if any.~~

~~SFAS~~9 No. 161 “Disclosures about Derivative Instruments and Hedging Activities—an amendment of FASB Statement No. 133.” In March 2008, the FASB issued SFAS No. 161 which amends and expands the disclosure requirements for SFAS No. 133 with the intent to provide users of financial statements an enhanced understanding of how and why derivative instruments are used, how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations and how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is

~~effective~~KRATON ~~for~~POLYMERS ~~fiscal~~LLC ~~years and interim periods within those fiscal years, beginning on or after November 15, 2008. For Kraton, SFAS No. 161 was effective as of January 1, 2009.~~

~~FASB~~NOTES ~~Staff~~TO ~~Position~~CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(~~FSP~~Continued) No. FAS 142-3, “Determination of the Useful Life of Intangible Assets.” In April 2008, the FASB issued FSP No. FAS 142-3 which amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets.” FSP No. FAS 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. For Kraton, FSP No. FAS 142-3 is effective as of January 1, 2009. The adoption of FSP No. FAS 142-3 did not materially affect Kraton’s consolidated results of operations, financial position or cash flows.

~~SFAS~~(Unaudited) No. 165, “Subsequent Events.” In May 2009, the FASB issued SFAS No. 165, which, absent related provisions contained in existing authoritative guidance, establishes general standards for the accounting for and disclosure of events that occur subsequent to the balance sheet date but before the financial statements of an entity are issued or are available to be issued. The adoption of the provisions of SFAS No. 165 by us effective June 30, 2009 did not have any impact on our consolidated results of operations, financial position or cash flows.

~~The~~ the ~~following~~factors ~~new~~that ~~accounting~~should ~~pronouncements~~be ~~have~~considered ~~been~~in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset. This topic is effective for financial statements issued for fiscal years beginning after December 15, ~~but~~2008 ~~have~~and ~~not~~interim ~~yet~~periods ~~been~~within ~~adopted~~those asfiscal ofyears. ~~June~~On January 301, 2009:, we adopted this topic, which did not have any impact on our condensed consolidated financial statements.

~~FSP~~In ~~No.~~March 2008, ~~FAS~~the ~~132(R)-1~~FASB issued SFAS No. 161, “~~Employers’~~ Disclosures about ~~Postretirement~~Derivative ~~Benefit~~Instruments ~~Plan~~and Hedging ~~Assets.”~~Activities-an Inamendment ~~December~~of ~~2008, the~~ FASB ~~issued FSP~~Statement No. 133” ~~FAS 132~~(R“SFAS No. 161”)-1, ~~which~~included ~~provides~~in ~~guidance~~the onCodification anas ~~employer’s~~ASC 815-10-65-1. ~~disclosures~~This ~~about~~topic ~~plan~~requires ~~assets~~enhanced ofdisclosure arelated ~~defined~~to ~~benefit~~derivatives ~~pension~~and orhedging ~~other~~activities. This ~~postretirement~~topic ~~plan~~must ~~and~~be ~~requires~~applied ~~employers~~prospectively to ~~provide~~all ~~more~~derivative ~~transparency~~instruments ~~about~~and ~~the~~non-derivative ~~assets~~instruments ~~held~~that byare ~~the~~designated ~~retirement plan~~ and ~~the~~qualify ~~concentrations~~as ofhedging ~~risk~~instruments inand ~~those~~related ~~plans.~~hedged ~~FSP~~items ~~No. FAS 132(R)-1 is effective~~ for all financial statements issued for fiscal years ~~beginning after December 15, 2009,~~ and interim periods ~~within~~beginning ~~those~~after ~~fiscal years. For Kraton~~November 15, ~~FSP No~~2008. ~~FAS 132(R)-1~~We isadopted ~~effective~~this astopic ofon January 1, ~~2010~~2009. ~~Kraton is currently evaluating the effect of adopting FSP No. FAS 132(R)-1.~~

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS 141(R)”), which is a revision of SFAS 141, “Business Combinations,” included in the Codification as ASC 805-10-05-2. The primary requirements of this topic are as follows: (i) Upon initially obtaining control, the acquiring entity in a business combination must recognize 100% of the fair values of the acquired assets, including goodwill, and assumed liabilities, with only limited exceptions even if the acquirer has not acquired 100% of its target. As a consequence, the current step acquisition model will be eliminated. (ii) Contingent consideration arrangements will be fair valued at the acquisition date and included on that basis in the purchase price consideration. The concept of recognizing contingent consideration at a later date when the amount of that consideration is determinable beyond a reasonable doubt, will no longer be applicable. (iii) All transaction costs will be expensed as incurred. This topic is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008. Our adoption of this topic on January 1, 2009 has had no impact to our financial position, results of operations or cash flows. A significant impact may, however, be realized on any future acquisitions by us. The amount of such impact will depend on the nature and terms of such future acquisition, if any.

Future Adoption of Accounting Standards

In January 2009, the FASB issued FSP Issue No. FAS No. 132(R)-1 “Employers Disclosures about Pensions and Other Postretirement Benefit Plan Assets” (“FSP FAS No. 132(R)-1”), included in the Codification as ASC 715-20-65-2. This topic provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan. This topic is effective for fiscal years ending after December 15, 2009. We are currently evaluating the impact that this topic will have on our condensed consolidated financial statements.

3. Share-Based Compensation

We account for share-based awards under the provisions of ~~SFAS~~ASC ~~No. 123(R)~~718, “Share-Based Payment,” previously referred to as SFAS No. 123(R), which established the accounting for share-based awards exchanged for employee services. Accordingly, share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period. We record non-cash compensation expense for the restricted membership units, notional membership units and option awards over the vesting period using the straight-line method. See Note 12 for further discussion.

~~Information~~10 ~~pertaining to option activity for the six months ended June 30, 2009 is as follows:~~

	Options		Weighted -AverageExercisePrice
	(in thousands)
Outstanding at December 31, 2008	22,101		$	1.00
Granted	—			—
Exercised	—			—
Forfeited	(512	)		1.00
Outstanding at June 30, 2009	21,589		$	1.00

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Information pertaining to option activity for the nine months ended September 30, 2009 is as follows:


	Options		Weighted-Average Exercise Price
	(in thousands)
Outstanding at December 31, 2008	22,101		$	1.00
Granted	—			—
Exercised	—			—
Forfeited	(548	)		1.00

Outstanding at September 30, 2009	21,553		$	1.00

4. Restructuring and Restructuring-Related Costs

As part of our ongoing efforts to improve efficiencies and increase productivity, we have implemented a number of restructuring initiatives in recent years.

In 2008, we restructured our research and technical service organizations to better align our research and product development capabilities with our customers’ needs and market requirements and to focus on our core capabilities and incurred $1.7 million and $0.5 million of severance and other staffing-related costs which were recorded in research and development expenses in the Condensed Consolidated Statements of Operations in the three month periods ended March 31, 2008 and June 30, 2008, respectively. Substantially all of the cash expenditures related to ~~these~~this ~~restructurings~~restructuring were paid as of the end of the first quarter of 2009.

AsOn ofSeptember 10, ~~June~~2009, we committed to exit our Pernis facility as of December 3031, 2009. In connection with our exit from the Pernis facility, ~~there~~we ~~was~~incurred a$5.1 ~~total~~million ~~liability~~in ~~for~~asset retirement obligations, $6.0 million in restructuring costs ofand ~~approximately~~a $1.2 1 million, non-cash charge to write-down our inventory of ~~which~~spare parts. The asset retirement obligations and the restructuring costs were recorded in the third quarter of 2009. As a result of our commitment to exit the Pernis facility, we performed an impairment test on the related property and equipment at September 30, 2009 pursuant to ASC 360-10-35, and concluded that there was no impairment. The $117.01 million isof property and equipment related to ~~severance~~Pernis ~~costs~~will continue to be ~~paid~~classified byas assets held and used and will be fully depreciated over their remaining estimated useful life through December 31, 2009. We currently expect that the ~~end~~asset ofretirement obligations and the ~~third~~cash ~~quarter~~restructuring charges will be substantially paid in the first half of ~~2009~~2010. ~~The~~We currently expect the exit ~~activity~~of our Pernis facility will result in an incremental cost savings of approximately $012.20 million isper ~~associated~~annum ~~with~~beginning in the ~~closure~~first quarter of ~~our~~2010. ~~office~~Prior into ~~London~~the exit, ~~United~~we ~~Kingdom~~manufactured ~~and~~isoprene isrubber (IR) at the Pernis facility. We currently plan to ~~expected~~transfer IR production to bean ~~paid~~alternative ~~over~~company site. We are in the ~~next~~process ~~several~~of ~~years~~completing ~~ending~~project inscoping, including associated capital expenditure requirements, for producing the ~~second~~alternative ~~quarter~~capacity, ofand ~~2011~~until such alternative production capacity is brought on line, we plan to satisfy customer demand for IR with inventory currently on hand.

As of September 30, 2009, there was a total liability for restructuring costs of approximately $6.2 million, of which $6.0 million is related to contract termination costs and $0.2 million is associated with the closure of our office in London, United Kingdom and is expected to be paid over the next several years ending in the second quarter of 2011. We classify restructuring costs within cost of goods sold in the Condensed Consolidated Statements of Operations.

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

5. Detail of Certain Balance Sheet Accounts

The components of inventories of products and other payables and accruals are as follows:

	June 30,2009		December 31,2008
	September 30,2009		December 31,2008
	(in thousands)
Inventories of products, net:
Finished products	$	~~191~~203,~~269~~236	$	271,449
Work in progress		25,~~871~~049		1,781
Raw materials		3744,~~215~~361		50,963
	$	~~231~~252,~~355~~646	$	324,193
Other payables and accruals:
Employee related	$	7,~~717~~453	$	25,418
Interest		96,~~927~~865		10,316
Property and other taxes		~~2,268~~592		—
Customer rebates		3,~~586~~576		4,402
Income taxes payable		48,~~102~~909		8,538
Derivative liabilities		6,~~013~~368		5,483
Other		16,266		15,192
Pernis restructuring		11,070		—
	$	49,879	$	69,349
Other		23,226		15,192
	$	68,059	$	69,349

6. Comprehensive Income

Comprehensive income includes net income (loss) and all other non-owner changes in equity. Components of comprehensive income are as follows:

	Three Months EndedJune 30,						Six Months EndedJune 30,
	Three months endedSeptember 30,							Nine months endedSeptember 30,
	2009			2008			~~2009~~	2009			~~2008~~	2008
	(in thousands)						~~(in thousands)~~	(in thousands)
Net Income (Loss)	$	(4,178	)	$	10,216		$	(20,644	)		$	806
Net Income	$	21,865		$	34,617			$	1,221			$	35,423
Other Comprehensive Income (Loss)
Other Comprehensive Income
Foreign currency translation adjustments		226,~~464~~323			2(26,~~968~~197	)		~~5,398~~	11,721			~~21,881~~	(4,316	)
Reclassification of interest rate swaps into earnings, net of tax		(421	)		—(421	)		~~(842~~	)(1,263	)		—	(421	)
Net unrealized gain (loss) on interest rate swaps, net of tax		(~~211~~226	)		~~4,345~~—			~~(358~~	)(584	)		~~2,935~~	2,935
Total Comprehensive Income (Loss)	$	17,654		$	17,529		$	(16,446	)		$	25,622
Total Comprehensive Income	$	27,541		$	7,999			$	11,095			$	33,621

Accumulated other comprehensive income consists of the following:

	June 30,2009			December 31,2008
	September 30,2009			December 31,2008
	(in thousands)
Foreign currency translation adjustments	$	4753,~~140~~463		$	41,742
Net unrealized loss on interest rate swaps, net of tax		(3,~~311~~958	)		(2,111	)
Pension adjustment, net of tax		(33,808	)		(33,808	)
Total Accumulated Other Comprehensive Income	$	1015,~~021~~697		$	5,823

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

7. Long-Term Debt

Long-term debt consists of the following:

	June 30,2009			December 31,2008
	September 30,2009			December 31,2008
	(in thousands)
Senior Secured Credit Facilities:
Revolving loans	$	—		$	50,000
Term loans		~~323~~322,~~400~~565			325,071
8.125% Notes		170,000			200,000
Less 8.125% Notes Held as Treasury Bonds		(7,000	)		—
Total debt		486,400			575,071
Total Debt		485,565			575,071
Less current portion of long-term debt		3,343			3,343
Total long-term debt	$	483,057		$	571,728
Total Long-term Debt	$	482,222		$	571,728

(a) Term Loans and Revolving Loans. We entered into a senior secured credit agreement dated as of December 23, 2003. The agreement and subsequent amendments to the agreement are defined herein as the Credit Agreement. See Note 15 for further discussion.

The Credit Agreement provides for a term facility (the “Term Facility”) of $385.0 million, and a revolving facility (the “Revolving Facility”), of $80.0 million of which $75.5 million is currently committed by lenders. In these notes to the Condensed Consolidated Financial Statements, the loans made under the Revolving Facility are referred to as the Revolving Loans, and the loans made under the Term Facility are referred to as the Term Loans.

Three of our subsidiaries, Kraton Polymers U.S. LLC, Elastomers Holdings LLC, and Kraton Polymers Capital Corporation, along with Polymer Holdings, have guaranteed the Credit Agreement. The guarantors, together with us, are referred to as the Loan Parties. The Credit Agreement is secured by a perfected first priority security interest in all of each Loan Party’s tangible and intangible assets, including intellectual property, real property, all of our capital stock and the capital stock of our domestic subsidiaries and 65% of the capital stock of the direct foreign subsidiaries of each Loan Party.

Maturity. The Term Loans are payable in quarterly installments in an amount approximating 0.25% of the principal amount through June 30, 2012 with the balance payable in four equal quarterly installments commencing on September 30, 2012 and ending on May 12, 2013. The Revolving Loans outstanding are payable in a single maturity on May 12, 2011.

Interest. The Term Loans bear interest at a rate equal to the adjusted Eurodollar rate plus 2.00% per annum or, at our option, the base rate plus 1.00% per annum. In general, interest is payable quarterly, subject to the interest period selected by us, per the terms of the Credit Agreement. The weighted average effective interest rates on the Term Loans for the ~~six~~ nine months ended ~~June~~September 30, 2009 was 4.3% compared to 4.95% for the ~~six~~nine months ended September 30, 2008. The average effective interest rates include the additional income statement effects of our interest rate swaps for both periods. See Note 9(a) for a description of the interest rate swap agreements.

11The Revolving Loans bear interest at a rate equal to the adjusted Eurodollar rate plus a margin of between 2.00% and 2.50% per annum, depending on our leverage ratio, or at our option, the base rate plus a margin of

~~ended~~KRATON ~~June 30,~~POLYMERS ~~2008.~~LLC The average effective interest rates include the additional income statement effects of Kraton’s highly effective interest rate swaps for both periods. See Note 9(a) for a description of the interest rate swap agreements.

~~The~~NOTES ~~Revolving~~TO ~~Loans~~CONDENSED ~~bear~~CONSOLIDATED ~~interest~~FINANCIAL atSTATEMENTS—(Continued) a rate equal to the adjusted Eurodollar rate plus a margin of between 2.00% and 2.50% per annum, depending on our leverage ratio, or at our option, the base rate plus a margin of between 1.00% and 1.50% per annum, also depending on our leverage ratio. The weighted average effective interest rates on the Revolving Loans for the six months ended June 30, 2009 was 4.3%. A commitment fee equal to 0.5% per annum times the daily average undrawn portion of the Revolving Facility accrues and is payable quarterly in arrears.

(Unaudited)

between 1.00% and 1.50% per annum, also depending on our leverage ratio. The weighted average effective interest rates on the Revolving Loans for the nine months ended September 30, 2009 was 3.8% compared to 7.7% for the nine months ended September 30, 2008. A commitment fee equal to 0.5% per annum times the daily average undrawn portion of the Revolving Facility accrues and is payable quarterly in arrears.

Mandatory Prepayments. The Term Facility is subject to mandatory prepayment with, in general: (1) 100% of the net cash proceeds of certain asset sales, subject to certain reinvestment rights; (2) 100% of the net cash proceeds of certain insurance and condemnation payments, subject to certain reinvestment rights; (3) 50% of the net cash proceeds of equity offerings (declining to 25%, if a leverage ratio is met); (4) 100% of the net cash proceeds of debt incurrences (other than debt incurrences permitted under the Credit Agreement); and (5) 50% of our excess cash flow, as defined in the Credit Agreement (declining to 25%, if a leverage ratio is met and to 0% if a further leverage ratio is met). Any such prepayment is applied first to the Term Facility and thereafter to the Revolving Facility.

Covenants. The Credit Agreement contains certain affirmative covenants including, among others, covenants to furnish the Lenders with financial statements and other financial information and to provide the Lenders notice of material events and information regarding collateral.

The Credit Agreement contains certain negative covenants that, among other things, restrict our ability, subject to certain exceptions, to incur additional indebtedness, grant liens on our assets, undergo ~~fundamental~~ fundamental changes, make investments, sell assets, make acquisitions, engage in sale and leaseback transactions, make restricted payments, engage in transactions with our affiliates, amend or modify certain agreements and charter documents and change our fiscal year. We are required to maintain a fiscal quarter end interest coverage ratio of 2.75:1.00 beginning March 31, 2009 and 3.00:1.00 beginning March 31, 2010 and continuing thereafter. In addition, we are required to maintain a fiscal quarter end leverage ratio not to exceed 4.45 beginning March 31, 2009 through September 30, 2009 and 4.00 beginning December 31, 2009 and continuing thereafter. As of ~~June~~September 30, 2009, we were in compliance with the applicable financial ratios in the senior secured credit facility and the other covenants contained in the senior secured credit facility and the indentures governing the 8.125% Notes. The maintenance of these financial ratios is based on our level of profitability and our degree of leverage. If the current global economic environment worsens or other factors arise which negatively impact our profitability, we may not be able to satisfy our covenants. If we are unable to satisfy such covenants or other provisions at any future time we would need to seek an amendment or waiver of such financial covenants or other provisions. The respective lenders under the senior secured credit facility may not consent to any amendment or waiver requests that we may make in the future, and, if they do consent, they may not do so on terms which are favorable to us. In the event that we were unable to obtain any such waiver or amendment and we were not able to refinance or repay our debt instruments, our inability to meet the financial covenants or other provisions of the senior secured credit facility would constitute an event of default under our Credit Agreement, including the senior secured credit facility, which would permit the bank lenders to accelerate the senior secured credit facility.

On January 14, 2008, we received an equity investment of $10 million, of which $9.6 million was included in the financial covenant calculation for the twelve-month period ending December 31, 2007 and was included in the fiscal quarter covenant calculations through the fiscal quarter ending September 30, 2008 pursuant to the equity cure provisions included in the Credit Agreement.

(b) Senior Subordinated 8.125% Notes Due January 15, 2014. On December 23, 2003, ~~Kraton~~our company and Kraton Polymers Capital Corporation issued the 8.125% Notes in an aggregate principal amount of $200.0 million. The 8.125% Notes are subject to the provisions for mandatory and optional prepayment and acceleration ~~and are~~

1214

~~payable~~KRATON inPOLYMERS ~~full on January 15, 2014. Polymer Holdings and each of Kraton Polymers U.S.~~ LLC and Elastomers Holdings LLC, which we refer to collectively as the Guarantor Subsidiaries, have guaranteed the 8.125% Notes. The amount of 8.125% Notes outstanding at June 30, 2009 was $170.0 million less $ 7.0 million held as treasury bonds and $200 million at December 31, 2008.

~~Interest.~~NOTES ~~The~~TO ~~8.125%~~CONDENSED ~~Notes~~CONSOLIDATED ~~bear~~FINANCIAL ~~interest~~STATEMENTS—(Continued) ~~at a fixed rate of 8.125% per annum. Interest is payable semi-annually on January 15 and July 15 each year. The $ 7.0 million 8.125% Notes held as treasury bonds do not bear interest.~~

(Unaudited)

and are payable in full on January 15, 2014. Polymer Holdings and each of Kraton Polymers U.S. LLC and Elastomers Holdings LLC, which we refer to collectively as the Guarantor Subsidiaries, have guaranteed the 8.125% Notes. The amount of 8.125% Notes outstanding at September 30, 2009 was $170.0 million less $7.0 million held as treasury bonds and $200 million at December 31, 2008.

Interest. The 8.125% Notes bear interest at a fixed rate of 8.125% per annum. Interest is payable semi-annually on January 15 and July 15 each year. The $7.0 million of 8.125% Notes held as treasury bonds do not bear interest.

Optional Redemption. Prior to January 15, 2007, we had the option to redeem up to 35% of the aggregate principal amount of the 8.125% Notes at a redemption price equal to 108.125% of the principal amount of the 8.125% Notes being redeemed, plus accrued and unpaid interest. Between January 15, 2007 and January 15, 2009, we could not elect to redeem the 8.125% Notes at predetermined redemption prices. After January 15, 2009, we can elect to redeem all or a part of the 8.125% Notes at certain predetermined redemption prices, plus accrued and unpaid interest.

Extinguishment of Debt. In March 2009, we purchased and extinguished $30 million face value of our 8.125% Notes for cash consideration of $10.9 million, which included accrued interest of $0.4 million. We recorded a gain of approximately $19.5 million in the quarter ended March 31, 2009 related to the purchase and extinguishment of these 8.125% Notes. In April 2009, TJ Chemical, purchased approximately $6.3 million face value of our 8.125% Notes for cash consideration of $2.5 million, which included accrued interest of $0.1 million. Immediately upon purchasing our Notes, TJ Chemical contributed the purchased Notes to Polymer Holdings which in turn contributed the Notes to us. No equity interest or other consideration was issued in exchange for the contribution of the senior subordinated notes, although members’ equity of each of Polymers Holdings and our company was increased by an amount equal to the cash consideration paid by TJ Chemical. We are holding the Notes as treasury bonds. Also in April 2009, we purchased approximately $0.7 million face value of our 8.125% Notes for cash consideration of $0.3 million which we are holding as treasury bonds. We recorded a gain of approximately $4.3 million on the extinguishment of debt in the Condensed Consolidated Statements of Operations in the quarter ended June 30, 2009.

We capitalize financing fees and other related costs and amortize them to interest expense over the term of the related debt instrument. ~~In the quarter ended June 30, 2009 we~~ We amortized to interest expense $0.16 million of remaining deferred financing costs associated with the extinguishment of the $30.0 million and $7.0 million face value of our 8.125% Notes for the nine months ended September 30, 2009.

Covenants. The 8.125% Notes contain certain affirmative covenants including, among others, covenants to furnish the holders of the 8.125% Notes with financial statements and other financial information and to provide the holders of the 8.125% Notes notice of material events.

The 8.125% Notes contain certain negative covenants including limitations on indebtedness, limitations on restricted payments, limitations or or restrictions on distributions from certain subsidiaries, limitations on lines of businesses and mergers and consolidations. As of ~~June~~September 30, 2009, we were in compliance with all covenants under the 8.125% Notes.

8. Fair Value Measurements

Effective January 1, 2008, we adopted ~~SFAS~~ASC ~~No. 157~~820, “Fair Value Measurements and Disclosures,” ~~for~~previously ~~financial~~referred ~~assets~~to ~~and~~as ~~liabilities.~~ SFAS No. 157. ASC 820 defines fair value, establishes a consistent framework for measuring ~~fair value and expands disclosure requirements~~ ~~about fair value measurements. SFAS No. 157 requires entities to, among other things, maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.~~

~~SFAS~~15 No. 157 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

~~SFAS~~KRATON ~~No. 157~~POLYMERS ~~specifies~~LLC a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. In accordance with SFAS No. 157, these two types of inputs have created the following fair value hierarchy:

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

fair value and expands disclosure requirements about fair value measurements. ASC 820 requires entities to, among other things, maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

ASC 820 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. In accordance with ASC 820, these two types of inputs have created the following fair value hierarchy:

•

Level 1—Quoted unadjusted prices for identical instruments in active markets.

•

Level 2—Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

•

Level 3—Model-derived valuations in which one or more significant inputs or significant value drivers are unobservable.

From time to time, we enter into derivative financial instruments that are measured at fair value. See Note 9 for further discussion.

9. Financial Instruments, Hedging Activities and Credit Risk

Financial Instruments

(a) Interest Rate Swap Agreements. In February 2008, we entered into a $325 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. The agreement had a fixed rate of 2.77%, with a margin of 2.0%, which resulted in a total cost of 4.77%, and a term through April 1, 2010. This agreement was designated as a cash flow hedge on the exposure of the variability of future cash flows subject to the variable quarterly interest rates on $325 million of the term loan portion of the Term Facility. We settled the swap early in June 2008 and realized cash proceeds of $4.6 million, resulting in a gain on the sale of $4.6 million. The gain is deferred in accumulated other comprehensive income and is being reclassified as a reduction in interest expense through March 31, 2010 using the effective interest method, unless we determine that the forecasted interest payments under the Term Facility are probable not to occur, in which case the remaining portion of the gain would then be reclassified immediately to interest expense. We reclassified $0.7 million into earnings for the quarter ended ~~June~~September 30, 2009.

In October 2008, we entered into a $320 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. The agreement had a fixed rate of 2.99%, with a margin of 2.0%, which resulted in a total cost of 4.99%, and a term through December 31, 2009. This agreement was designated as a cash flow hedge on the exposure of the variability of future cash flows subject to the variable quarterly interest rates on $320 million of the term loan portion of the Term Facility. We recorded aan unrealized gain of $0.37 million in accumulated other comprehensive income related to the effective portion of the hedge for the quarter ended ~~June~~September 30, 2009.

In16 May 2009, we entered into a $310 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. This agreement is effective on January 4, 2010 and expires on January 3, 2011 and has a fixed rate of 1.53%, with a margin of 2.0%, which resulted in a total cost of 3.53%. We recorded a unrealized loss of $0.5 million in accumulated other comprehensive income related to the effective portion of this hedge for the quarter ended June 30, 2009.

Foreign Currency Hedge. On February 18, 2009 we entered into a foreign currency option contract to reduce our exposure to fluctuations in the Euro to U.S. dollar exchange rate for a notional amount of €47.3 million which expires on December 29, 2009. The option contract does not qualify for hedge accounting. During the quarters ended March 31, 2009 and June 30, 2009, we recorded gains of $0.5 million and $0.3 million, respectively, which represented the mark-to-market impact of the purchased option contract. The gains were recorded in selling, general, and administrative expense on the Condensed Consolidated Statements of Operations.

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

In May 2009, we entered into a $310 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. This agreement is effective on January 4, 2010 and expires on January 3, 2011 and has a fixed rate of 1.53%, with a margin of 2.0%, which resulted in a total cost of 3.53%. We recorded an unrealized loss of $0.9 million in accumulated other comprehensive income related to the effective portion of this hedge for the quarter ended September 30, 2009.

Foreign Currency Hedge. On February 18, 2009, we entered into a foreign currency option contract to reduce our exposure to fluctuations in the Euro to U.S. dollar exchange rate for a notional amount of €47.3 million, which expires on December 29, 2009. The option contract does not qualify for hedge accounting. During the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009, we recorded gains of $0.5 million, $0.3 million and $0.9 million, respectively, which represented the mark-to-market impact of the purchased option contract. The gains were recorded in selling, general, and administrative expense on the Condensed Consolidated Statements of Operations.

The financial assets and liabilities measured at fair value on a recurring basis are included below:

Fair Value Measurements at Reporting Date Using

Balance Sheet Location

September 30,2009

Fair Value Measurements at Reporting Date Using

Balance Sheet Location

June 30,2009

Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)

SignificantOtherObservableInputs(Level 2)

SignificantUnobservableInputs(Level 3)

Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)

SignificantOtherObservableInputs(Level 2)

SignificantUnobservableInputs(Level 3)

(in thousands)

Derivative assets— Foreign currency option

Other current assets

12,~~810~~717

—

12,~~810~~717

—

Derivative liabilities— Interest rate swap

Other payables and accruals

54,~~243~~143

—

54,~~243~~143

—

Derivative liabilities— Interest rate swap

Other payables and accruals

~~770~~2,225

—

~~770~~2,225

—

Fair Value Measurements at Reporting Date Using

Balance Sheet Location

December 31,2008

Fair Value Measurements at Reporting Date Using

Balance Sheet Location

December 31,2008

Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)

SignificantOtherObservableInputs(Level 2)

SignificantUnobservableInputs(Level 3)

Quoted Pricesin ActiveMarkets forIdentical Assets(Level 1)

SignificantOtherObservableInputs(Level 2)

SignificantUnobservableInputs(Level 3)

(in thousands)

Derivative liabilities— Interest rate swap

Other payables and accruals

5,483

—

5,483

—

The use of derivatives creates exposure to credit risk relating to potential losses that could be recognized in the event that the counterparties to these instruments fail to perform their obligations under the contracts. We minimize this risk by limiting our counterparties to major financial institutions with acceptable credit ratings and monitoring positions with individual counterparties. In the event of a default by one of our counterparties, we may not receive payments provided for under the terms of our derivatives. We do not anticipate any defaults by our derivative instrument contract counterparties.

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

(b) Fair Value of Financial Instruments

The following table presents the carrying values and approximate fair values of our long-term debt at ~~June~~September 30, 2009 and December 31, 2008:

	June 30, 2009				December 31, 2008
	September 30, 2009				December 31, 2008
	CarryingValue		Fair Value		CarryingValue		Fair Value
	(in thousands)
Revolving loans	$	—	$	—	$	50,000	$	50,000
Revolving Loans	$	—	$	—	$	50,000	$	50,000
Term loans		323,400		323,400		325,071		325,071
Term Loans		322,565		322,565		325,071		325,071
Bonds Payable 8.125% Notes		163,000		~~103~~112,~~709~~878		200,000		79,250
8.125% Notes Held as Treasury Bonds		7,000		4,~~454~~848		—		—

The Term Loans and Revolving Loans are variable interest rate securities, and as such, the fair value approximates their carrying value.

Credit Risk. ~~Kraton’s~~Our customers are diversified by industry and geography with approximately 700 customers in approximately 60 countries worldwide. We do not have concentrations of receivables from these industry sectors throughout these countries. The recent global economic downturn may affect our overall credit risk. Where exposed to credit risk, ~~Kraton~~we ~~analyzes~~analyze the counterparties’ financial condition prior to entering into an agreement, ~~establishes~~establish credit limits and monitor the appropriateness of those limits on an ongoing basis. We also obtain cash, letters of credit or other acceptable forms of security from customers to provide credit support, where appropriate, based on our financial analysis of the customer and the contractual terms and conditions applicable to each transaction.

credit limits and monitors the appropriateness of those limits on an ongoing basis. We also obtain cash, letters of credit or other acceptable forms of security from customers to provide credit support, where appropriate, based on our financial analysis of the customer and the contractual terms and conditions applicable to each transaction.

10. Income Taxes

The effective tax rate for the ~~six~~ nine months ended ~~June~~September 30, 2009 was ~~approximately (~~6.0)5% compared to a rate of 7517.63% infor the ~~six~~nine months ended ~~June~~September 30, 2008. Our effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2009 was lower than ~~our~~the statutory rate of 35.0% primarily due to aan expected pretax loss, along with not recording a tax benefit for certain net operating losses generated during that period and changes in where our income is earned. During the third quarter, we recognized additional expense primarily due to the exit from our Pernis facility in the Netherlands. Our effective tax rate for the ~~six~~nine months ended ~~June~~September 30, 2008 was ~~higher~~lower than our statutory rate primarily due to ~~pre-tax~~a pretax ~~income~~loss, along with not recording a tax benefit for certain net operating losses generated during that period and changes in where our income is earned.

AsWe ofare ~~June 30,~~required ~~2009,~~to weprovide ~~had~~a ~~total~~valuation ~~unrecognized~~allowance ~~tax~~for ~~benefits~~our ofdeferred ~~$1.4~~tax ~~million.~~assets Asin excess of ~~June 30,~~deferred ~~2009,~~tax liabilities because we ~~believe~~have concluded that noit ~~current~~is ~~tax~~more ~~positions~~likely ~~that have~~than ~~resulted~~not inthat ~~unrecognized~~such deferred tax assets ~~benefits~~ultimately will ~~significantly~~not ~~increase~~be orrealized. As ~~decrease~~a ~~within one year~~result, ~~and~~our noincome ~~material~~after ~~changes~~taxes ~~have~~for ~~occurred~~the infirst ~~our~~nine ~~estimates~~months orof ~~are~~2009 ~~expected~~was toimpacted ~~occur~~by ina ~~events~~tax ~~related~~benefit toof ~~anticipated~~$0.5 ~~changes in our unrecognized tax benefits~~million.

~~Kraton~~As ~~files~~of ~~income~~September 30, ~~tax~~2009, ~~returns~~we inhad ~~the U~~$1.S.6 ~~federal~~million ~~jurisdiction,~~of ~~and~~total ~~various~~unrecognized ~~state~~tax ~~and~~benefits related to foreign ~~jurisdictions.~~tax Aspositions, all of ~~June 30~~ which, ~~2009~~if recognized, ~~our~~would ~~2005~~affect ~~through~~the ~~2007~~effective Utax rate.S. ~~federal~~We ~~income~~include ~~tax~~interest ~~returns~~and ~~remain~~penalties ~~open~~related to ~~examination~~unrecognized tax benefits in income tax expense. InAs ~~addition~~of September 30, ~~open~~2009, ~~tax~~we ~~years~~have torecorded ~~state~~the ~~and~~total ~~foreign~~$1.6 ~~jurisdictions~~million ~~remain~~of ~~subject~~unrecognized totax ~~examination~~benefits as a current liability.

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

The Company’s tax jurisdictions include the United States and various state and foreign jurisdictions. The U.S. federal income tax return has been examined by the tax authorities through December 31, 2004; all years subsequent to 2004 remain subject to examination. In addition, open tax years for state and foreign jurisdictions remain subject to examination.

11. Commitments and Contingencies

Legal Proceedings

Pursuant to the sale agreements between ~~us and~~ Shell Chemicals and us relating to the separation from Shell Chemicals in 2001, Shell Chemicals has agreed to indemnify us for certain liabilities and obligations to third parties or claims against us by a third party relating to matters arising prior to the closing of the acquisition by Ripplewood Chemical~~, subject to certain time limitations~~. Shell Chemicals has been named in several lawsuits relating to the elastomers business that we have acquired. In particular, claims have been filed against Shell Chemicals alleging workplace asbestos exposure at the Belpre, Ohio facility. WeIn the event we are named as parties to any of these claims, we would be indemnified by Shell Chemicals; however, ~~with~~as ~~respect~~of tothe ~~these~~date ~~claims~~of this Quarterly Report on Form 10-Q, ~~subject~~we tohave ~~certain~~not ~~time~~been ~~limitations~~named as parties in any of these claims. InOur ~~addition,~~right weto ~~and~~indemnification from Shell Chemicals ~~have~~is ~~entered~~subject ~~into~~to acertain ~~consent~~time ~~order~~limitations ~~relating~~disclosed tounder “Business—Environmental ~~certain~~Regulation ~~environmental~~in ~~remediation~~our atmost ~~the~~recently ~~Belpre,~~filed ~~Ohio~~Annual ~~facility~~Report on Form 10-K. ”

In addition, we and Shell Chemicals have entered into a consent order relating to certain environmental remediation at the Belpre, Ohio facility. While we are involved from time to time in litigation and governmental actions arising in the ordinary course of business, we are not aware of any actions which we believe would individually or in the aggregate materially adversely affect our business, consolidated results of operations, financial position or cash flows.

12. Employee Benefits

(a) Investment in Kraton Management LLC (Management LLC). We provided certain key employees who held interests in us prior to the acquisition the opportunity to roll over their interests into membership units of Management LLC, which owns a corresponding number of membership units in TJ Chemical. Additional employees have also been given the opportunity to purchase membership units in TJ Chemical through Management LLC at the original buy-in price. The membership units are subject to customary tag-along and drag-along rights, as well as a company call right in the event of termination of employment. As of ~~June~~September 30, 2009, there were 1,~~706~~855,000 membership units of Management LLC issued and outstanding.

(b) TJ Chemical Holdings LLC 2004 Option Plan. On September 9, 2004, TJ Chemical adopted an option plan, or the Option Plan, which allows for the grant to key employees, consultants, members and service providers of TJ Chemical and its affiliates, including us, of non-qualified options to purchase TJ Chemical membership units. As of September 30, 2009 there were 21,553,118 options granted and outstanding. The exercise price per membership unit shall be equal to or in excess of the fair market value of a membership unit on the date of grant. All options granted in 2008, 2007 and 2006 had an exercise price of $1 per membership unit, which was equal to or in excess of the fair value of the membership unit on the date of grant. The options generally vest in 20% annual increments from the date of grant. However, the Compensation Committee (the “Committee”) determined that a shorter vesting period was appropriate for grants made during the 2008 fiscal year and therefore options granted in 2008 were set to vest in increments of 1/3 over 3 years. With respect to directors, prior to 2008 options were exercisable in 50% increments annually on each of the first two anniversaries of the grant date, so long as the holder of the option is still a director on the vesting date. Two of

1619

~~membership~~KRATON ~~units.~~POLYMERS AsLLC of June 30, 2009 there were 21,589,118 options granted and outstanding. The exercise price per membership unit shall be equal to the fair market value of a membership unit on the date of grant. All options granted in fiscal 2008, fiscal 2007 and fiscal 2006 had an exercise price of $1 per membership unit, which is equal to or in excess of the fair value of the membership unit on the date of grant. The Options generally vest in 20% annual increments from the date of grant. However, the Compensation Committee (the “Committee”) determined that a shorter vesting period was appropriate for grants made during the 2008 fiscal year and therefore Options granted in 2008 were set to vest in increments of 1/3 over 3 years. With respect to directors, previous to 2008 options were exercisable in 50% increments annually on each of the first two anniversaries of the grant date, so long as the holder of the option is still a director on the vesting date. In 2008, Options granted to directors were granted in increments of 1/3 over 3 years, except the Chairman who has a one year vesting. Upon a change in control, the options will become 100% vested if the participant’s employment is terminated without cause or by the participant for good reason (as each term is defined in the Option Plan) within the 2-year period immediately following such change in control.

~~The~~NOTES ~~Committee~~TO ofCONDENSED ~~Kraton~~CONSOLIDATED ~~Polymers~~FINANCIAL administers the Option Plan on behalf of TJ Chemical, including, without limitation, the determination of the individuals to whom grants will be made, the number of membership units subject to each grant and the various terms of such grants. The Committee will have the right to terminate all of the outstanding options at any time and pay the participants an amount equal to the excess, if any, of the fair market value of a membership unit as of such date over the exercise price with respect to such option, or the spread. Generally, in the event of a merger STATEMENTS—(~~except a merger where membership unit holders receive securities of another corporation~~Continued), the options will pertain to and apply to the securities that the option holder would have received in the merger; and in the event of a dissolution, liquidation, sale of assets or any other merger, the Committee has the discretion to: (1) provide for an “exchange” of the options for new options on all or some of the property for which the membership units are exchanged (as may be adjusted by the Committee); (2) cancel and cash out the options (whether or not then vested) at the spread; or (3) provide for a combination of both. Generally, the Committee may make appropriate adjustments with respect to the number of membership units covered by outstanding options and the exercise price in the event of any increase or decrease in the number of membership units or any other corporate transaction not described in the preceding sentence.

~~On a termination of a participant’s employment~~ (~~other than without cause or by the participant for good reason within the 2-year period immediately following a change in control~~Unaudited), unvested options automatically expire and vested options expire on the earlier of: (1) the commencement of business on the date the employment is terminated for cause; (2) 90 days after the date employment is terminated for any reason other than cause, death or disability; (3) 1-year after the date employment is terminated by reason of death or disability; or (4) the 10th anniversary of the grant date for such option.

~~Generally,~~ the ~~pursuant~~option togrants TJmade ~~Chemical’s~~to ~~operating~~directors ~~agreement,~~in ~~membership~~2008 ~~units~~vest ~~acquired~~in ~~pursuant~~increments toof ~~the~~1/3 ~~Option~~over ~~Plan~~3 ~~are~~years, ~~subject~~one toof ~~customary~~the ~~tag-along and~~option ~~drag-along~~grants ~~rights~~made ~~for~~in ~~the~~2008 ~~180-day~~vests ~~period~~in ~~following~~increments ~~the later~~ of a1/2 ~~termination~~over of2 ~~employment~~years, and 6the ~~months~~Chairman’s ~~and~~grant fully ~~1-day~~vests ~~following~~in ~~the~~one ~~date~~year. ~~that~~Upon ~~units~~a ~~were~~change ~~acquired~~in ~~pursuant~~control, to the ~~exercise~~options ofwill ~~the~~become ~~option,~~100% TJvested ~~Chemical~~if ~~has~~ the ~~right~~participant’s toemployment ~~repurchase~~is ~~each membership~~terminated ~~unit~~without ~~then~~cause ~~owned~~or by the participant atfor ~~fair~~good ~~value,~~reason (as ~~determined~~each interm ~~good~~is ~~faith~~defined byin the ~~Board~~Option ofPlan) ~~Directors~~within ofthe 2-year TJperiod ~~Chemical.~~immediately ~~See~~following ~~Note~~such ~~12(e)~~change ~~for~~in ~~further discussion~~control.

~~(c)~~The ~~Profits~~Committee ~~Units~~ of Kraton ~~Management~~Polymers administers the Option Plan on behalf of TJ Chemical, ~~LLC~~including, ~~(Management~~without limitation, ~~LLC).~~the Wedetermination ~~provided~~of ~~certain~~the ~~key~~individuals ~~employees~~to ~~with~~whom agrants ~~grant~~will be made, the number of ~~profits~~membership units (subject to ~~the~~each ~~8.7%~~grant ~~pool~~and ~~limitation~~the ~~described~~various interms ~~Note~~of ~~12(d))~~such grants. ~~Profits~~The ~~units are~~Committee ~~economically~~will ~~equivalent~~have the right to terminate anall ~~option,~~of ~~except~~the ~~that~~outstanding ~~they~~options ~~provide~~at ~~the~~any ~~recipient/employee~~time ~~with~~and pay the participants an ~~opportunity~~amount equal to ~~recognize~~the ~~capital~~excess, ~~gains~~if inany, of the ~~appreciation~~fair market value of TJa ~~Chemical~~membership ~~and~~unit ~~its~~as ~~affiliates~~of ~~and~~such TJdate ~~Chemical~~over ~~and~~the ~~its~~exercise ~~affiliates~~price ~~does~~with ~~not~~respect ~~receive~~to ~~any~~such option, or the spread. ~~deduction~~Generally, atin the ~~time~~event of ~~grant~~a ormerger ~~disposition~~(except ofa ~~the~~merger ~~profits~~where membership unit byholders ~~the~~receive ~~employee.~~securities ~~Generally~~of another corporation), ~~pursuant~~the options will pertain to and apply to the ~~applicable~~securities ~~grant~~that ~~agreements~~the option holder would have received in the merger; and in the event of a dissolution, ~~50%~~liquidation, sale of ~~such~~assets ~~profits~~or ~~units~~any ~~will~~other ~~vest~~merger, ~~when~~the Committee has the ~~fair~~discretion ~~value~~to: (1) provide for an “exchange” of TJthe ~~Chemical’s~~options ~~assets~~for ~~equals~~new options on all or ~~exceeds~~some ~~two times~~of the ~~Threshold~~property ~~Amount,~~for ~~i.e.,~~which the ~~first~~membership units ~~tranche,~~are ~~and~~exchanged ~~the~~(as ~~remaining~~may ~~50%~~be ~~will~~adjusted ~~vest~~by ~~when~~ the ~~fair~~Committee); ~~value~~(2) cancel ofand TJcash ~~Chemical’s~~out ~~assets~~the ~~equals~~options (whether or ~~exceeds~~not ~~three~~then ~~times~~vested) at the ~~threshold~~value ~~amount,~~of ithe spread; or (3) provide for a combination of both.e. Generally, the ~~second~~Committee ~~tranche,~~may inmake ~~each~~appropriate adjustments ~~case,~~with asrespect ~~determined~~to the number of membership units covered by outstanding options and the ~~Board~~ exercise price in the event of TJany ~~Chemical,~~increase ~~provided~~or ~~that~~decrease in the ~~executive~~number of membership units or any other corporate transaction not described in the preceding sentence.

17In general, on a termination of a participant’s employment (other than without cause or by the participant for good reason within the 2-year period immediately following a change in control), unvested options automatically expire and vested options expire on the earlier of: (1) the commencement of business on the date the employment is terminated for cause; (2) 90 days after the date employment is terminated for any reason other than cause, death or disability; (3) 1-year after the date employment is terminated by reason of death or disability; or (4) the 10th anniversary of the grant date for such option.

Generally, pursuant to TJ Chemical’s operating agreement, membership units acquired pursuant to the Option Plan are subject to customary tag-along and drag-along rights for the 180-day period following the later of a termination of employment and 6 months and 1-day following the date that units were acquired pursuant to the exercise of the option. During this 180-day period, TJ Chemical has the right to repurchase each membership unit then owned by the participant at fair value, as determined in good faith by the Board of Directors of TJ Chemical. See Note 12(e) for further discussion.

(c) Profits Units of Kraton Management, LLC (Management, LLC). We provided certain key employees with a grant of profits units (subject to the 8.7% pool limitation described in Note 12(d)). Profits units are economically equivalent to an option, except that they provide the employees with an opportunity to recognize capital gains in the appreciation of TJ Chemical and its affiliates and TJ Chemical and its affiliates does not receive any deduction at the time of grant or disposition of the profits unit by the employee. Generally, pursuant to the applicable grant agreements, 50% of such profits units will vest when the fair value of TJ Chemical’s assets equals or exceeds two-times the value of TJ Chemical’s assets on the date of grant (the “Threshold Amount”), i.e., the first tranche, and the remaining 50% will vest when the fair value of TJ Chemical’s assets equals or exceeds three-times the Threshold Amount, i.e., the second tranche, in each case, as determined by the Board of TJ Chemical, provided that the executive remains employed through the applicable vesting date. Additionally, 100% of the profits units shall vest upon the effective date of a disposition by the initial investors of 51% or more of their aggregate interests in us. If at the time TJ Chemical makes a determination as to whether

~~remains~~KRATON ~~employed~~POLYMERS ~~through~~LLC the applicable vesting date. Additionally, 100% of the profits units shall vest upon the effective date of a disposition by the initial investors of 51% or more of their aggregate interests in Kraton. If at the time TJ Chemical makes a determination as to whether an individual is entitled to any appreciation with respect to the profits units, the value of the assets is more than two times, but less than three times the Threshold Amount, a pro rata portion of the second tranche will vest based on the appreciation above the two times Threshold Amount. Compensation expense will be recorded in our Condensed Consolidated Financial Statements for this difference at the time it becomes probable the profits units will become vested. If an employees’ employment terminates prior to any applicable vesting date, such employee shall automatically forfeit all rights to any unvested profits units. As of June 30, 2009, there were 900,000 profits units granted and not yet vested. See Note 12(e) for further discussion.

~~(d)~~NOTES ~~Options~~TO ~~and~~CONDENSED ~~Profits~~CONSOLIDATED ~~Units~~FINANCIAL ~~Outstanding.~~STATEMENTS—(Continued) As of August 2008, the Option Plan was amended to provide for an increase in the number of options and profit units from 21,740,802 to 23,740,802, or 8.7% of the outstanding membership units and profits units of TJ Chemical on March 31, 2004, on a fully diluted basis.

In the second quarter of 2009, no options were granted and 185,000 options were forfeited. As of June 30, 2009, the total options granted under the Option Plan amounted to 21,589,118. In addition, as of June 30, 2009, there were 900,000 profits units granted under the Option Plan and not yet vested. See Note 12(cUnaudited) ~~for further discussion.~~

~~(e)~~ an ~~Kraton~~individual ~~Polymers~~is ~~LLC~~entitled ~~Executive~~to ~~Deferred~~any ~~Compensation Plan.~~appreciation Onwith ~~September 9,~~respect ~~2004,~~to the ~~Board~~profits ofunits, ~~Directors adopted~~ the ~~Kraton~~value ~~Deferred~~of ~~Compensation~~the ~~Plan.~~assets ~~Under~~is ~~the~~more ~~plan~~than two-times, ~~certain~~but ~~employees~~less ~~will~~than bethree-times ~~permitted~~the toThreshold ~~elect~~Amount, toa ~~defer~~pro arata portion of ~~(generally~~the upsecond totranche ~~50%)~~will ofvest ~~their~~based ~~annual~~on ~~incentive~~the ~~bonus~~appreciation ~~with respect~~above tothe ~~each~~two-times ~~bonus~~Threshold ~~period~~Amount. ~~Participating~~Compensation ~~employees~~expense will be ~~credited~~recorded ~~with~~in aour ~~notional~~Condensed ~~number~~Consolidated ofFinancial ~~membership~~Statements ~~units~~for ~~based~~this ondifference ~~the~~at ~~fair value of TJ Chemical membership units as of~~ the ~~date~~time ofit ~~deferral,~~becomes ~~although~~probable the ~~distribution of membership units in~~profits ~~such accounts may be made indirectly through Management LLC. Such membership~~ units will bebecome ~~distributed~~vested. ~~upon~~If ~~termination~~an ~~of the participant~~employees’s employment ~~subject~~terminates prior to aany ~~call~~applicable ~~right~~vesting ordate, ~~upon~~such aemployee ~~change~~shall inautomatically ~~control.~~forfeit Weall ~~reserved~~rights ~~2,000,000 membership units for issuance pursuant~~ to ~~the~~any ~~Kraton~~unvested ~~Deferred~~profits ~~Compensation~~units. ~~Plan~~As as of ~~December~~September 3130, ~~2006~~2009, ~~and currently,~~ there ~~are~~were 1900,~~800,504~~000 ~~membership~~ profits units ~~available~~granted ~~for~~and ~~issuance~~not ~~pursuant~~yet tovested. ~~the~~See ~~Kraton~~Note ~~Deferred~~12(e) ~~Compensation~~for ~~Plan~~further discussion.

(fd) ~~2009~~Options ~~Incentive~~and ~~Compensation~~Profits ~~Plan~~Units Outstanding. As ~~On February 13, 2009, the Committee~~ of ~~the~~August ~~Board of Directors (the “Board”) of Kraton approved and adopted the 2009 Incentive Compensation Plan (the “Plan”)~~2008, ~~including~~ the ~~performance-based~~Option ~~criteria by which potential bonus payouts to participants in the~~ Plan ~~(“Participants”)~~was ~~will~~amended ~~be determined. The Plan is designed~~ to ~~attract,~~provide ~~retain,~~for ~~motivate~~an ~~and~~increase ~~reward officers, including named executive officers, and certain other employees that have been deemed eligible to participate~~ in the ~~Plan.~~number ~~For~~of ~~the~~options ~~bonus~~and ~~year~~profits ~~that~~units ~~ends December 31, 2009, the Board established a common bonus pool based upon performance calculations, in accordance with Plan provisions. The potential range for this bonus pool is~~ from ~~zero to $15 million~~21, ~~depending on Kraton’s and individual performance factors~~740,802 ~~including performance criteria~~ to ~~be established by the Committee. Based on additional performance criteria such as our safety performance~~23, ~~innovation as a percent of total revenue~~740, ~~productivity~~802, ~~specific~~or ~~cost out and pricing initiatives, the Committee may add up to $1 million to the bonus pool~~8.7% ~~Kraton’s~~of ~~2009 performance will be~~ the ~~most~~outstanding ~~significant~~membership ~~factor~~units inand ~~determining~~profits ~~the~~units ~~size~~ of ~~the~~TJ ~~bonus~~Chemical ~~pool. As of June~~on March 3031, ~~2009~~2004, weon ~~recorded~~ a ~~total~~fully ~~liability~~diluted ~~for incentive compensation of approximately $0~~basis.5 ~~million.~~

18In the third quarter of 2009, no options were granted and 36,000 options were forfeited. As of September 30, 2009, the total options granted under the Option Plan amounted to 21,553,118. In addition, as of September 30, 2009, there were 900,000 profits units granted under the Option Plan and not yet vested. See Note 12(c) for further discussion.

(e) Kraton Polymers LLC Executive Deferred Compensation Plan. On September 9, 2004, the Board of Directors adopted the Kraton Deferred Compensation Plan. Under the plan, certain employees are permitted to elect to defer a portion (generally up to 50%) of their annual incentive bonus with respect to each bonus period. Participating employees will be credited with a notional number of membership units based on the fair value of TJ Chemical membership units as of the date of deferral, although the distribution of membership units in such accounts may be made indirectly through Management LLC. Such membership units will be distributed upon termination of the participant’s employment subject to a call right or upon a change in control. We reserved 2,000,000 membership units for issuance pursuant to the Kraton Deferred Compensation Plan as of December 31, 2006, and currently, there are 1,800,504 membership units available for issuance pursuant to the Kraton Deferred Compensation Plan.

(f) 2009 Incentive Compensation Plan. On February 13, 2009, the Committee of the Board of Directors (the “Board”) approved and adopted the 2009 Incentive Compensation Plan (the “Plan”), including the performance-based criteria by which potential bonus payouts to participants in the Plan (“Participants”) will be determined. The Plan is designed to attract, retain, motivate and reward officers, including named executive officers, and certain other employees that have been deemed eligible to participate in the Plan. For the bonus year that ends December 31, 2009, the Board established a common bonus pool based upon performance calculations, in accordance with Plan provisions. The potential range for this bonus pool is from zero to $15 million, depending on our and individual performance factors, including performance criteria to be established by the Committee. Based on additional performance criteria such as our safety performance, innovation as a percent of total revenue, specific cost out and pricing initiatives, the Committee may add up to $1 million to the bonus pool. Our 2009 performance will be the most significant factor in determining the size of the bonus pool. As of September 30, 2009, we recorded a total liability for incentive compensation of approximately $0.2 million.

~~(g) Retirement~~KRATON ~~Plans.~~POLYMERS ~~The~~LLC ~~components of net periodic benefit cost related to pension benefits and other postretirement benefits for the three and six months ended June 30, 2009 and June 30, 2008, are as follows:~~

	Three Months EndedJune 30,						Six Months EndedJune 30,
	2009			2008			2009			2008
Pension Benefits
Components of net periodic benefit cost:
Service cost	$	709		$	603		$	1,418		$	1,206
Interest cost		1,186			1,059			2,372			2,118
Expected return on plan assets		(1,170	)		(1,032	)		(2,340	)		(2,064	)
Amortization of prior service cost		135			—			271			—
Net periodic benefit cost	$	860		$	630		$	1,721		$	1,260
	Three Months EndedJune 30,						Six Months EndedJune 30,
	2009			2008			2009			2008
Components of net periodic benefit cost:
Service cost	$	100		$	88		$	200		$	176
Interest cost		230			212			460			424
Amortization of prior service cost		18			—			35			—
Net periodic benefit cost	$	348		$	300		$	695		$	600

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~Contributions.~~(Unaudited) ~~We made a $1.2 million and $0.8 million contribution to our pension plan in the quarters ended March 31, 2009 and June 30, 2009, respectively, and expect to contribute $4.2 million in total in 2009.~~

(g) Retirement Plans. The components of net periodic benefit cost related to pension benefits and other postretirement benefits for the three and nine months ended September 30, 2009 and September 30, 2008, are as follows:


	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Defined Benefit
*Components of net periodic benefit cost:*
Service cost	$	709		$	603		$	2,126		$	1,809
Interest cost		1,186			1,059			3,557			3,177
Expected return on plan assets		(1,170	)		(1,032	)		(3,510	)		(3,096	)
Amortization of prior service cost		135			—			406			—

Net periodic benefit cost	$	860		$	630		$	2,579		$	1,890


	Three months ended September 30,						Nine months ended September 30,
	2009			2008			2009			2008
Other Postretirement Benefits
*Components of net periodic benefit cost:*
Service cost	$	98		$	88		$	293		$	264
Interest cost		265			212			795			636
Amortization of prior service cost		58			—			173			—

Net periodic benefit cost	$	421		$	300		$	1,261		$	900

Contributions. We made contributions of $1.2 million, $0.8 million and $1.4 million to our pension plan in the quarters ended March 31, 2009, June 30, 2009 and September 30, 2009, respectively, and expect to contribute $4.2 million in total in 2009.

13. Industry Segment and Foreign Operations

We operate in one segment for the manufacture and marketing of styrenic block copolymers. In accordance with ~~SFAS~~the ~~No. 131,~~provisions ~~Disclosures~~of ~~About~~ASC ~~Segments~~280, of“Segment anReporting,” ~~Enterprise~~previously ~~and~~referred ~~Related~~to ~~Information~~as SFAS No. 131, our chief operating decision-maker has been identified as the President and Chief Executive Officer, who regularly reviews financial information to make decisions about allocating resources and assessing performance for the entire company. Since we operate in one segment and in one group of similar products, all financial segment and product line information required by ~~SFAS~~ASC ~~131~~280 can be found in the Condensed Consolidated Financial Statements.

1922

~~For~~KRATON ~~geographic~~POLYMERS ~~reporting,~~LLC revenues are attributed to the geographic location in which the customers’ facilities are located. Long-lived assets consist primarily of property, plant, and equipment, which are attributed to the geographic location in which they are located. Net revenues and long-lived assets by geographic region were as follows:

	Three Months EndedJune 30,				Six Months EndedJune 30,
	2009		2008		2009		2008
	(in thousands)				(in thousands)
Total Operating Revenues:
United States	$	78,641	$	111,113	$	139,188	$	192,834
Germany		29,072		40,888		50,642		75,737
The Netherlands		16,057		12,951		24,702		42,656
Japan		16,040		16,168		26,969		31,549
Italy		9,168		25,433		16,049		25,798
China		8,826		3,141		12,443		18,726
Brazil		7,937		10,665		14,335		18,604
United Kingdom		7,672		13,201		13,987		20,948
Thailand		6,704		5,841		12,513		9,267
France		6,569		11,933		14,304		21,104
Taiwan		5,111		3,422		7,655		10,794
Poland		4,943		11,240		5,602		11,029
Canada		4,100		3,941		7,828		14,595
Sweden		3,730		3,152		6,181		7,535
Mexico		3,584		8,487		5,806		6,266
Turkey		3,568		6,176		5,680		9,425
Denmark		3,276		2,797		6,079		5,835
Korea, Republic of		2,706		4,509		4,600		5,341
Argentina		2,657		4,387		5,303		7,465
Australia		2,346		3,791		3,202		8,175
Austria		2,227		3,937		2,938		5,230
Norway		1,875		1,758		1,969		1,927
Belgium		1,677		7,056		14,659		12,264
Switzerland		1,357		1,382		2,952		2,396
Malaysia		1,337		1,580		2,400		2,913
India		1,162		1,077		2,263		1,945
Czech Republic		1,157		1,171		2,264		2,424
Other		10,322		24,172		16,266		39,448
	$	243,821	$	345,369	$	428,779	$	612,230

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	June 30, 2009			December 31, 2008
Long-Lived Assets:
United States	$	324,686		$	303,278
France		108,776			108,665
Brazil		57,752			48,237
Germany		39,937			39,361
The Netherlands		34,058			34,018
China		2,320			2,317
Japan		(59	)		6,699
Other		11,740			11,685
	$	579,210		$	554,260

(Unaudited)

20For geographic reporting, revenues are attributed to the geographic location in which the customers’ facilities are located. Long-lived assets consist primarily of property, plant, and equipment, which are attributed to the geographic location in which they are located. Total operating revenues and long-lived assets by geographic region were as follows:


	Three months ended September 30,				Nine months ended September 30,
	2009		2008		2009		2008
	(in thousands)				(in thousands)
*Total Operating Revenues:*
United States	$	92,932	$	126,489	$	232,120	$	319,361
Germany		39,638		45,207		90,280		120,959
Japan		17,673		19,367		44,642		50,922
China		11,720		9,165		24,163		27,895
The Netherlands		11,677		25,930		36,379		68,589
Brazil		11,217		13,823		25,552		32,430
Italy		9,614		13,819		25,663		39,622
Thailand		7,513		8,103		20,026		17,372
United Kingdom		7,080		11,748		21,067		32,700
France		7,019		10,163		21,323		31,271
Poland		6,964		11,000		12,566		22,032
Turkey		5,778		4,526		11,458		13,953
Taiwan		4,840		6,701		12,495		17,497
Canada		4,595		6,776		12,423		21,374
Australia		3,950		3,498		7,152		11,674
Argentina		3,299		4,589		8,602		12,055
Austria		3,109		4,187		6,047		9,450
Sweden		3,101		4,059		9,282		11,595
Mexico		2,865		5,082		8,671		11,349
Korea, Republic of		2,829		3,982		7,429		9,323
Malaysia		1,925		426		4,325		3,339
Hong Kong		1,618		3,274		2,862		6,977
Hungary		1,542		1,738		2,781		6,264
Belgium		1,385		11,218		16,044		23,484
Switzerland		1,312		1,623		4,264		4,019
Denmark		1,248		2,070		7,327		7,906
Singapore		1,153		1,581		2,450		4,377
Other		20,922		22,023		39,903		56,608

	$	288,518	$	382,167	$	717,296	$	994,397

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)


	September 30, 2009			December 31, 2008
*Long-Lived Assets:*
United States	$	324,240		$	303,278
France		107,465			108,665
Brazil		57,658			48,237
Germany		39,212			39,361
The Netherlands		39,862			34,018
China		2,155			2,317
Japan		(94	)		6,699
Other		12,861			11,685

	$	583,359		$	554,260

14. Supplemental Guarantor Information

~~Kraton~~Our company and Kraton Polymers Capital Corporation, a financing subsidiary, collectively, the Issuers, are co-issuers of the 8.125% Notes. The Guarantor Subsidiaries fully and unconditionally guarantee, on a joint and several basis, the Issuers’ obligations under the 8.125% Notes. ~~Kraton’s~~Our remaining subsidiaries are not guarantors of the 8.125% Notes. We do not believe that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would provide any additional information that would be material to investors in making an investment decision.

2124

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Kraton Polymers LLC

Condensed Consolidating Balance Sheet

~~June~~September 30, 2009

(In thousands)

	Issuers(1)			GuarantorSubsidiaries			Non-GuarantorSubsidiaries		Eliminations			Consolidated
	(Unaudited)
ASSETS
Current Assets
Cash and cash equivalents	$	—		$	24,~~486~~359		$	1518,~~224~~006	$	—		$	1722,~~710~~365
Receivables, net		~~24,425~~—			6351,~~875~~135			8781,~~390~~621		~~(49,243~~—	)		~~126~~132,~~447~~756
Inventories of products, net		—			96102,~~915~~793			~~146~~163,~~525~~078		(1213,~~085~~225	)		~~231~~252,~~355~~646
Inventories of materials and supplies		—			6,~~852~~565			43,~~517~~147		—			119,~~369~~712
Deferred income taxes		—			14,778			—		—			14,778
Other current assets		6,~~786~~873			14,~~714~~032			413,~~074~~364		—			1224,~~574~~269
Total current assets		316,~~211~~873			~~186~~183,~~620~~662			~~257~~279,~~730~~216		(6113,~~328~~225	)		~~414~~456,~~233~~526
Property, plant and equipment, less accumulated depreciation		9592,~~896~~440			~~175~~180,~~619~~270			~~105~~109,~~205~~278		—			~~376~~381,~~720~~988
Identifiable intangible assets, less accumulated amortization		1615,~~827~~184			—			4645,~~938~~997		—			6361,~~765~~181
Investment in consolidated subsidiaries		~~909~~945,~~479~~178			—			—		(~~909~~945,~~479~~178	)		—
Investment in unconsolidated joint venture		~~813~~814			—			1011,~~737~~183		—			11,~~550~~997
Deferred financing costs		6,~~602~~145			—			—		—			6,~~602~~145
Deferred income taxes		~~21,020~~—			6,~~698~~895			~~622~~9,750		(2816,~~340~~645	)		—
Other long-term assets		~~116,708~~—			~~472~~502,~~429~~776			1589,~~405~~153		(~~582~~569,~~428~~886	)		22,~~114~~043
Total Assets	$	1,~~198~~066,~~556~~634		$	~~841~~873,~~366~~603		$	~~436~~544,~~637~~577	$	(1,~~581~~544,~~575~~934	)	$	~~894~~939,~~984~~880
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities
Current portion of long-term debt	$	3,343		$	—		$	—	$	—		$	3,343
Accounts payable-trade		2,~~700~~698			3235,~~258~~269			4145,~~972~~543		—			7683,~~930~~510
Other payables and accruals		15(12,~~940~~293	)		3736,~~877~~670			2043,~~277~~991		(~~24,215~~309	)		4968,~~879~~059
Due to related party		—			~~8,501~~—			2515,~~882~~601		~~(25,028~~—	)		915,~~355~~601
Insurance note payable		3,019			—			—		—			3,019
Total current liabilities		(6,252	)		71,939			105,135		(309	)		170,513
Total current liabilities		25,002			78,636			88,131		(49,243	)		142,526
Long-term debt, net of current portion		482,222			—			—		—			482,222
Long-term debt, net of current portion		483,057			—			—		—			483,057
Deferred income taxes		36,757			—			—		(16,645	)		20,112
Deferred income taxes		58,944			—			—		(28,340	)		30,604
Long-term liabilities		368,482			67,531			196,698		(569,577	)		63,134
Long-term liabilities		469,004			53,960			122,380		(582,428	)		62,916
Total Liabilities		881,209			139,470			301,833		(586,531	)		735,981
Total liabilities		1,036,007			132,596			210,511		(660,011	)		719,103
Commitments and contingencies (Note 11)
Member’s equity
Common equity		~~165~~188,~~860~~489			~~742~~760,~~578~~530			~~178~~197,~~986~~586		(~~921~~958,~~564~~403	)		~~165~~188,~~860~~202
Accumulated other comprehensive income		(3,~~311~~064	)		(3326,~~808~~397	)		4745,~~140~~158		—			1015,~~021~~697
Total member’s equity		~~162~~185,~~549~~425			~~708~~734,~~770~~133			~~226~~242,~~126~~744		(~~921~~958,~~564~~403	)		~~175~~203,~~881~~899
Total Liabilities and Member’s Equity	$	1,~~198~~066,~~556~~634		$	~~841~~873,~~366~~603		$	~~436~~544,~~637~~577	$	(1,~~581~~544,~~575~~934	)	$	~~894~~939,~~984~~880

(1)	Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

2225

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Kraton Polymers LLC

Condensed Consolidating Balance Sheet

December 31, 2008

(In thousands)

	Issuers(1)			GuarantorSubsidiaries			Non-GuarantorSubsidiaries		Eliminations			Consolidated
ASSETS
Current Assets
Cash and cash equivalents	$	—		$	65,460		$	35,936	$	—		$	101,396
Receivables, net		944			45,322			68,148		(18,971	)		95,443
Inventories of products, net		—			145,654			187,396		(8,857	)		324,193
Inventories of materials and supplies		—			6,816			4,239		—			11,055
Deferred income taxes		—			14,778			—		—			14,778
Other current assets		2,905			720			3,144		—			6,769
Total current assets		3,849			278,750			298,863		(27,828	)		553,634
Property, plant and equipment, less accumulated depreciation		93,782			164,396			113,830		—			372,008
Identifiable intangible assets, less accumulated amortization		20,113			—			46,938		—			67,051
Investment in consolidated subsidiaries		898,565			—			—		(898,565	)		—
Investment in unconsolidated joint venture		813			—			11,558		—			12,371
Deferred financing costs		8,184			—			—		—			8,184
Deferred income taxes		20,131			—			—		(20,131	)		—
Other long-term assets		137,954			411,841			11,739		(542,908	)		18,626
Total Assets	$	1,183,391		$	854,987		$	482,928	$	(1,489,432	)	$	1,031,874
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities
Current portion of long-term debt	$	3,343		$	—		$	—	$	—		$	3,343
Accounts payable-trade		2,700			36,806			35,671		—			75,177
Other payables and accruals		15,815			26,184			27,350		—			69,349
Due to related party		—			9,546			35,010		(18,971	)		25,585
Total current liabilities		21,858			72,536			98,031		(18,971	)		173,454
Long-term debt, net of current portion		571,728			—			—		—			571,728
Deferred income taxes		—			53,435			1,681		(20,131	)		34,985
Long-term liabilities		408,416			53,626			143,983		(542,908	)		63,117
Total liabilities		1,002,002			179,597			243,695		(582,010	)		843,284
Total Liabilities		1,002,002			179,597			243,695		(582,010	)		843,284
Commitments and contingencies (Note 11)
Member’s equity
Common equity		182,767			694,170			213,252		(907,422	)		182,767
Accumulated other comprehensive income		(1,378	)		(18,780	)		25,981		—			5,823
Total member’s equity		181,389			675,390			239,233		(907,422	)		188,590
Total Liabilities and Member’s Equity	$	1,183,391		$	854,987		$	482,928	$	(1,489,432	)	$	1,031,874

(1)	Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

2326

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

Three Months Ended ~~June~~September 30, 2009

(In thousands)

	Issuers(1)			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations	~~Eliminations~~			Consolidated	~~Consolidated~~
	(Unaudited)
Operating Revenues
Sales	$	—		$	~~122~~141,~~112~~653		$	~~151~~169,~~539~~737		$	$(40,936	~~(39,910~~)	)	$	$270,454	~~233,741~~
Other		—			—14			1018,~~080~~050			—	—			18,064	~~10,080~~
Total operating revenues		—			~~122~~141,~~112~~667			~~161~~187,~~619~~787			(40,936	~~(39,910~~)	)		288,518	~~243,821~~
Cost of Goods Sold		51,~~449~~277			95100,~~779~~191			~~146~~158,~~742~~017			(40,936	~~(39,910~~)	)		218,549	~~208,060~~
Gross Profit		(51,~~449~~277	)		2641,~~333~~476			1429,~~877~~770			—	—			69,969	~~35,761~~
Operating Expenses
Research and development		—			3,~~485~~327			1,~~586~~748			—	—			5,075	~~5,071~~
Selling, general, and administrative		(~~272~~757	)		910,~~123~~743			910,~~201~~296			—	—			20,282	~~18,052~~
Depreciation and amortization		35,~~973~~098			5,~~522~~217			36,~~047~~162			—	—			16,477	~~12,542~~
Total operating expenses		34,~~701~~341			1819,~~130~~287			1318,~~834~~206			—	—			41,834	~~35,665~~
Gain on Extinguishment of Debt		4,340			—			—				—				4,340
Equity in Earnings of Consolidated Subsidiaries		35,317			—			—			(35,317	)			—
Equity in Earnings of Consolidated Subsidiaries		12,781			—			—				(12,781	)			—
Equity in Earnings of Unconsolidated Joint Venture		—			—			129			—				129
Equity in Earnings of Unconsolidated Joint Venture		—			—			102				—				102
Interest Expense, net		9,693			(2,729	)		1,080			—				8,044
Interest Expense, net		9,725			(2,746	)		846				—				7,825
Income (Loss) Before Income Taxes		20,006			24,918			10,613			(35,317	)			20,220
Income (Loss) Before Income Taxes		(1,754	)		10,949			299				(12,781	)			(3,287	)
Income Tax Expense (Benefit)		(1,859	)		34			180			—				(1,645	)
Income Tax Expense (Benefit)		2,424			33			(1,566	)			—				891
Net Income (Loss)	$	21,865		$	24,884		$	10,433		$	(35,317	)		$	21,865
Net Income (Loss)	$	(4,178	)	$	10,916		$	1,865			$	(12,781	)		$	(4,178	)

(1)	Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

2427

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

Three Months Ended ~~June~~September 30, 2008

(In thousands)

Issuers(1)

GuarantorSubsidiaries

Non-GuarantorSubsidiaries

Eliminations

Consolidated

Operating Revenues

Sales

—

~~173~~190,~~152~~613

~~201~~218,~~984~~192

(4645,~~774~~530

)

~~328~~363,~~362~~275

Other

—

1718,~~007~~892

—

1718,~~007~~892

Total operating revenues

—

~~173~~190,~~152~~613

~~218~~237,~~991~~084

(4645,~~774~~530

)

~~345~~382,~~369~~167

Cost of Goods Sold

(1,~~457~~034

)

~~139~~134,~~801~~803

~~191~~199,~~253~~480

(4645,~~774~~530

)

~~282~~287,~~823~~719

Gross Profit

1,~~457~~034

3355,~~351~~810

2737,~~738~~604

—

6294,~~546~~448

Operating Expenses

Research and development

—

43,~~186~~285

32,~~217~~523

—

75,~~403~~808

Selling, general, and administrative

~~235~~500

816,~~643~~872

1110,~~031~~842

—

1928,~~909~~214

Depreciation and amortization

4,169

5,~~379~~426

3,~~562~~523

—

13,~~110~~118

Total operating expenses

4,~~404~~669

1825,~~208~~583

1716,~~810~~888

—

4047,~~422~~140

Equity in Earnings of Consolidated Subsidiaries

2146,~~902~~631

—

(2146,~~902~~631

)

—

Equity in Earnings of Unconsolidated Joint Venture

—

~~159~~94

—

~~159~~94

Interest Expense, net

108,~~046~~943

(2,~~489~~715

)

1,~~861~~647

—

97,~~418~~875

Income (Loss) Before Income Taxes

834,~~909~~053

1732,~~632~~942

819,~~226~~163

(2146,~~902~~631

)

1239,~~865~~527

Income Tax Expense (Benefit)

(~~1,307~~564

)

1536

35,~~941~~438

—

24,~~649~~910

Net Income (Loss)

1034,~~216~~617

1732,~~617~~906

413,~~285~~725

(2146,~~902~~631

)

1034,~~216~~617

(1)	Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

2528

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

~~Six~~Nine Months Ended ~~June~~September 30, 2009

(In thousands)

	Issuers(1)			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations			Consolidated
	(Unaudited)
Operating Revenues
Sales	$	—		$	~~218~~360,~~973~~626		$	~~273~~443,~~425~~162		$	(80121,~~791~~727	)	$	~~411~~682,~~607~~061
Other		—			—13			1735,~~172~~222			—			1735,~~172~~235
Total operating revenues		—			~~218~~360,~~973~~639			~~290~~478,~~597~~384			(80121,~~791~~727	)		~~428~~717,~~779~~296
Cost of Goods Sold		(32,~~706~~429	)		~~191~~291,~~552~~742			~~277~~435,~~030~~047			(80121,~~791~~727	)		~~384~~602,~~085~~633
Gross Profit		32,~~706~~429			2768,~~421~~897			1343,~~567~~337			—			44114,~~694~~663
Operating Expenses
Research and development		—			69,~~060~~387			35,~~980~~728			—			1015,~~040~~115
Selling, general, and administrative		(~~625~~1,382	)		1930,~~354~~097			1727,~~574~~870			—			3656,~~303~~585
Depreciation and amortization		813,~~141~~239			1116,~~025~~241			512,~~940~~102			—			2541,~~106~~582
Total operating expenses		711,~~516~~857			3655,~~439~~725			2745,~~494~~700			—			71113,~~449~~282
Gain on Extinguishment of Debt		23,831			—			—			—			23,831
Equity in Earnings of Consolidated Subsidiaries		~~(18~~16,~~948~~369	)		—			—			18(16,~~948~~369	)		—
Equity in Earnings of Unconsolidated Joint Venture		—			—			~~176~~305			—			~~176~~305
Interest Expense, net		1929,~~858~~551			(58,~~471~~199	)		23,~~346~~426			—			1624,~~733~~778
Income (Loss) Before Income Taxes		~~(18~~1,~~785~~221	)		(321,~~547~~371	)		(165,~~097~~484	)		18(16,~~948~~369	)		~~(19,481~~739	)
Income Tax Expense (Benefit)		~~1,859~~—			67101			(~~763~~583	)		—			~~1,163~~(482	)
Net Income (Loss)	$	~~(20~~1,~~644~~221	)	$	(321,~~614~~270	)	$	(154,~~334~~901	)	$	18(16,~~948~~369	)	$	~~(20~~1,~~644~~221	)

(1)	Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

2629

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Kraton Polymers LLC

Condensed Consolidating Statement of Operations

~~Six~~Nine Months Ended ~~June~~September 30, 2008

(In thousands)

Issuers(1)

GuarantorSubsidiaries

Non-GuarantorSubsidiaries

Eliminations

Consolidated

Operating Revenues

Sales

—

~~304~~494,~~120~~733

~~370~~588,~~187~~379

(89135,~~657~~187

)

~~584~~947,~~650~~925

Other

—

2746,~~580~~472

—

2746,~~580~~472

Total operating revenues

—

~~304~~494,~~120~~733

~~397~~634,~~767~~851

(89135,~~657~~187

)

~~612~~994,~~230~~397

Cost of Goods Sold

(671,101

)

~~238~~373,~~315~~118

~~352~~551,~~308~~788

(89135,~~657~~187

)

~~500~~788,~~899~~618

Gross Profit

671,101

65121,~~805~~615

4583,~~459~~063

—

~~111~~205,~~331~~779

Operating Expenses

Research and development

—

912,~~630~~915

58,~~691~~214

—

1521,~~321~~129

Selling, general, and administrative

~~252~~752

2441,~~190~~062

2031,~~922~~764

—

4573,~~364~~578

Depreciation and amortization

913,~~790~~959

1016,~~761~~187

710,~~211~~734

—

2740,~~762~~880

Total operating expenses

1014,~~042~~711

4470,~~581~~164

3350,~~824~~712

—

88135,~~447~~587

Equity in Earnings of Consolidated Subsidiaries

2976,~~565~~196

—

(2976,~~565~~196

)

—

Equity in Earnings of Unconsolidated Joint Venture

—

~~220~~314

—

~~220~~314

Interest Expense, net

2129,~~020~~963

(57,~~065~~780

)

35,~~848~~495

—

1927,~~803~~678

Income (Loss) Before Income Taxes

(132,~~430~~623

)

2659,~~289~~231

827,~~007~~170

(2976,~~565~~196

)

342,~~301~~828

Income Tax Expense (Benefit)

(2,~~236~~800

)

1551

410,~~716~~154

—

27,~~495~~405

Net Income (Loss)

~~806~~35,423

2659,~~274~~180

317,~~291~~016

(2976,~~565~~196

)

~~806~~35,423

(1)	Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

2730

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Kraton Polymers LLC

Condensed Consolidating Statement of Cash Flows

~~Six~~Nine Months Ended ~~June~~September 30, 2009

(In thousands)

	Issuers(1)			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations		Consolidated
	(Unaudited)
Cash flows provided by (used in) operating activities	$	(2223,~~334~~396	)	$	1925,~~861~~680		$	738,~~180~~865		$	—	$	441,~~707~~149
Cash flows used in investing activities
Purchase of property, plant and equipment net ofproceeds from sales of equipment		—			(22,247	)		(577	)		—		(22,824	)
Purchase of property, plant and equipment net of proceeds from sales of equipment		—			(32,115	)		(178	)		—		(32,293	)
Net cash used in investing activities		—			(2232,~~247~~115	)		(~~577~~178	)		—		(2232,~~824~~293	)
Cash flows provided by (used in) financing activities
Borrowings under debt obligations		53124,000			—			—			—		53124,000
Repayment of debt obligations		(~~115~~187,~~341~~177	)		—			—			—		(~~115~~187,~~341~~177	)
Proceeds from (payments on) intercompany loan		8186,~~656~~573			(6054,~~588~~666	)		(2131,~~068~~907	)		—		—
Proceeds from insurance note payable		3,019			—			—			—		3,019
Net cash provided by (used in) financing activities		23,396			(54,666	)		(31,907	)		—		(63,177	)
Net cash provided by (used in) financing activities		22,334			(60,588	)		(21,068	)		—		(59,322	)
Effect of exchange rate difference on cash and cash equivalents		—			—			(24,710	)		—		(24,710	)
Effect of exchange rate difference on cash and cash equivalents		—			—			(6,247	)		—		(6,247	)
Net decrease in cash and cash equivalents		—			(61,101	)		(17,930	)		—		(79,031	)
Net decrease in cash and cash equivalents		—			(62,974	)		(20,712	)		—		(83,686	)
Cash and cash equivalents at beginning of period		—			65,460			35,936			—		101,396
Cash and cash equivalents at end of period	$	—		$	24,~~486~~359		$	1518,~~224~~006		$	—	$	1722,~~710~~365

(1)	Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

2831

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

Kraton Polymers LLC

Condensed Consolidating Statement of Cash Flows

~~Six~~Nine Months Ended ~~June~~September 30, 2008

(In thousands)

	Issuers(1)			GuarantorSubsidiaries			Non-GuarantorSubsidiaries			Eliminations		Consolidated
Cash flows provided by (used in) operating activities	$	(1527,~~370~~969	)	$	1858,~~770~~072		$	(1726,~~263~~718	)	$	—	$	~~(13~~3,~~863~~385	)
Cash flows used in investing activities
Purchase of property, plant and equipment net ofproceeds from sales of equipment		—			(7,811	)		(1,858	)		—		(9,669	)
Purchase of property, plant and equipment net of proceeds from sales of equipment		—			(11,880	)		(3,441	)		—		(15,321	)
Net cash used in investing activities		—			(711,~~811~~880	)		(13,~~858~~441	)		—		(915,~~669~~321	)
Cash flows provided by (used in) financing activities
Borrowings under debt obligations		~~154~~316,~~750~~250			—			—			—		~~154~~316,~~750~~250
Repayment of debt obligations		(~~166~~278,~~472~~808	)		—			—			—		(~~166~~278,~~472~~808	)
Proceeds from cash contribution from member		10,000			—			—			—		10,000
Proceeds from (payments on) intercompany loan		17(19,~~586~~473	)		~~(19~~6,~~040~~719	)		112,~~454~~754			—		—
Payment of insurance note payable		(494	)		—			—			—		(494	)
Net cash provided by financing activities		27,969			6,719			12,754			—		47,442
Net cash provided by (used in) financing activities		15,370			(19,040	)		1,454			—		(2,216	)
Effect of exchange rate difference on cash and cash equivalents		—			—			456			—		456
Effect of exchange rate difference on cash and cash equivalents		—			—			(1,177	)		—		(1,177	)
Net increase (decrease) in cash and cash equivalents		—			52,911			(16,949	)		—		35,962
Net decrease in cash and cash equivalents		—			(8,081	)		(18,844	)		—		(26,925	)
Cash and cash equivalents at beginning of period		—			11,152			37,125			—		48,277
Cash and cash equivalents at end of period	$	—		$	364,~~071~~063		$	1820,~~281~~176		$	—	$	2184,~~352~~239

(1)	Kraton Polymers Capital Corporation has minimal assets and income. We do not believe that separate financial information concerning the Issuers would provide additional information that would be useful.

~~15.~~32 ~~Subsequent Event~~

We have evaluated significant events and transactions that occurred from July 1, 2009 through the date of this report and have determined that there were no events or transactions other than those disclosed in this report, if any, that would require recognition or disclosure in our Condensed Consolidated Financial Statements for the quarterly period ended June 30, 2009.

KRATON POLYMERS LLC

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Unaudited)

15. Subsequent Events

On October 1, 2009, Polymer Holdings, the parent company of our company, filed a registration statement on Form S-1 with the U.S. Securities and Exchange Commission relating to a proposed initial public offering of its common stock. On November 3, 2009, Polymer Holdings filed Amendment No. 1 to the registration statement on Form S-1.

On October 20, 2009, we entered into Amendment No. 6 (the “Amendment”) to the Credit and Guaranty Agreement (as amended from time to time, the “Credit Agreement”) among the Company, each of the guarantors thereto, the lenders party thereto and Banc of America Securities LLC, as arranger. The Amendment permits, in each case subject to the terms and conditions of the Credit Agreement, (i) the establishment of separate classes of commitments to replace all or a portion of the existing revolving commitments (“Replacement Revolving Commitments”), (ii) the conversion of all or a portion of existing term loans into separate classes of extended term loans that extend the scheduled amortization and maturity of the existing term loans (“Extended Term Loans”) and (iii) the incurrence of indebtedness secured pari passu with the current lenders to refinance existing term loans (“Refinancing Indebtedness”).

The terms of Replacement Revolving Commitments shall be substantially identical to the terms of the existing revolving commitments, with the exception of tenor, fees and interest rates. There may be no more than three (3) classes of revolving commitments (existing or replacement) outstanding at any time.

The terms of Extended Term Loans shall be substantially identical to the terms of the existing term loans, with the exception of scheduled installment payments and maturity, fees, interest rates and/or prepayment rights vis-à-vis existing term loans. There is no limit on the number of classes of term loans outstanding at any one time.

Refinancing Indebtedness may be incurred in an amount not to exceed the amount of the term loans as of the amendment date minus the sum of existing and extended term loans as of the date of incurrence of such Refinancing Indebtedness. Such Refinancing Indebtedness may not amortize or mature prior to the maturity of the existing term loans and the net proceeds are required to be applied to repay terms loans under the Credit Agreement.

We have evaluated significant events and transactions that occurred from October 1, 2009 through November 10, 2009 and have determined that there were no other events or transactions other than those disclosed in this report that would require recognition or disclosure in our Condensed Consolidated Financial Statements for the quarterly period ended September 30, 2009.

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

~~INTRODUCTION~~You should read the following discussion of our financial condition and results of operations with our audited consolidated financial statements and related notes thereto, included in our Annual Report on Form 10-K as of and for the year ended December 31, 2008. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, the risk factors discussed in the “Risk Factors” section of our most recent Form 10-K and in “Factors Affecting Our Results of Operations” and elsewhere in this Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements.

~~You~~Overview should read the following discussion of our financial condition and results of operations with our audited consolidated financial statements and related notes thereto, included in Kraton’s Annual Report on Form 10-K as of and for the year ended December 31, 2008. This discussion contains forward-looking statements and involves numerous risks and uncertainties, including, but not limited to, the risk factors discussed in the “Risk Factors” section of our most recent Form 10-K and in “Factors Affecting Our Results of Operations” and elsewhere in this Form 10-Q. Actual results may differ materially from those contained in any forward-looking statements.

~~EXECUTIVE~~We ~~OVERVIEW~~believe we are the world’s leading producer, as measured by 2008 sales revenues and volumes, of styrenic block copolymers, or SBCs, a family of performance polymer products whose chemistry we pioneered over 40 years ago. SBCs are highly-engineered synthetic elastomers that enhance the performance of numerous products by delivering a variety of performance characteristics, including greater flexibility, resilience, strength, durability and processability, and are a fast growing subset of the elastomers industry. Our polymers are typically formulated or compounded with other products to achieve improved, customer specific performance characteristics in a variety of applications. The majority of our polymers are highly customized to specific applications and thus are a critical component to the performance of our customer’s product, yet each polymer represents a small fraction of the overall cost of the customer’s finished product. Each polymer requires a significant amount of testing and certification, which, when combined with our proprietary chemistry, encourages strong customer loyalty.

We believe wethat ~~are~~our ~~the~~superior ~~world’s~~technical ~~leading~~expertise, ~~producer~~strong ~~(in~~customer ~~terms~~relationships, oftrack ~~both~~record ~~2008~~of innovation, ~~sales~~second-to-none ~~revenues~~service ~~and~~offering, ~~sales~~diversity ~~volumes)~~ of ~~styrenic~~ ~~block~~customers ~~copolymers~~and ~~(SBCs)~~geographies, aand ~~family~~history of ~~specialty~~continuous ~~chemical~~improvements, ~~products~~together ~~whose~~with ~~chemistry~~the werecognized ~~pioneered~~quality ~~over~~standard 40associated ~~years~~with ~~ago.~~our ~~SBCs~~KRATON® ~~are~~brand ~~highly~~name ~~engineered~~have ~~synthetic~~enabled ~~elastomers~~us ~~which~~to ~~enhance~~maintain ~~the~~our ~~performance~~leading ofglobal ~~numerous~~position ~~products~~in bySBCs. ~~delivering~~We serve a ~~variety~~large number of ~~performance~~ ~~characteristics,~~customers ~~including~~across ~~greater~~a ~~flexibility,~~diverse ~~resilience,~~set ~~strength,~~of ~~durability~~end-use ~~and~~markets in ~~processability,~~many ~~and~~regions ~~are a fast growing subset~~ of the ~~elastomers industry~~world. ~~Our~~As ~~specialty~~a ~~polymers~~result, ~~are~~we ~~typically~~believe ~~processed~~our ~~with~~sales ~~other~~are ~~products~~less sensitive to ~~achieve customer~~conditions ~~specific~~in ~~performance~~any ~~characteristics~~one inparticular aend-use ~~variety~~market ofor ~~applications~~region. ~~Each~~We ~~polymer~~currently isoffer ~~highly~~approximately ~~customized~~800 products to ~~each~~more ~~application~~than ~~and~~700 iscustomers ~~usually~~in aover ~~critical~~60 ~~component~~countries toworldwide. We are the ~~performance~~only ofSBC ~~our~~producer ~~customer’s~~with ~~product,~~manufacturing ~~yet~~and ~~represents~~service acapabilities ~~small~~on ~~fraction of~~four ~~the~~continents, ~~overall~~enabling ~~cost~~us ofto meet the ~~customer’s~~global ~~finished~~needs ~~product. The versatility~~ of our ~~portfolio~~multinational ofcustomers. ~~polymers~~We ismanufacture ~~due~~products toat asix ~~wide~~plants ~~range of distinctive molecular structures~~globally, ~~which~~including ~~can~~our beflagship ~~precisely~~plant ~~controlled~~in ~~and tailored to unique design and performance~~Belpre, ~~characteristics.~~Ohio, ~~Each~~the ~~polymer~~largest ~~requires~~by aproduction ~~significant~~volume ~~amount of testing~~ and ~~certification,~~most ~~which,~~diversified ~~when~~SBC ~~combined~~plant ~~with~~in ~~our~~the ~~proprietary~~world, ~~chemistry~~as ~~encourages~~well ~~strong~~as ~~customer~~plants ~~loyalty.~~in ~~We believe that our global scale~~Germany, ~~broad product offerings~~France, ~~superior technical~~the ~~expertise~~Netherlands, ~~strong~~and ~~customer~~Brazil ~~relationships~~ and ~~well-recognized~~a ~~KRATON®~~joint ~~brand~~venture ~~name~~operated ~~have allowed us to maintain our leading global position~~ in ~~SBCs~~Japan.

We serve athree ~~large~~core ~~number of customers across a diverse set of~~ end-use markets: in(1) Advanced ~~many~~Materials; ~~regions of the world. As a result~~(2) Adhesives, weSealants ~~believe~~and ~~our~~Coatings; sales are less sensitive to conditions in any one particular end-use market or region. We currently offer over 800 products to more than 700 customers in over 60 countries worldwide. We are the only SBC producer with manufacturing and ~~service~~(3) Paving ~~capabilities on four continents, enabling our multinational customers to meet their global needs~~and Roofing. We ~~manufacture~~also ~~products~~serve ata ~~six~~fourth ~~plants globally~~market, ~~including~~an ~~our~~Emerging ~~flagship~~Business ~~Belpre~~category, ~~Ohio~~which ~~plant~~includes inour ~~the~~Isoprene ~~United~~Rubber ~~States,~~Latex ~~the largest~~(IRL) ~~SBC plant in the world, as well as plants in Germany, France, The Netherlands, Brazil and Japan~~activity. ~~The plant in Japan is operated by an unconsolidated manufacturing joint venture.~~

We serve three core end-use markets: (1) Advanced Materials; (2) Adhesives, Sealants and Coatings; and (3) Paving and Roofing. We also serve an emerging business category which includes our IR Latex activity. Other markets include footwear; lubricant and fuel additive applications; and high styrenics.

Each of our end-uses has its own dedicated management, sales force and market development. In addition, each end-use is linked directly to the Research, Development and Technical Services (“RTS”) function and, via this link, sponsors the creation and commercialization of new products in addition to servicing its customers’ technical needs. We believe we hold the number one market position, based on 2008 sales, in each of our core end-use markets.

Recent Developments

New Innovations. Consistent with our strategy, we believe that we continue to lead SBC innovation as evidenced by numerous developments announced across several of our core end-use markets throughout the ~~second~~third quarter of 2009. Below are our most recently announced product innovations.

In ~~April~~August 2009, we ~~announced~~made additional announcements concerning our recently introduced NEXAR™ polymers. The new NEXAR polymers family offers a ~~series~~unique set of ~~new~~key ~~formulations~~performance ~~designed~~attributes tothat can be used in ~~support~~a ~~lower~~myriad ~~Volatile~~of ~~Organic~~applications, ~~Compound~~ranging ~~(VOC)~~from ~~requirements~~water ~~and~~desalination, ~~reduce~~to ~~costs~~industrial ~~associated~~separation ~~with~~applications, ~~contact~~to ~~adhesives~~improving high performance textiles and clothing. The unique ~~structure~~permselectivity of ~~the~~NEXAR membranes allows for a flow of moisture in one direction while blocking other substances such as potentially harmful chemicals.

3034

In September 2009, we announced new developments for Kraton A SBCs that enable a new ~~styrenic~~approach ~~block~~for ~~copolymers~~environmentally ~~provides~~friendly ~~key~~adhesives ~~advantages~~and tooil ~~formulators~~gels. The ~~end~~use ~~block~~of ~~enables~~the ~~cohesion,~~new ~~good~~class ~~load~~of ~~bearing~~Kraton ~~properties~~polymers ~~and~~will ~~temperature~~make ~~resistance~~it possible to formulate pressure sensitive adhesives (PSAs), ~~while~~ ~~the~~sealants ~~center~~and ~~block~~coatings ~~promotes~~using natural oils. ~~adhesion~~The new technology offers a green solution and ~~elongation~~represents the latest addition to our portfolio of environmentally friendly materials.

InPricing. ~~April~~Beginning in August 2009, we announced anthe ~~innovation~~implementation ~~with~~of ~~proven~~a ~~ability~~series toof ~~double styrene-butadiene-styrene~~regional ~~(SBS)~~price ~~modification~~increases, ~~levels~~which inwere ~~pre~~generally broad-~~modified~~based ~~asphalt~~across ~~emulsions. These new high polymer content or “HPC” emulsions are a result of Kraton utilizing~~ our ~~latest~~end-use ~~development~~markets and in ~~high~~response ~~vinyl~~to ~~products. The effects of~~ the ~~enhanced~~increase ~~mechanical~~in ~~properties~~raw ~~can~~material ~~enable~~and ~~a transformation of traditional modified asphalt emulsion applications as well as open the door to new opportunities~~energy costs.

InExit ~~May~~from Pernis Facility. On September 10, 2009, we ~~announced~~committed to exit our ~~recent~~Pernis ~~commercialization~~facility as of December ~~Kraton~~31, ~~G1645~~2009. In connection with our exit from the Pernis facility, awe ~~polymer~~incurred ~~that~~$5.1 ~~creates~~million ~~new~~in ~~opportunities~~asset retirement obligations, $6.0 million in restructuring costs and a $1.1 million non-cash charge to ~~replace~~write-down ~~PVC~~our inventory of spare parts. The asset retirement obligations and the restructuring costs were recorded in ~~medical~~the ~~applications~~third quarter of 2009. In ~~recent~~As ~~years~~a ~~there~~result ~~has~~of ~~been~~our ~~increased~~commitment ~~demand~~to ~~for~~exit the Pernis facility, we performed an impairment test on the related property and equipment at September 30, ~~eco~~2009 pursuant to ASC 360-~~friendly~~10-35, ~~better~~and ~~performing~~concluded ~~products~~that ~~versus~~there ~~conventional~~was ~~elastomers~~no impairment. We ~~have~~The ~~delivered~~$17.1 ~~breakthrough~~million ~~technology~~of ~~offering~~property aand ~~clear,~~equipment ~~sterilizable~~related to Pernis will continue to be classified as assets held and used and will be fully depreciated over their remaining estimated useful life through December 31, ~~strong~~2009. ~~elastomer~~We currently expect that ~~offers~~the aasset ~~broad~~retirement ~~formulating~~obligations ~~window~~and ~~without~~the cash restructuring charges will be substantially paid in the ~~need~~first ~~for~~half ~~phthalate~~of 2010. We currently expect the exit of our Pernis facility ~~plasticizers~~will result in an incremental cost savings of approximately $12.0 ~~Our~~million ~~technology~~per ~~provides~~annum abeginning ~~solution~~in ~~that~~the isfirst ~~eco-friendly~~quarter ~~and~~of ~~ultra-clear~~2010. Prior to the exit, we manufactured isoprene rubber (IR) at the Pernis facility. We currently plan to transfer IR production to an alternative company site. We are in ~~comparison~~the process of completing project scoping, including associated capital expenditure requirements, for producing the alternative capacity, and until such alternative production capacity is brought on line, we plan to ~~PVC~~satisfy orcustomer ~~silicone~~demand for IR with inventory currently on hand.

InAmendment ~~June~~to the Credit and Guaranty Agreement. On October 20, 2009, we ~~announced~~entered ~~our~~into ~~newly~~Amendment ~~commercialized~~No. 6 ~~Nexar™~~(the ~~polymer~~“Amendment”) ~~product~~to ~~family~~the Credit and Guaranty Agreement (as amended from time to time, the “Credit Agreement”) among the Company, each of the guarantors thereto, the lenders party thereto and Banc of America Securities LLC, as arranger. The ~~Nexar~~Amendment ~~polymer~~permits, ~~family~~in ~~is uniquely~~each ~~designed~~case ~~for~~subject ~~high~~to ~~performance~~the ~~breathable~~terms ~~fabrics~~and conditions of the Credit Agreement, ~~water~~(i) the ~~transport~~establishment of separate classes of commitments to replace all or a portion of the existing revolving commitments (“Replacement Revolving Commitments”), ~~filtration~~(ii) the conversion of all or a portion of existing term loans into separate classes of extended term loans that extend the scheduled amortization and ~~separation~~maturity ~~applications~~of the existing term loans (“Extended Term Loans”) and (iii) the incurrence of indebtedness secured pari passu with the current lenders to refinance existing term loans (“Refinancing Indebtedness”).

InThe ~~June~~terms ~~2009~~of ~~we announced~~Replacement ~~new~~Revolving ~~advances~~Commitments inshall ~~pressure~~be ~~sensitive~~substantially ~~adhesives~~identical ~~for the tape market. We have determined it is now possible~~ to ~~blend Kraton styrene-isoprene-butadiene-styrene (SIBS) and styrene-butadiene-styrene (SBS) polymers with rosin ester tackifying~~ ~~resins. The initial testing indicates~~ the ~~unique~~terms ~~combination~~ of ~~Kraton~~the ~~SIBS~~existing ~~and~~revolving ~~SBS~~commitments, with athe ~~rosin~~exception ~~ester~~of ~~can~~tenor, ~~produce~~fees ~~a tape with properties similar to a traditional SIS~~ and C5interest ~~hydrocarbon~~rates. ~~resin~~There ~~formulation,~~may ~~resulting~~be inno amore ~~system~~than ~~cost~~three ~~savings of 10% to 20%.~~(3) ~~The~~classes ~~SIBS product is more compatible with the SBS, allowing higher concentrations~~ of ~~the~~revolving ~~lower~~commitments ~~cost~~(existing ~~SBS~~or inreplacement) ~~tape~~outstanding ~~formulations~~at ~~while~~any ~~maintaining excellent pressure sensitive performance~~time.

~~Kraton~~The ~~Innovation~~terms ~~Center.~~of InExtended ~~June~~Term ~~2009~~Loans weshall ~~announced~~be ~~the~~substantially ~~grand~~identical ~~opening~~to ofthe ~~our~~terms ~~state-~~of- the~~-art~~ ~~Kraton~~existing ~~Innovation~~term ~~Center~~loans, ~~located~~with in the ~~West Houston~~exception ~~Energy~~of ~~Corridor. The~~scheduled installment ~~world-class~~payments ~~technology~~and ~~facility~~maturity, ~~allows~~fees, ~~Kraton~~interest torates ~~upgrade~~ and/or ~~expand~~prepayment ~~its~~rights ~~current~~vis-à-vis ~~capabilities~~existing interm ~~ways~~loans. ~~that~~There weis ~~believe~~no ~~will~~limit ~~build~~ on ~~existing~~the ~~synergies~~number ~~and~~of ~~significantly~~classes ~~improve~~of ~~process~~term ~~efficiencies~~loans ~~for~~outstanding ~~the~~at ~~ultimate benefit~~any ofone ~~our customers~~time.

~~Purchase~~Refinancing ofIndebtedness amay ~~portion~~be ofincurred ~~our~~in ~~8.125%~~an ~~Notes.~~amount Innot ~~April 2009,~~to TJexceed ~~Chemical~~the ~~Holdings~~amount ~~LLC, or “TJ Chemical,” purchased approximately $6.3 million face value~~ of ~~our~~the ~~8.125%~~term ~~Notes~~loans ~~for~~as ~~cash consideration~~ of ~~$2.5~~the ~~million,~~amendment ~~which~~date ~~included~~minus ~~accrued~~the ~~interest~~sum of ~~$0.1 million. Immediately upon purchasing our Notes, TJ Chemical contributed the~~ ~~purchased~~existing ~~Notes~~and toextended ~~Polymer~~term ~~Holdings~~loans ~~which~~as inof ~~turn contributed~~ the ~~Notes~~date toof ~~us.~~incurrence Weof ~~are~~such ~~holding~~Refinancing ~~the Notes as treasury bonds~~Indebtedness. ~~Also~~Such inRefinancing ~~April~~Indebtedness ~~2009,~~may wenot ~~purchased~~amortize ~~approximately~~or ~~$0.7~~mature ~~million~~prior ~~face~~to ~~value~~the ofmaturity ~~our 8.125% Notes for cash consideration~~ of ~~$0.3 million~~the ~~which~~existing weterm ~~are~~loans ~~holding~~and ~~as treasury bonds. We recorded a gain of approximately $4.3 million on~~ the ~~extinguishment~~net ofproceeds ~~debt~~are inrequired ~~the~~to ~~Condensed~~be ~~Consolidated~~applied to ~~Statements~~repay ofterms ~~Operations~~loans inunder the ~~quarter~~Credit ~~ended June 30, 2009~~Agreement.

~~Pricing.~~35 In July 2009 we announced the implementation of a series of global price increases which were generally broad-based across our end-use markets and in response to the increase in raw material and energy costs. These announced global price increases were effective August 1, 2009.

Factors Affecting Our Results of Operations

Raw Materials. Our results of operations are directly affected by the cost of raw materials. We use three monomers as our primary raw materials in the manufacture of our products: styrene, butadiene, and isoprene. These monomers together represented approximately 52%, 45% and 49% of our total cost of goods sold for the twelve months ended December 31, 2008, and the six months ended June 30, 2009 and 2008, respectively. Other raw materials used in our production process include catalysts, solvents, stabilizers and various process control chemicals. The cost of these monomers has generally been correlated to changes in crude prices and affected by global supply and demand and global economic conditions. The market prices for these monomers declined

~~significantly~~Factors ~~late~~Affecting inOur ~~2008~~Results ~~and into the first quarter~~ of ~~2009.~~Operations ~~During the second quarter of 2009 certain monomer costs increased from the first quarter of 2009.~~

WeRaw ~~believe~~Materials. ~~that~~Our ~~through~~results ~~our~~of ~~contractual~~operations ~~arrangements~~are ~~with~~directly ~~suppliers,~~affected orby ~~through~~the ~~other~~cost ~~arrangements,~~of weraw ~~can~~materials. ~~presently~~We ~~source~~use ~~adequate~~three monomers as our ~~supplies~~primary raw materials in the manufacture of our products: styrene, butadiene, and isoprene. atThese ~~competitive,~~monomers ~~market-based~~together ~~prices.~~represented Weapproximately ~~can~~52%, ~~provide~~43% noand ~~assurances,~~49% ~~however,~~of ~~that~~ our ~~suppliers~~total cost of ~~raw~~goods ~~materials~~sold ~~will~~for ~~not~~the ~~terminate~~twelve ~~applicable~~months ~~contracts~~ended atDecember 31, 2008, and the ~~expiration~~nine ofmonths ~~their~~ended ~~terms~~September 30, or2009 ~~that~~and we2008, ~~will~~respectively. ~~be able~~Other toraw ~~obtain~~materials ~~substitute~~used ~~contractual~~in ~~arrangements~~our onproduction ~~comparable~~process ~~terms~~include catalysts, orsolvents, ~~that~~stabilizers weand ~~generally~~various ~~will~~process becontrol ~~able~~chemicals. toThe ~~source~~cost ~~raw~~of ~~materials~~these onmonomers anhas ~~economic~~generally ~~basis~~been correlated into ~~the~~changes ~~future.~~in ~~Our~~crude ~~U.S.~~prices ~~butadiene~~and ~~supply~~affected ~~agreement~~by ~~with~~global ~~Shell~~supply ~~Chemical~~and ~~expired~~demand asand ~~of April 30,~~global ~~2009~~economic conditions. WeThe ~~currently~~market ~~have~~prices ~~access~~for tostyrene ~~adequate~~and butadiene ~~supplies~~monomers atdeclined ~~competitive~~significantly ~~market~~late ~~rates,~~in 2008 and weinto ~~are~~the ~~currently~~first ~~engaged~~quarter inof ~~efforts~~2009. ~~with~~Continuing through ~~various~~2009, ~~suppliers~~these ~~and~~monomer ~~potential~~costs ~~suppliers~~have toeither ~~purchase~~stabilized ~~ongoing~~or ~~and~~begun ~~continuing~~to ~~supplies of butadiene for our U~~increase.S ~~operations.~~

~~Styrene~~We believe that through our contractual arrangements with suppliers, or through other arrangements, we can presently source adequate supplies of styrene, butadiene and isoprene ~~used~~at bycompetitive, ~~our~~market-based Uprices.S. ~~and~~We ~~European~~can ~~facilities~~provide ~~are~~no ~~primarily~~assurances, ~~supplied~~however, bythat ~~Shell~~our ~~Chemicals~~suppliers of raw materials will not terminate applicable contracts at the expiration of their terms or ~~its~~that ~~affiliates,~~we ~~LyondellBasell~~will ~~Industries~~be able to obtain substitute contractual arrangements on comparable terms, ~~and~~or ~~other~~that ~~suppliers~~we ~~under~~generally ~~long-term~~will ~~supply~~be ~~contracts~~able ~~with~~to ~~various~~source ~~expiration~~raw ~~dates~~materials on an economic basis in the future. Our ~~Isoprene~~U.S. ~~Sales~~butadiene ~~Contract~~supply agreement with Shell ~~Chemical~~Chemicals ~~ends~~expired onas ~~December~~of April 3130, 2009,. ~~subject~~We torecently ~~termination~~entered asinto ofa ~~that~~butadiene ~~date~~supply contract with a new supplier for 2010. We currently have access to adequate butadiene supplies at orcompetitive ~~any~~market ~~date~~rates ~~thereafter,~~and onare ~~not~~engaged ~~less~~in ~~than~~efforts ~~four~~with ~~(4) months~~various ~~written~~suppliers ~~notice~~and ~~given~~potential bysuppliers ~~either~~to ~~party~~purchase ongoing and continuing supplies of butadiene for our U.S. operations.

Styrene, butadiene and isoprene used by our U.S. and European facilities are primarily supplied by Shell Chemicals or its affiliates, LyondellBasell, and other suppliers under long-term supply contracts with various expiration dates. Our isoprene sales contract with Shell Chemicals in the United States ends on December 31, 2009, subject to termination as of that date or any date thereafter, on not less than one (1) month written notice given by either party. To date, neither party has given notice of termination under the contract. For our U.S. facilities, we also procure substantial amounts of isoprene from several Chinese and Russian suppliers. We generally contract with them on a short-term basis, although the number of such contracts has been increasing since 2008. We recently entered into a new isoprene supply contract and are engaged in discussions with various suppliers regarding one or more isoprene supply contracts.

In Japan, butadiene and isoprene supplies for our joint venture plant are supplied under our joint venture agreement, where our partner supplies our necessary requirements. Styrene in Japan is sourced from local third-party suppliers. Our facility in Paulinia, Brazil generally purchases all of its raw materials from local third-party suppliers.

International Operations and Currency Fluctuations. We operate a geographically diverse business serving customers in more than 60 countries from six manufacturing plants in six countries. For the ~~six~~nine months ended ~~June~~September 30, 2009, 4142% of ~~net~~total ~~product~~operating ~~sales~~revenues were generated from customers located in the Americas, 40% in Europe and 1718% in the Asia Pacific region.

Although we sell and manufacture our products in many countries, our sales and production costs are mainly denominated in U.S. dollars, Euros, Japanese Yen and Brazilian Real.

Our financial results are subject to gains and losses on currency transactions denominated in currencies other than the functional currency of the relevant operations. Any gains and losses are included in operating income, but have historically not been material. On February 18, 2009 we entered into a foreign currency option contract to reduce our exposure to fluctuations in the Euro to U.S. dollar exchange rate for a notional amount of €47.3 million, which expires on December 29, 2009. See Note 9(a) of Notes to Condensed Consolidated Financial Statements for further discussion.

In36 addition, our financial results are subject to gains and losses on currency translations, which occur when the financial statements of foreign operations are translated into U.S. dollars. The financial statements of operations outside the U.S. where the local currency is considered to be the functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the average exchange rate for each period for revenues, expenses, gains and losses and cash flows. The effect of translating the balance sheet into U.S. dollars is included as a component of other comprehensive income (loss) in member’s equity. Any appreciation of the functional currencies against the U.S. dollar will increase the U.S. dollar equivalent of amounts of revenues, expenses, gains and losses and cash flows, and any depreciation of the functional currencies will decrease the U.S. dollar amounts reported.

Outlook

The effects of the global economic slowdown on Kraton’s business appeared to begin to shift to recovery in the second quarter of 2009 as evidenced by our quarterly sales volume, as compared to the previous year’s comparable quarter, which improved from a 39% decline in the first quarter of 2009 to a 24% decline in the second quarter of 2009, with our June 2009 sales volume narrowing to a 12% decline compared to June 2008.

~~RESULTS~~In OFaddition, ~~OPERATIONS~~our financial results are subject to gains and losses on currency translations, which occur when the financial statements of foreign operations are translated into U.S. dollars. The financial statements of operations outside the United States where the local currency is considered to be the functional currency are translated into U.S. dollars using the exchange rate at each balance sheet date for assets and liabilities and the average exchange rate for each period for revenues, expenses, gains and losses and cash flows. The effect of translating the balance sheet into U.S. dollars is included as a component of other comprehensive income (loss) in member’s equity. Any appreciation of the functional currencies against the U.S. dollar will increase the U.S. dollar equivalent of amounts of revenues, expenses, gains and losses and cash flows, and any depreciation of the functional currencies will decrease the U.S. dollar amounts reported.

Seasonality. Our business is subject to seasonality that may affect our quarterly operating results. Seasonal changes and weather conditions typically affect the Paving and Roofing end-use market. In particular, sales volumes for paving products generally rise in the warmer months and generally decline during the colder months of fall and winter. Roofing product sales volumes tend to be more consistent throughout the year. Abnormally cold or wet seasons may cause reduced purchases from our Paving and Roofing customers. However, because seasonal weather patterns are difficult to predict, we cannot accurately estimate fluctuations in our quarterly Paving and Roofing sales in any given year. Our other end-use markets, Advanced Materials and Adhesives, Sealants and Coatings, however, tend to show relatively little seasonality.

Outlook

The positive volume momentum that began in the second quarter of 2009, continued into the third quarter of 2009. Our quarterly sales volume, as compared to the previous year’s comparable quarter, improved from a 24.0% decline in the second quarter of 2009 to a 9.7% decline in the third quarter of 2009, with our September 2009 sales volume narrowing to a 2.1% decline compared to September 2008.

Results of Operations

The following table summarizes certain information relating to our operating results that has been derived from our Condensed Consolidated Financial Statements.

	Three Months EndedJune 30,					Six Months EndedJune 30,
	Three months endedSeptember 30,					Nine months endedSeptember 30,
	2009			2008		2009			2008
Operating Revenues
Sales	$	~~233~~270,~~741~~454		$	~~328~~363,~~362~~275	$	~~411~~682,~~607~~061		$	~~584~~947,~~650~~925
Other		10,080			17,007		17,172			27,580
Other(1)		18,064			18,892		35,235			46,472
Total operating revenues		~~243~~288,~~821~~518			~~345~~382,~~369~~167		~~428~~717,~~779~~296			~~612~~994,~~230~~397
Cost of Goods Sold		~~208~~218,~~060~~549			~~282~~287,~~823~~719		~~384~~602,~~085~~633			~~500~~788,~~899~~618
Gross Profit		3569,~~761~~969			6294,~~546~~448		44114,~~694~~663			~~111~~205,~~331~~779
Operating Expenses
Research and development		5,~~071~~075			75,~~403~~808		1015,~~040~~115			1521,~~321~~129
Selling, general and administrative		1820,~~052~~282			1928,~~909~~214		3656,~~303~~585			4573,~~364~~578
Depreciation and amortization		1216,~~542~~477			13,~~110~~118		2541,~~106~~582			2740,~~762~~880
Total operating expenses		3541,~~665~~834			4047,~~422~~140		71113,~~449~~282			88135,~~447~~587
Gain on Extinguishment of Debt		~~4,340~~—			—		23,831			—
Equity in Earnings of Unconsolidated Joint Venture		102			159		176			220
Equity in Earnings of Unconsolidated Joint Venture(2)		129			94		305			314
Interest Expense, net		78,~~825~~044			97,~~418~~875		1624,~~733~~778			1927,~~803~~678
Income (Loss) Before Income Taxes		(320,~~287~~220	)		1239,~~865~~527		~~(19,481~~739	)		342,~~301~~828
Income Tax Expense		891			2,649		1,163			2,495
Income Tax Expense (Benefit)		(1,645	)		4,910		(482	)		7,405
Net Income (Loss)	$	(4,178	)	$	10,216	$	(20,664	)	$	806
Net Income	$	21,865		$	34,617	$	1,221		$	35,423

~~Three~~(1) ~~Months~~Other ~~Ended~~revenues ~~June 30,~~include ~~2009~~the ~~Compared~~sale toof ~~Same~~by-products ~~Period~~generated in ~~2008~~the production of IR and SIS.

~~Operating~~(2) ~~Revenues~~Represents our 50% joint venture interest in Kraton JSR Elastomers K.K., which is accounted for using the equity method of accounting.

~~Operating~~37 ~~revenues for the three months ended June 30, 2009 decreased $101.5 million or 29.4% compared to the same period in 2008. The decrease was driven primarily by:~~

Sales decreased $94.6 million or 28.8%. Sales volume amounted to 71.4 kT in 2009 compared to 94.2 kT in 2008. The 22.8 kT or 24.0% decline in sales volume reduced sales by $77.5 million. The impact of changes in foreign currency exchange rates reduced sales by $17.7 million.

The following are the primary factors influencing our sales volume:

• In our Adhesives, Sealants and Coatings end-use market, we experienced a decrease in sales volume due to weakness in demand for commercial packaging tape applications, which began in the second-half of 2008 and continued into the second quarter of 2009. In addition, non-woven and construction applications sales volume have been negatively impacted by deteriorating global economic conditions.

•Three InMonths ~~our~~Ended ~~Advanced Materials end-use market~~September 30, ~~our~~2009 ~~sales~~Compared ~~volume~~to ~~into~~Same ~~automotive,~~Period ~~consumer~~in ~~electronics/appliances,~~2008 ~~and personal care applications declined commensurate with deteriorating global economic conditions.~~

•Operating InRevenues our Paving and Roofing end-use market, roofing applications were lower due to the overall decline in construction activity. We also experienced a decline in asphalt modification volume, largely due to delays associated with the uncertainty around the impact of the U.S. Government economic stimulus spending.

~~Other~~Operating ~~revenue~~revenues for the three months ended September 30, 2009 decreased $693.96 million or 4024.75%. ~~Other~~compared ~~revenue~~to ~~primarily consists of~~ the ~~sales~~same ofperiod ~~small~~in ~~quantities~~2008. ofThe ~~by-products~~decrease ~~resulting~~was ~~from~~driven ~~the~~primarily ~~manufacturing process of isoprene rubber, which is offset~~ by: ~~a corresponding cost included in cost of goods sold.~~

Sales decreased $92.8 million or 25.6%. Sales volume amounted to 80.9 kT in 2009 compared to 89.6 kT in 2008. The 8.7 kT or 9.7% decline in sales volume reduced sales by $38.4 million. Changes in (i) global product sales prices and product mix and (ii) the impact of changes in foreign currency exchange rates reduced sales by $47.1 million and $7.3 million, respectively.

The decrease in sales revenue of $92.8 million or 25.6% was comprised of a reduction in sales revenue of $25.0 million, $22.6 million, $38.6 million and $13.5 million in the Adhesives, Sealants and Coatings, the Advanced Materials, the Paving and Roofing and the Other Markets end-use markets, respectively. These decreases in sales revenue were partially offset by an increase totaling $6.9 million in the Emerging Businesses end-use market.

The following are the primary factors influencing our sales volume in these end-use markets:

•

In our Adhesives, Sealants and Coatings end-use market, we experienced a decrease in sales volume due to weakness in demand for industrial adhesives. While aggregate volume was down when compared to the comparable quarter in 2008, we experienced a modest improvement in demand, led by construction and general shipments of consumable goods, which drive demand for packaging tapes.

•

In our Advanced Materials end-use market, our sales volume continues to recover as global economic conditions improve, especially in consumer/small appliance and personal care applications. However, volume was down when compared to the comparable quarter in 2008, as automotive and heavy appliance markets remain weak.

•

In our Paving and Roofing end-use market, roofing applications were lower due to the overall decline in construction activity, particularly in the commercial sector. However, we saw a recovery in our paving business that more than offset the decline in the construction business.

Other revenue decreased $0.8 million or 4.4%. Other revenue primarily consists of the sales of small quantities of by-products resulting from the manufacturing process of isoprene rubber, which is offset by a corresponding cost included in cost of goods sold.

Cost of Goods Sold

Cost of goods sold for three months ended ~~June~~September 30, 2009 decreased $7469.82 million or 2624.40% compared to the same period in 2008. The decrease was driven primarily by:

• $5338.67 million ~~related~~in tomonomer ~~the~~and ~~decline~~other inproduction ~~sales volume~~costs,

• $1324.26 million ~~from~~related ~~changes~~to inthe ~~foreign~~decline ~~currency~~in ~~exchange~~sales ~~rates~~volume,

• $6.90 million ~~due~~from tochanges ~~lower~~in ~~by-product~~foreign ~~costs~~currency ~~and~~exchange rates,

• $10.18 million indue ~~monomer~~to ~~and~~lower ~~other~~by-product ~~production~~ costs., offset by

As• a$0.9 ~~percentage~~million ofin ~~operating~~plant ~~revenues,~~turnaround ~~cost of goods sold increased to 85~~costs.~~3% from 81.9%.~~

As a percentage of operating revenues, cost of goods sold increased to 75.7% from 75.3%.

Gross Profit

Gross profit for the three months ended ~~June~~September 30, 2009 decreased $2624.85 million or 4225.89% compared to the same period in 2008. The decrease was driven primarily by a decrease in sales volume. As a percentage of operating revenues, gross profit decreased to 1424.73% from 1824.17%.

Operating Expenses

Operating expenses for the three months ended ~~June~~ September 30, 2009 decreased $45.83 million or 11.83% compared to the same period in 2008. The decrease was driven primarily by:

• Research and development decreased $20.37 million or 3112.56%. The decrease was ~~largely~~primarily due to ~~the~~a ~~costs associated~~reduction ~~with the realignment~~ of our ~~Research~~incentive ~~and~~compensation ~~Technology~~costs ~~Service~~of ~~organization~~$0.3 ~~in 2008~~million. As a percentage of operating revenues, research and development ~~was~~increased ~~unchanged~~to ~~at 2~~1.8% from 1.5%.

• Selling, general and administrative decreased $17.9 million or 928.31%. The decrease was primarily due to a reduction of our incentive compensation costs ~~and lower~~of ~~restructuring~~$6.5 ~~costs~~million. As a percentage of operating revenues, selling, general and administrative ~~increased~~decreased to 7.40% from 57.84%.

Interest Expense, net.

Interest expense, net for the three months ended ~~June~~ September 30, 2009 ~~decreased~~amounted ~~$1.6 million or 17.0%~~ to $7.8.0 million compared to $97.49 million during the same period in 2008. The ~~decrease was primarily due to lower interest rates and amortized gains from our interest rate swap that was settled in June 2008. The~~ average debt balances outstanding were $~~532~~541.69 million for the three months ended ~~June~~September 30, 2009 and $~~568~~542.90 million for the three months ended ~~June~~September 30, 2008. The effective interest rates on our debt were 56.90% for the three months ended ~~June~~September 30, 2009 and 6.63% for the three months ended ~~June~~ September 30, 2008.

Income Tax Expense

Income tax expense was a net benefit of $01.96 million for three months ended ~~June~~September 30, 2009 compared to an expense of $24.69 million for the three months ended ~~June~~September 30, 2008. The effective tax rate was (2713.16)% for the three months ended ~~June~~ September 30, 2009 compared to 2012.64% for the three months ended ~~June~~September 30, 2008. Our effective tax rate for the current period was ~~less~~lower than ~~our~~the statutory rate of 35% primarily due to a ~~decrease~~pretax ~~in pre-tax income~~loss, along with not recording a tax benefit for certain net operating losses generated during that period and achanges ~~change~~ in ~~mix~~where ofour ~~pre-tax~~ income ~~between~~is ~~foreign and domestic tax jurisdictions~~earned. Our effective tax rate for the prior period was higher than our statutory rate primarily due to an increase in pre-tax income, along with not recording a tax benefit for certain net operating losses generated during that period and a change in mix of pre-tax income between foreign and domestic tax jurisdictions.

Net Income ~~(Loss)~~

Net ~~loss~~income was $421.29 million for the three months ended ~~June~~September 30, 2009, a decrease of $1412.47 million compared to a net income of $1034.26 million in the same period in 2008.

~~Six~~Nine Months Ended ~~June~~September 30, 2009 Compared to Same Period in 2008

Operating Revenues

Operating revenues for the ~~six~~nine months ended ~~June~~September 30, 2009 decreased $~~183~~277.51 million or 3027.09% compared to the same period in 2008. The decrease was driven primarily by:

Sales decreased $~~173~~265.09 million or 2928.60%. Sales volume amounted to ~~118~~199.54 kT in 2009 compared to ~~171~~260.05 kT in 2008. The 52 61.51 kT or 3023.75% decline in sales volume reduced sales by $~~171~~209.26 million. ~~The~~Changes in (i) global product sales prices and product mix and (ii) the impact of changes in foreign currency exchange rates reduced sales by $3117.27 million. ~~Partially~~and ~~offsetting these decreases in sales was a~~ $2938.46 million, ~~increase in global product sales prices and changes in product mix~~respectively.

~~The~~39 ~~following are the primary factors influencing our sales volume:~~

• In our Adhesives, Sealants and Coatings end-use market, we experienced a decrease in sales volume due to weakness in demand for commercial packaging tape applications, which began in the second-half of 2008 and has continued into the first half of 2009. In addition, non-woven and construction applications sales volume have been negatively impacted by deteriorating global economic conditions.

• In our Advanced Materials end-use market, our sales volume into automotive, consumer electronics/appliances, and personal care applications declined commensurate with deteriorating global economic conditions.

• In our Paving and Roofing end-use market, roofing applications were lower due to the overall decline in construction activity. We also experienced a decline in asphalt modification volume, largely due to delays associated with the uncertainty around the impact of the U.S. Government economic stimulus spending.

Other revenue decreased $10.4 million or 37.7%. Other revenue primarily consists of the sales of small quantities of by-products resulting from the manufacturing process of isoprene rubber, which is offset by a corresponding cost included in cost of goods sold.

Cost of Goods Sold

Cost of goods sold for the six months ended June 30, 2009 decreased $116.8 million or 23.3% compared to the same period in 2008. The decrease was driven primarily by:

• $121.4 million related to the decline in sales volume,

•The decrease in sales revenue of $23265.89 or 28.0% was comprised of a reduction in sales revenue of $86.2 million, ~~from~~$89.1 ~~changes~~million, $104.3 million and $2.5 million in ~~foreign~~the ~~currency~~Adhesives, ~~exchange~~Sealants ~~rates~~and Coatings, the Advanced Materials, the Paving and Roofing and the Other Markets end-use markets, respectively. These decreases in sales revenue were partially offset by an increase totaling $16.2 million in the Emerging Businesses end-use market.

•The ~~$10.4~~following are ~~million~~the ~~due~~primary tofactors ~~lower~~influencing ~~by-product~~our ~~costs,~~sales ~~partially~~volume ~~offset~~in bythese end-use markets:

• ~~$38~~In our Adhesives, Sealants and Coatings end-use market, we experienced a decline in overall demand that began in the fourth quarter of 2008 and continued into 2009.8 ~~million~~Demand, however, for non-woven applications supported by a modest improvement in ~~monomer~~consumer demand as well as continued growth in commercial and ~~other~~specialty ~~production~~tapes ~~costs~~and labels had a positive impact on our upward volume trend starting in the second quarter of 2009 and continuing through the third quarter of 2009.

As• aIn ~~percentage~~our ofAdvanced ~~operating~~Materials ~~revenues~~end-use market, ~~cost~~our ofsales ~~goods~~volume ~~sold~~into ~~increased~~key tomarkets ~~89.6%~~such ~~from~~as ~~81.8%.~~automotive, consumer electronics/appliances and personal care applications declined commensurate with global economic conditions; however, as market conditions improved late in the third quarter of 2009, volume began to recover.

•

In our Paving and Roofing end-use market, roofing applications were lower due to the overall decline in construction activity, particularly in the commercial sector. We also experienced a decline in our paving business, largely due to delays associated with the uncertainty around the impact of the U.S. Government economic stimulus spending and budgetary constraints on state and local governments.

Other revenue decreased $11.2 million or 24.2%. Other revenue primarily consists of the sales of small quantities of by-products resulting from the manufacturing process of isoprene rubber, which is offset by a corresponding cost included in cost of goods sold.

Cost of Goods Sold

Cost of goods sold for the nine months ended September 30, 2009 decreased $186.0 million or 23.6% compared to the same period in 2008. The decrease was driven primarily by:

•

$146.1 million related to the decline in sales volume,

•

$29.8 million from changes in foreign currency exchange rates,

•

$11.2 million due to lower by-product costs,

•

$6.6 million in monomer and other production costs, offset by

•

$7.7 million in plant turnaround costs.

As a percentage of operating revenues, cost of goods sold increased to 84.0% from 79.3%.

Gross Profit

Gross profit for the ~~six~~nine months ended ~~June~~September 30, 2009 decreased $6691.61 million or 5944.93% compared to the same period in 2008. The decrease was driven primarily by a decrease in sales volume. As a percentage of operating revenues, gross profit decreased to 1016.40% from 1820.27%.

Operating Expenses

Operating expenses for the ~~six~~nine months ended ~~June~~September 30, 2009 decreased $1722.03 million or 1916.25% compared to the same period in 2008. The decrease was driven primarily by:

Research and development decreased $56.30 million or 3428.5%. The decrease was largely due to the costs associated with the realignment of our Research and Technology Service organization in 2008 of $3.3 million. As a percentage of operating revenues, research and development ~~decreased~~was tounchanged ~~2.3%~~at ~~from~~ 2.51%.

~~Selling,~~40 general and administrative decreased $9.1 million or 20%. The decrease was primarily due to lower restructuring costs and a reduction of our incentive compensation costs of $8.1 million. As a percentage of operating revenues, selling, general and administrative increased to 8.5% from 7.4%.

Selling, general and administrative decreased $17.0 million or 23.1%. The decrease was primarily due to a reduction of our incentive compensation costs of $9.3 million and lower restructuring costs of $5.4 million. As a percentage of operating revenues, selling, general and administrative increased to 7.9% from 7.4%.

Interest Expense, net.

Interest expense, net for the ~~six~~nine months ended ~~June~~September 30, 2009 decreased $32.19 million or 1510.5% to $1624.78 million compared to $1927.87 million during the same period in 2008. The decrease was primarily due to lower interest rates and amortized gains from our interest rate swap that was settled in June 2008. The average debt balances outstanding were $~~549~~546.69 million for the ~~six~~nine months ended ~~June~~September 30, 2009 and $~~565~~557.68 million for the ~~six~~nine months ended ~~June~~September 30, 2008. The effective interest rates on our debt were 6.10% for the ~~six~~nine months ended ~~June~~September 30, 2009 and 76.06% for the ~~six~~ nine months ended ~~June~~September 30, 2008.

Income Tax Expense

Income tax expense was a net benefit of $10.25 million for the ~~six~~nine months ended ~~June~~September 30, 2009 compared to an expense of $27.54 million for the ~~six~~nine months ended ~~June~~September 30, 2008. The effective tax rate ~~was (6.0)%~~ for the ~~six~~nine months ~~ended~~ ~~June~~ended September 30, 2009 was (6.5)% compared to 7517.63% for the ~~six~~nine months ended ~~June~~September 30, 2008. Our effective tax rate for the current period was ~~less~~lower than ~~our~~the statutory rate of 35% primarily due to a ~~decrease~~pretax ~~in pre-tax income~~loss, along with not recording a tax benefit for certain net operating losses generated during that period and achanges ~~change~~ in ~~mix~~where ofour ~~pre-tax~~ income ~~between~~is ~~foreign and domestic tax jurisdictions~~earned. Our effective tax rate for the prior period was higher than our statutory rate primarily due to an increase in pre-tax income, along with not recording a tax benefit for certain net operating losses generated during that period and a change in mix of pre-tax income between foreign and domestic tax jurisdictions.

Net Income ~~(Loss)~~

Net ~~loss~~income was $201.62 million for the ~~six~~nine months ended ~~June~~September 30, 2009, a decrease of $2134.42 million compared to a net income of $035.84 million in the same period in 2008.

LIQUIDITY AND CAPITAL RESOURCES

Known Trends and Uncertainties

We are a holding company without any operations or assets other than the operations of our subsidiaries. ~~Our liquidity depends on distributions from our subsidiaries and we expect to continue to fund our liquidity requirements principally with cash derived from operations and existing cash balances.~~

Credit markets in the United States have experienced varying degrees of credit volatility and contraction that have limited and reduced our ability to explore financing options. This volatility has been caused by many factors, including concerns about creditworthiness in the overall market, especially the financial services sector, which has culminated in the failure or consolidation of several large financial and investment institutions. As a result of these market conditions, the cost and availability of credit has been and may continue to be adversely affected by illiquid credit markets and wider credit spreads. Concern about the stability of the markets generally and the strength of counterparties specifically has led many lenders and institutional investors to reduce, and in some cases, cease to provide funding to borrowers. Continued turbulence in the U.S. and international markets and economies may adversely affect our liquidity and financial condition, and the liquidity and financial condition of our customers, to timely replace maturing liabilities, and access the capital markets to meet liquidity needs, resulting in adverse effects on our financial condition and results of operations. During this credit contraction, we have been able to access borrowings available to us in amounts sufficient to fund liquidity needs.

Based upon current and anticipated levels of operations, we believe that cash flow from operations of our subsidiaries and borrowings available to us will be adequate for the foreseeable future for us to fund our working capital and capital expenditure requirements and to make required payments of principal and interest on our 8.125% Notes and senior secured credit facility. However, these cash flows are subject to a number of factors, including, but not limited to, earnings, sensitivities to the cost of raw materials, seasonality, currency transactions and currency translation. Since feedstock costs represent approximately 50% of our cost of production, in periods of rising feedstock costs, we consume cash in operating activities due to increases in accounts receivable and inventory, partially offset by increased value of accounts payable. Conversely, in periods where feedstock costs are declining, Kraton generates cash flow from decreases in working capital. We currently expect to have lower levels of working capital in 2009. There can be no assurance that continued or increased volatility and disruption in the global capital and credit markets will not impair our ability to access these markets on terms commercially acceptable to us or at all.

~~Going~~41 forward there can be no assurance that our business will generate sufficient cash flow from operations or that future borrowings will be available under our senior secured credit facility to fund liquidity needs in an amount sufficient to enable us to service our indebtedness. At June 30, 2009, we had $17.7 million of cash and cash equivalents. Our available cash and cash equivalents are held in accounts managed by third-party financial institutions and consist of cash invested in interest bearing funds and cash in our operating accounts. To date, we have experienced no loss or lack of access to our invested cash or cash equivalents; however, we can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions in the financial markets. We have available to us, upon compliance with customary conditions, the $75.5 million revolving portion of the senior secured credit facility of which we had borrowed $0.0 million at June 30, 2009. While we have met the conditions required to provide us full access to the revolving portion of our senior secured credit facility, we cannot guarantee that all of the counterparties contractually committed to fund a revolving credit draw request will actually fund future requests, although, based upon our present analysis, we currently believe that any such shortfall would not exceed 10% of the total amount of such revolver. Under the terms of our senior secured credit facility, as amended May 12, 2006, we are subject to certain financial covenants, including maintenance of a minimum interest rate coverage ratio and a maximum leverage ratio. We are required to maintain a fiscal quarter end interest coverage ratio of 2.75:1.00 beginning March 31, 2009 and 3.00:1.00 beginning March 31, 2010 and continuing thereafter. In addition, we are required to maintain a fiscal quarter end leverage ratio not to exceed 4.45 beginning March 31, 2009 through September 30, 2009 and 4.00 beginning December 31, 2009 and continuing thereafter.

~~Our~~ including, ~~failure~~but tonot ~~comply~~limited ~~with~~to, ~~any~~earnings, ofsensitivities ~~these financial covenants would give rise~~ to ~~a default under~~ the ~~senior secured~~cost ~~credit facility. As~~ of ~~June 30~~raw materials, ~~2009~~seasonality, wecurrency ~~were~~transactions ~~in compliance with the applicable financial ratios in the senior secured credit facility~~ and ~~the~~currency ~~other~~translation. ~~covenants~~Since ~~contained~~feedstock incosts ~~the~~represent ~~senior~~approximately ~~secured credit facility and the indentures governing the 8.125~~50% ~~Notes. The maintenance~~ of ~~these financial ratios is based on~~ our ~~level~~cost of ~~profitability.~~production, Ifin ~~the~~periods ~~2009~~of ~~global~~rising ~~economic~~feedstock ~~environment worsens or other factors arise which negatively impact our profitability~~costs, we ~~may~~consume ~~not~~cash bein ~~able~~operating toactivities ~~satisfy~~due ~~our covenants. If we are unable~~ to ~~satisfy~~increases ~~such~~in ~~covenants~~accounts orreceivable ~~other~~and ~~provisions~~inventory, atpartially ~~any~~offset ~~future~~by ~~time~~increased wevalue ~~would need to seek an amendment or waiver~~ of ~~such~~accounts ~~financial covenants or other provisions~~payable. ~~The~~Conversely, ~~respective~~in ~~lenders~~periods ~~under the senior secured credit~~where ~~facility~~feedstock ~~may~~costs ~~not~~are ~~consent~~declining, towe ~~any~~generate ~~amendment~~cash orflow ~~waiver~~from ~~requests~~decreases ~~that we may make~~ in ~~the~~working ~~future,~~capital. ~~and,~~We ifcurrently ~~they~~expect doto ~~consent,~~have ~~they~~lower ~~may~~levels ~~not~~of doworking socapital onin ~~terms~~2009. ~~which~~There ~~are~~can ~~favorable~~be tono ~~us.~~assurance ~~In the event~~ that wecontinued ~~were unable to obtain any such waiver~~ or ~~amendment~~increased volatility and we ~~were~~disruption ~~not~~in ~~able to refinance or repay our debt instruments, our inability to meet~~ the global ~~financial~~capital ~~covenants~~and ~~or other provisions of the senior secured~~ credit ~~facility~~markets ~~would~~will ~~constitute~~not animpair ~~event of default under~~ our ~~debt~~ability ~~instruments,~~to ~~including~~access ~~the senior~~these ~~secured~~markets ~~credit~~on ~~facility,~~terms ~~which~~commercially ~~would~~acceptable ~~permit the bank lenders~~ to ~~accelerate~~us ~~the~~or ~~senior~~at ~~secured credit facility~~all.

~~From~~Going ~~time~~forward tothere ~~time, on~~can anbe ~~ongoing~~no ~~basis,~~assurance wethat ~~continue~~our tobusiness ~~evaluate~~will ~~options~~generate ~~with~~sufficient ~~respect~~cash toflow ~~our~~from ~~overall~~operations ~~debt~~or ~~structure,~~that ~~including,~~future ~~without~~borrowings ~~limitation,~~will ~~the~~be ~~possibility~~available ofunder ~~cash~~our ~~purchases,~~senior insecured ~~the~~credit ~~open~~facility ~~market,~~to ~~privately~~fund liquidity ~~negotiated~~needs ~~transactions~~in oran ~~otherwise,~~amount ofsufficient ~~Kraton indebtedness up~~ to ~~amounts~~enable ~~permitted~~us ~~under~~to service our ~~senior secured credit facility~~indebtedness. ~~Such~~At ~~repurchases~~September 30, ~~if any~~2009, ~~will~~we ~~depend~~had on$22.4 million ~~prevailing~~of ~~market~~cash ~~conditions,~~and ~~our~~cash ~~liquidity~~equivalents. ~~requirements,~~Our ~~contractual~~available ~~restrictions~~cash and ~~other~~cash ~~factors.~~equivalents Inare ~~March 2009,~~held ~~we purchased~~in ~~and~~accounts ~~extinguished~~managed ~~$30~~by ~~million~~third-party financial ~~face~~institutions ~~value~~and consist of ~~our~~cash ~~8.125%~~invested ~~Notes~~in ~~for~~interest bearing funds and cash ~~consideration~~in ofour ~~$10~~operating accounts.9 ~~million~~To date, ~~which~~we ~~included~~have ~~accrued~~experienced ~~interest~~no ofloss ~~$0.4~~or ~~million.~~lack Weof ~~recorded~~access ato ~~gain~~our ofinvested ~~approximately~~cash ~~$19.5~~or ~~million~~cash inequivalents; ~~the~~however, ~~quarter~~we ~~ended~~can ~~March 31,~~provide no assurances ~~2009~~that ~~related~~access to ~~the~~our ~~purchase~~invested cash and ~~extinguishment~~cash ofequivalents ~~these~~will ~~8.125%~~not ~~Notes.~~be Inimpacted ~~April~~by ~~2009~~adverse TJconditions ~~Chemical~~in ~~purchased~~the ~~approximately~~financial $6markets.3 ~~million~~We ~~face~~have ~~value~~available ofto ~~our~~us, ~~8.125%~~upon ~~Notes~~compliance ~~for~~with ~~cash~~customary ~~consideration~~conditions, ofthe $275.5 million, ~~which~~revolving ~~included~~portion ~~accrued~~of ~~interest~~the senior secured credit facility, of which we had borrowed $0.1 0 million at September 30, 2009. ~~Immediately~~While ~~upon~~we ~~purchasing~~have ~~our~~met ~~Notes,~~the TJconditions ~~Chemical~~required ~~contributed~~to ~~the~~provide ~~purchased~~us ~~Notes~~full access to ~~Polymer~~the ~~Holdings~~revolving ~~which~~portion inof ~~turn~~our ~~contributed~~senior secured credit facility, we cannot guarantee that all of the ~~Notes~~counterparties contractually committed to ~~us.~~fund Wea ~~are~~revolving ~~holding~~credit ~~the~~draw ~~Notes~~request inwill ~~treasury.~~actually ~~Also~~fund infuture ~~April~~requests, ~~2009~~although, based upon our present analysis, we ~~purchased~~currently ~~approximately~~believe ~~$0.7 million~~that ~~face~~any ~~value~~such ofshortfall ~~our~~would ~~8.125%~~not ~~Notes~~exceed ~~for~~10% ~~cash~~of ~~consideration~~the total amount of $0such revolver.3 ~~million~~Under ~~which~~the terms of our senior secured credit facility, as amended May 12, 2006, we are ~~holding~~subject asto ~~treasury~~certain ~~bonds~~financial covenants, including maintenance of a minimum interest rate coverage ratio and a maximum leverage ratio. We are ~~recorded~~required to maintain a ~~gain~~fiscal ofquarter ~~approximately~~end $4interest coverage ratio of 2.75:1.00 beginning March 31, 2009 and 3.00:1.00 ~~million~~beginning onMarch 31, ~~the~~2010 ~~extinguishment~~and ofcontinuing ~~debt~~thereafter. inIn ~~the~~addition, ~~Condensed~~we ~~Consolidated~~are ~~Statements~~required ~~of Operations~~to inmaintain ~~the~~a fiscal quarter ~~ended~~end leverage ~~June~~ratio not to exceed 4.45 beginning March 31, 2009 through September 30, 2009 and 4.00 beginning December 31, 2009 and continuing thereafter.

Our failure to comply with any of these financial covenants would give rise to a default under the senior secured credit facility. As of September 30, 2009, we were in compliance with the applicable financial ratios in the senior secured credit facility and the other covenants contained in the senior secured credit facility and the indentures governing the 8.125% Notes. The maintenance of these financial ratios is based on our level of profitability. If the global economic environment worsens or other factors arise which negatively impact our profitability, we may not be able to satisfy our covenants. If we are unable to satisfy such covenants or other provisions at any future time we would need to seek an amendment or waiver of such financial covenants or other provisions. The respective lenders under the senior secured credit facility may not consent to any amendment or waiver requests that we may make in the future, and, if they do consent, they may not do so on terms that are favorable to us. In the event that we were unable to obtain any such waiver or amendment and we were not able to refinance or repay our debt instruments, our inability to meet the financial covenants or other provisions of the senior secured credit facility would constitute an event of default under our debt instruments, including the senior secured credit facility, which would permit the bank lenders to accelerate the senior secured credit facility.

From time to time, on an ongoing basis, we continue to evaluate options with respect to our overall debt structure, including, without limitation, the possibility of cash purchases, in the open market, privately negotiated transactions or otherwise, of our indebtedness up to amounts permitted under our senior secured credit facility. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. In March 2009, we purchased and extinguished $30.0 million face value of our 8.125% Notes for cash consideration of $10.9 million, which included accrued interest of $0.4 million. We recorded a gain of approximately $19.5 million in the quarter ended March 31, 2009 related to the purchase and extinguishment of these 8.125% Notes. In April 2009, TJ Chemical purchased approximately $6.3 million face

value of our 8.125% Notes for cash consideration of $2.5 million, which included accrued interest of $0.1 million. Immediately upon purchasing our Notes, TJ Chemical contributed the purchased Notes to Polymer Holdings which in turn contributed the Notes to us. No equity interest or other consideration was issued in exchange for the contribution of the senior subordinated notes, although members’ equity of each of Polymers Holdings and our company was increased by an amount equal to the cash consideration paid by TJ Chemical. We are holding the Notes in treasury. Also in April 2009, we purchased approximately $0.7 million face value of our 8.125% Notes for cash consideration of $0.3 million which we are holding as treasury bonds. We recorded a gain of approximately $4.3 million on the extinguishment of debt in the Condensed Consolidated Statements of Operations in the quarter ended June 30, 2009.

Operating Cash Flows

Net cash provided by operating activities increased $1837.67 million to $441.71 million for the ~~six~~nine months ended ~~June~~September 30, 2009 compared to $133.94 million ~~used~~ inprovided by operating activities during the same period in 2008. This change was driven primarily by:

• ~~Decreased~~$127.1 ~~working~~million ~~capital~~decrease ~~due to decreases~~ in ~~inventory~~inventories ~~and~~of ~~accounts receivable~~products, ~~partially~~materials ~~offset~~and ~~by decreased accounts payable~~supplies, ~~other~~largely ~~payables~~due ~~and~~to ~~accruals~~decreases ~~and~~in ~~related~~the ~~party~~cost ~~balances~~of ~~primarily~~raw ~~related~~material ~~to decreased costs of~~ feedstocks and ~~sales~~ volume.,

•

$14.0 million decrease in accounts receivable due to an improvement in days sales outstanding and the decline in sales volume, partially offset by

•

$14.1 million increase in other assets largely due to the timing of certain payments of $8.2 million,

•

$11.1 million decrease in due to/from affiliate, primarily due to the timing of payments for purchases made from our unconsolidated joint venture,

•

$16.1 million decrease in accounts payable, indicative of the decline in volume,

•

$23.8 million gain on the extinguishment of debt,

•

$5.5 million decrease in deferred income tax expense, and

•

$34.2 million in lower earnings.

Cash and cash equivalents decreased from $101.4 million at December 31, 2008 to $22.4 million at September 30, 2009. Including amounts undrawn on our revolving loans, which amounted to $75.5 million at September 30, 2009 and $25.5 million at December 31, 2008, liquidity, defined as cash and cash equivalents (and the undrawn amount of our revolving loans), amounted to $97.9 million at September 30, 2009 and $126.9 million at December 31, 2008.

Investing Cash Flows

Net cash flows used in investing activities totaled $2232.83 million for the ~~six~~nine months ended ~~June~~September 30, 2009 compared to net cash flows used in investing activities of $915.73 million during the same period in 2008. This $1317.10 million increase was primarily driven by timing of capital expenditures.

Expected Capital Expenditures. We are forecasting 2009 expenditures of approximately $50.0 million. Our minimum annual capital expenditure levels to maintain and achieve required improvements in our facilities in each of the next three to five years are expected to be approximately $12 million to $16 million. We are upgrading certain systems and operating controls at our Belpre, Ohio facility. This project is designed to significantly improve the effectiveness, competitiveness and operating efficiency of the Belpre plant. The project began in the second-half of 2008 and will be completed in distinct phases extending into 2012, with 2009 spending estimated at $9.0 million and the total project spending estimated at $40.0 million. We also invested in a Enterprise Resource Plan (ERP), which began in January 2009 with a cost of approximately $15.0 million to be incurred in 2009. We upgraded our ERP software systems utilizing a single global system and implementing best practices for our industry. For Europe and the United States we completed this in August 2009, and for Brazil and Asia we completed this in October 2009.

3843

2012, with 2009 spending estimated at $9.0 million and the total project spending estimated at $40.0 million. We are also investing in a Global Enterprise Resource Plan (ERP) which began in January 2009 with a cost of approximately $15.0 million to be incurred in 2009. We have undertaken this project to upgrade to an ERP implementation utilizing a single global system and implementing best practices for our industry. This will result in Kraton having a world-class global ERP system. The ERP implementation is projected to be completed by January 2010.

Financing Cash Flows and Liquidity

~~Kraton’s~~Our consolidated capital structure as of ~~June~~September 30, 2009, was 7372% debt and 2728% member’s equity.

Net cash used in financing activities totaled $5963.32 million for the ~~six~~nine months ended ~~June~~ September 30, 2009 compared to $247.24 million net cash provided by financing activities during the same period in 2008. This change was driven primarily by:

• $1050.50 million torepayment ~~purchase~~on ~~and~~the ~~extinguish~~revolving ~~$30~~portion ~~million~~of ~~face~~the ~~value~~senior ofsecured ~~our~~credit ~~8.125%~~facility ~~Notes~~in 2009,

• $5010.8 million ~~repayment~~to onpurchase ~~the~~and ~~Revolver~~extinguish in$30.7 ~~June~~million ~~2009~~face value of our 8.125% Notes in 2009,

•

$50.0 million draw on the revolving portion of the senior secured credit facility in 2008.

Description of Our Indebtedness. See Note 7 of Notes to Condensed Consolidated Financial Statements for a discussion of our debt facilities and related financial and other covenants.

Other Contingencies

As a chemicals manufacturer, our operations in the U.S. and abroad are subject to a wide range of environmental laws and regulations at both the national and local levels. These laws and regulations govern, among other things, air emissions, wastewater discharges, solid and hazardous waste management, site remediation programs and chemical use and management.

Pursuant to these laws and regulations, our facilities are required to obtain and comply with a wide variety of environmental permits for different aspects of their operations. Generally, many of these environmental laws and regulations are becoming increasingly stringent, and the cost of compliance with these various requirements can be expected to increase over time.

Management believes that we are in material compliance with all current environmental laws and regulations. We estimate that any expenses incurred in maintaining compliance with these requirements will not materially affect our results of operations or cause us to exceed our level of anticipated capital expenditures. However, we cannot give assurances that regulatory requirements or permit conditions will not change, and we cannot predict the aggregate costs of additional measures that may be required to maintain compliance as a result of such changes or expenses.

In the context of the separation in February 2001, Shell Chemicals agreed to indemnify us for specific categories of environmental claims brought with respect to matters occurring before the separation, subject to dollar and time limitations. Coverage under the indemnity also varies depending upon the nature of the environmental claim, the location giving rise to the claim and the manner in which the claim is triggered. Therefore, if claims arise in the future related to past operations, we cannot give assurances that those claims will be covered by the Shell Chemicals’ indemnity and also cannot be certain that any amounts recoverable will be sufficient to satisfy claims against us.

In addition, we may in the future be subject to claims that arise solely from events or circumstances occurring after February 2001, which would not, in any event, be covered by the Shell Chemicals’ indemnity. While we recognize that we may in the future be held liable with respect for remediation activities beyond those identified to date, at present we are not aware of any circumstances that are reasonably expected to give rise to remediation claims that would have a material adverse effect on our results of operations or cause us to exceed our projected level of anticipated capital expenditures.

We had no material operating expenditures for environmental fines, penalties, government imposed remedial or corrective actions in the presented periods of 2009 and 2008.

Contractual Commitments

We have contractual obligations for long-term debt, operating leases and purchase obligations that were summarized in a table of contractual commitments in our 2008 Annual Report on Form 10-K. There has been no material change since that date.

Off-Balance Sheet Transactions

We are not involved in any material off-balance sheet transactions as of ~~June~~September 30, 2009.

OTHER ISSUES

New Accounting Pronouncements

~~The~~Future ~~following~~Adoption ~~new accounting pronouncements have been issued, but have not yet been adopted as~~ of ~~June 30,~~Accounting ~~2009:~~Standards

~~FASB~~In ~~Staff~~January 2009, ~~Position~~the (FASB issued FSP) Issue No. FAS No. 132(R)-1, “Employers’ Disclosures about Pensions and Other Postretirement Benefit Plan Assets.” ~~In December 2008, the FASB issued~~ (“FSP ~~No.~~ FAS No. 132(R)-1”), ~~which~~included in the Codification as ASC 715-20-65-2. This topic provides guidance on an employer’s disclosures about plan assets of a defined benefit pension or other postretirement plan ~~and requires employers to provide more transparency about the assets held by the retirement plan and the concentrations of risk in those plans~~. ~~FSP~~This ~~No.~~topic ~~FAS 132(R)-1~~ is effective for ~~financial statements issued for~~ fiscal years ~~beginning~~ending after December 15, 2009~~, and interim periods within those fiscal years~~. ~~For~~We ~~Kraton,~~are ~~FSP~~currently ~~No.~~evaluating ~~FAS~~the ~~132(R)-1~~impact isthat ~~effective~~this astopic ofwill ~~January 1,~~have ~~2010.~~on ~~Kraton~~our iscondendsed ~~currently~~consolidated ~~evaluating~~financial ~~the effect of adopting FSP No~~statements. ~~FAS 132(R)-1.~~

Item 3.

Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risk from changes in interest rates, foreign currency exchange rates, and commodity prices.

Interest Rate Risk. We have $~~323~~322.45 million of variable rate debt outstanding under our senior secured credit facility as of ~~June~~September 30, 2009. The debt bears interest at the adjusted Eurodollar rate plus 2.00% per annum or at our option, the base rate plus 1.00% per annum. In February 2008, we entered into a $325 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. The agreement had a fixed rate of 2.77%, with a margin of 2.0%, which resulted in a total cost of 4.77%, and a term through April 1, 2010. This agreement was designated as a cash flow hedge on the exposure of the variability of future cash flows subject to the variable quarterly interest rates on $325 million of the term loan portion of the ~~Term~~senior ~~Facility~~secured credit facility. We settled the swap early in June 2008 and realized cash proceeds of $4.6 million, resulting in a gain on the sale of $4.6 million. The gain is deferred in accumulated other comprehensive income at ~~June~~September 30, 2009 and is being reclassified as a reduction in interest expense through March 31, 2010 using the effective interest method, unless we determine that the forecasted interest payments under the ~~Term~~senior ~~Facility~~secured credit facility are probable not to occur, in which case the gain would then be reclassified immediately to interest expense. In October 2008, we entered into a $320 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. The agreement had a fixed rate of 2.99%, with a margin of 2.0%, which resulted in a total cost of 4.99%, and a term through December 31, 2009. In May 2009, we entered into a $310 million notional amount interest rate swap agreement to hedge or otherwise protect against Eurodollar interest rate fluctuations on a portion of our variable rate debt. The agreement is effective on January 4, 2010 and expires on January 3, 2011 and has a fixed rate of 1.53%, with a margin of 2.0%, which resulted in a total cost of 3.53%. These agreements were designated as cash flow hedges on the exposure of the variability of future cash flows subject to the variable quarterly interest rates on the term loan portion of the ~~Term~~senior ~~Facility.~~secured credit facility.

40Foreign Currency Risk. We conduct operations in many countries around the world. Our results of operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of

~~Foreign Currency Risk. We conduct operations in many countries around the world. Our results of~~ operations are subject to both currency transaction risk and currency translation risk. We incur currency transaction risk whenever we enter into either a purchase or sale transaction using a currency other than the local currency of the transacting entity. With respect to currency translation risk, our financial condition and results of operations are measured and recorded in the relevant domestic currency and then translated into U.S. dollars for inclusion in our historical consolidated financial statements. In recent years, exchange rates between these currencies and U.S. dollars have fluctuated significantly and may do so in the future. Approximately, one-half of our revenue and costs are denominated in U.S. dollars. Euro-related currencies are also significant. In February, 2009 we entered into a foreign currency option contract to reduce our exposure to fluctuations in the Euro to U.S. dollar exchange rate for a notional amount of €47.3 million which expires on December 29, 2009.

Credit Risk. Our customers are diversified by industry and geography with approximately 700 customers in approximately 60 countries worldwide. We do not have concentrations of receivables from these industry sectors throughout these countries. The recent global economic downturn may affect our overall credit risk. Where exposed to credit risk, we analyze the counterparties’ financial condition prior to entering into an agreement, establish credit limits and monitor the appropriateness of those limits on an ongoing basis. We also obtain cash, letters of credit or other acceptable forms of security from customers to provide credit support, where appropriate, based on our financial analysis of the customer and the contractual terms and conditions applicable to each transaction.

Commodity Price Risk. We are subject to commodity price risk under agreements for the supply of our raw materials and energy. From time to time we may hedge our commodity price exposure.

Item 4.

Controls and Procedures.

We have evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures as of ~~June~~September 30, 2009. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention of overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives. Based upon our evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms, and that they are accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

There have been no changes in our internal control over financial reporting during the quarter ended ~~June~~September 30, 2009 that have materially affected, or are reasonably likely to materially affect, our internal control reporting.

4146

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings.

For information regarding legal proceedings, see Note 11 of Notes to Condensed Consolidated Financial Statements.

Item 1A.

Risk Factors.

Readers of this ~~the~~ Quarterly Report on Form 10-Q should carefully consider the risks described in our other reports filed with or furnished to the SEC, including our prior and subsequent reports on Forms 10-K, 10-Q, and 8-K, in connection with any evaluation of our ~~Kraton’s~~ financial position, results of operations and cash flows.

The risks and uncertainties described in our most recent Annual Report on Form 10-K, filed with the SEC on March 26, 2009, are not the only ones facing us. ~~Additional risks and uncertainties not presently known or those that are currently deemed immaterial may also affect our operations.~~ Any of the risks, uncertainties, events or circumstances described therein could cause our future financial condition, results of operations or cash flows to be adversely affected.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

Not Applicable.

Item 3.

Defaults Upon Senior Securities.

Not Applicable.

Item 4.

Submission of Matters to a Vote of Security Holders.

Not Applicable.

Item 5.

Other Information.

4247

Item 6.

Exhibits.

ExhibitNumber
10.1		Amendment Number 69 to Isoprene Sales Contract dated ~~July~~October 2930, 2009 between Shell Chemical LP and Kraton Polymers U.S. LLC f/k/a Shell Elastomers LLC (incorporated by reference from Exhibit 99.1 to Kraton’s Current Report on Form 8-K filed with the Commission on ~~July~~November 312, 2009)
10.2		On October 20, 2009, Kraton Polymers LLC (the “Company”) entered into Amendment ~~Number~~No. 56 (the “Amendment”) to ~~Isoprene~~the ~~Sales~~Credit ~~Contract~~and ~~dated~~Guaranty ~~June~~Agreement 26(as amended from time to time, ~~2009~~the ~~between~~“Credit ~~Shell~~Agreement”) ~~Chemical~~among LPthe ~~and~~Company, ~~Kraton~~each ~~Polymers~~of ~~U.S.~~the ~~LLC~~guarantors ~~f/k/a~~thereto, ~~Shell~~the ~~Elastomers~~lenders party thereto and Banc of America Securities LLC, as arranger (incorporated by reference from Exhibit 99.1 to Kraton’s Current Report on Form 8-K filed with the Commission on ~~July~~October 122, 2009)
10.3		Amendment Number 48 to Isoprene Sales Contract dated ~~May~~September 2814, 2009 between Shell Chemical LP and Kraton Polymers U.S. LLC f/k/a Shell Elastomers LLC (incorporated by reference from Exhibit 99.1 to Kraton’s Current Report on Form 8-K filed with the Commission on ~~May~~September 2915, 2009)
10.4		Amendment Number 37 to Isoprene Sales Contract dated ~~April~~August 2425, 2009 between Shell Chemical LP and Kraton Polymers U.S. LLC f/k/a Shell Elastomers LLC (incorporated by reference from Exhibit 99.1 to Kraton’s Current Report on Form 8-K filed with the Commission on ~~April~~August 2927, 2009)
*31.1		Certification of Chief Executive Officer under Section 302 of Sarbanes—Oxley Act of 2002
*31.2		Certification of Chief Financial Officer under Section 302 of Sarbanes—Oxley Act of 2002
*32.1		Certification Pursuant to Section 906 of Sarbanes—Oxley Act of 2002

*	Filed herewith.

4348

SIGNATURES

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.

	KRATON POLYMERS LLC	~~KRATON POLYMERS LLC~~
Date: August 11, 2009		/s/ KEVIN M. FOGARTY
Date: November 12, 2009	/s/ KEVIN M. FOGARTY
	Kevin M. Fogarty President and Chief Executive Officer	~~Kevin M. Fogarty President and Chief Executive Officer~~
Date: August 11, 2009		/s/ STEPHEN E. TREMBLAY
Date: November 12, 2009	/s/ STEPHEN E. TREMBLAY
	Stephen E. Tremblay Vice President and Chief Financial Officer	~~Stephen E. Tremblay Vice President and Chief Financial Officer~~

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