S-4

As filed with the Securities and Exchange Commission on December  12, 2003

Registration No. 333-            

333-            

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM S-4

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

EQUISTAR CHEMICALS, LP

EQUISTAR FUNDING CORPORATION

(Exact name of co-registrants as specified in their charters)

Delaware Delaware	2869 2869		76-0550481 51-0388569
(State or other jurisdiction of incorporation or organization)	(Primary Standard Industrial Classification Code Number)		(I.R.S. Employer Identification No.)
1221 McKinney Street, Suite 700 Houston, Texas 77010 (713) 652-7200		Gerald A. O’Brien Vice President, General Counsel and Secretary 1221 McKinney Street, Suite 700 Houston, Texas 77010 (713) 652-7200
(Address, including zip code, and telephone number, including area code, of each co-registrant’s principal executive offices)		(Name, address, including zip code, and telephone number, including area code, of agent for service for each co-registrant)

Copy to:

Stephen A. Massad

Baker Botts L.L.P.

One Shell Plaza

Houston, Texas 77002

(713) 229-1234

Approximate date of commencement of proposed sale of the securities to the public:  As soon as practicable following the effectiveness of this Registration Statement.

If the securities being registered on this Form are to be offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box.    ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, as amended (the “Securities Act”), check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.    ¨

Calculation of Registration Fee

Title of each class of securities to be registered	Amount to be registered	Proposed maximum offering price per unit (1)	Proposed maximum aggregate offering price (1)	Amount of registration fee (1)
10 5/8% Senior Notes Due 2011	$250,000,000	104.685%	$261,712,500	$21,173

(1) Estimated solely for the purpose of calculating the registration fee in accordance with Rule 457(f) under the Securities Act.

The co-registrants hereby amend this Registration Statement on such date or dates as may be necessary to delay its effective date until the co-registrants shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said section 8(a), may determine.

The information in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED DECEMBER 12, 2003

PROSPECTUS

Equistar Chemicals, LP

Equistar Funding Corporation

$250,000,000

Offer to Exchange

Registered

10 ⁵/8% Senior Notes due 2011

for

All Outstanding Unregistered

10 ⁵/8% Senior Notes due 2011

The new notes: •      will be freely tradeable; •      are otherwise substantially identical to the outstanding notes issued on November 21, 2003; •      will accrue interest at the same rate per annum as the outstanding notes, payable semiannually in arrears on each May 1 and November 1, beginning May 1, 2004; •      will be unsecured and will rank equally with outstanding notes that are not exchanged and all other unsecured and unsubordinated indebtedness but will effectively be junior to all our secured indebtedness to the extent of the value of the assets securing that indebtedness; and •      will not be listed on any securities exchange or on any automated dealer quotation system, but may be sold in the over-the-counter market, in negotiated transactions or through a combination of those methods. The exchange offer: •      expires at 5:00 p.m., New York City time,
on             , 2003, unless extended; and •      is not conditioned on any minimum aggregate principal amount of notes being tendered. In addition, you should note that: •      all outstanding unregistered notes issued on November 21, 2003 that are validly tendered and not validly withdrawn will be exchanged for an equal principal amount of new notes that are registered under the Securities Act of 1933; •      the $450 million principal amount of our 10 ⁵/8% senior notes due 2011 issued on April 22, 2003 are not subject to this exchange offer; however, after the outstanding notes have been exchanged for new notes and the 10 ⁵/8% senior notes issued on April 22, 2003 have been similarly exchanged for registered notes, the registered notes issued in both exchange offers are expected to trade under the same CUSIP number; •      tenders of outstanding notes may be withdrawn any time before the expiration of the exchange offer; •      the exchange of new notes for outstanding notes in the exchange offer should not be a taxable event for U.S. federal income tax purposes; and •      the exchange offer is subject to customary conditions, which we may waive in our sole discretion.

Please consider carefully the risk factors beginning on page 14 of this prospectus before participating in the exchange offer.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the new notes or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

The date of this prospectus is                   , 2004.

TABLE OF CONTENTS

Prospectus Summary	1
Risk Factors	14
Use of Proceeds	25
Capitalization	25
Selected Historical Consolidated Financial and Operating Data	26
The Exchange Offer	28
Management’s Discussion and Analysis of Financial Condition and Results of Operations	38
Disclosure of Market and Regulatory Risk	58
About Equistar Chemicals, LP	59
Our Management	71
Ownership	74
Description of the Partnership Agreement	76
Description of the Parent Agreement	84
Related Party Transactions	87
Description of Other Indebtedness	92
Description of New Notes	97
Registration Rights Agreement	138
Material United States Federal Income Tax Consequences	140
Plan of Distribution	149
Transfer Restrictions on Outstanding Notes	150
Legal Matters	150
Experts	150
Forward-Looking Statements	151
Where You Can Find More Information	152
Index to Consolidated Financial Statements	F-1

This prospectus is part of a registration statement we filed with the SEC.

• You should rely only on the information or representations provided in this prospectus.

• We have not authorized any person to provide information in this prospectus other than that provided in this prospectus.

• We have not authorized anyone to provide you with different information.

• We are not making an offer of these securities in any jurisdiction where the offer is not permitted.

• You should not assume that the information in this prospectus is accurate as of any date other than the date on the front of this document.

In this prospectus, except as the context otherwise requires:

• “Equistar,” “we,” “us,” “our” and “ours” refer to Equistar Chemicals, LP and its subsidiaries, including Equistar Funding;

• “Equistar Funding” refers to Equistar Funding Corporation, a wholly owned subsidiary of Equistar that was formed solely to act as co-obligor for debt securities issued by Equistar;

• “issuers” refers to Equistar and Equistar Funding, who will jointly issue the new notes and jointly issued the outstanding notes;

• “notes” refers to both the new notes and the outstanding notes;

• “outstanding notes” refers to the unregistered 10 ⁵/8% senior notes due 2011 we issued on November 21, 2003; and

i

• “pro forma” means that the information has been adjusted to give effect to the use of the proceeds from the sale of the outstanding notes as described under “Use of Proceeds.”

This prospectus incorporates important business and financial information about us from documents that are not included in or delivered with this prospectus. This information is available to holders of the notes without charge upon written or oral request. You can obtain documents incorporated by reference in this prospectus by requesting them in writing or by telephone from us at the following address and telephone number:

Equistar Chemicals, LP

1221 McKinney, Suite 700

Houston, Texas 77010

Attn: Investor Relations

(713) 652-4590

To obtain timely delivery of any of our filings, agreements or other documents, you must make your request to us no later than             , 2003. The exchange offer will expire at 5:00 p.m., New York City time, on             , 2004. The exchange offer can be extended by us in our sole discretion, but we currently do not intend to extend the expiration date. See the caption “The Exchange Offer” for more detailed information.

MARKET, RANKING AND INDUSTRY DATA

The data included or incorporated by reference in this prospectus regarding markets and ranking, including the size of certain markets and our position and the position of our competitors within these markets, are based on independent industry publications, reports from government agencies or other published industry sources and our estimates. Our estimates are based on information obtained from our customers, distributors, suppliers, trade and business organizations and other contacts in the markets in which we operate and our management’s knowledge and experience. We believe these estimates to be accurate as of the date of the document in which the estimates were made or as of the date specified in such document. However, this information may prove to be inaccurate because of the methods by which we obtained some of the data for our estimates or because this information cannot always be verified with complete certainty due to the limits on availability and reliability of raw data, the voluntary nature of the data gathering process and other limitations and uncertainties inherent in a survey of market size.

NON-GAAP FINANCIAL MEASURES

The body of generally accepted accounting principles is commonly referred to as “GAAP.” For this purpose, a non-GAAP financial measure is generally defined by the SEC as one that purports to measure historical or future financial performance, financial position, or cash flows, but excludes or includes amounts that would not be so adjusted in the most comparable U.S. GAAP measures. From time to time we disclose so-called non-GAAP financial measures, primarily EBITDA, or earnings before interest, taxes and depreciation and amortization of long-lived assets. The non-GAAP financial measures described herein are not a substitute for the GAAP measures of earnings, for which management has responsibility.

EBITDA is a key measure used by the banking and high-yield investing communities in their evaluation of economic performance. Accordingly, management believes that disclosure of EBITDA provides useful information to investors because it is frequently cited by financial analysts in evaluating companies’ performance and it is a key measure in the calculation of financial covenants contained in our credit facility and the indentures governing our senior debt. Management believes that inclusion of EBITDA in certain disclosures is useful because it increases the visibility of this component of the covenant analysis to an investor. Additionally,

ii

multiples of EBITDA are one measure of the indicated fair value of certain long-lived assets. For example, we used the multiples-of-EBITDA approach in evaluating our goodwill for impairment.

We also periodically report adjusted net income (loss) or adjusted EBITDA, excluding specified items that are unusual in nature or not comparable from period to period and that are included in GAAP measures of earnings. Management believes that excluding these items generally helps investors to compare operating performance between two periods. Such adjusted data is not reported without an explanation of the items that are excluded.

iii

PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this prospectus or incorporated by reference into this prospectus to help you understand the terms of this exchange offer and the new notes. It likely does not contain all of the information that is important to you or that you should consider. To understand all of the terms of this exchange offer and the new notes and to obtain a more complete understanding of our business and financial situation, we encourage you to carefully read this entire prospectus, including “Risk Factors,” the consolidated financial statements included with this prospectus and the information we have incorporated by reference herein.

About Equistar

We are one of the largest chemical producers in the world, with total 2002 revenues of $5.5 billion and assets of $4.9 billion as of September 30, 2003. We are North America’s second largest producer of ethylene, the world’s most widely used petrochemical. We are also the third largest producer of polyethylene in North America. The chemicals we produce are fundamental to many diverse segments of the economy, including consumer products, housing and automotive components and other durable and nondurable goods.

We produce a variety of petrochemicals at eleven facilities located in five states, including:

• Olefins—We produce ethylene, propylene and butadiene, which together account for a majority of our petrochemicals business. Ethylene, our most significant product, is the key building block for polyethylene and most of our oxygenated products. Propylene is used to make polypropylene and propylene oxide. The chemicals made from olefins are used to create a variety of products, including food packaging, antifreeze, carpet facing and backing, urethane foam seating and rubber for tires and hoses.

• Oxygenated products—We produce ethylene oxide and its derivatives, ethylene glycol, ethanol and methyl tertiary butyl ether, commonly referred to as MTBE. These chemicals are used to produce paint, detergents, polyester fibers and film, antifreeze, gasoline additives and other products.

• Aromatics—We produce benzene and toluene. Our aromatics products are used to make plastics, rubber and nylon carpet fiber and as additives to enhance octane value in gasoline.

• Specialty products—We manufacture a number of specialty chemicals that are used as key inputs in inks, adhesives, polyester resins, rubber and other products.

Through facilities located at nine plants in four states, our polymers segment manufactures a wide variety of polymers, including:

• Polyethylene—We manufacture high density polyethylene, low density polyethylene and linear low density polyethylene. Polyethylene is used in packaging film, trash bags and lightweight high-strength plastic bottles for milk, juices, shampoos and detergents.

• Polypropylene—We manufacture polypropylene, which is used in plastic bottle caps and other closures, rigid packaging, automotive components and carpet facing.

• Performance polymers—The majority of our performance polymers are sold for use as compounds for wire and cable insulation, bulk molding, hot-melt adhesives and carpet backing. We believe that, over a business cycle, average selling prices and profit margins for performance polymers tend to be higher than average selling prices and profit margins for higher volume commodity polyethylenes.

1

Equistar is a joint venture limited partnership owned by Lyondell Chemical Company and Millennium Chemicals Inc. Since August 2002, when Lyondell acquired Occidental Petroleum Corporation’s 29.5% partnership interest in Equistar, we have been owned 70.5% by Lyondell and 29.5% by Millennium. See “Ownership.” Under the terms of our partnership agreement, Lyondell manages our business, although significant decisions regarding acquisitions, indebtedness and other matters require the consent of representatives of each owner.

Competitive Strengths

Leading Positions in All of Our Key Products

We enjoy leading positions in our three key products: ethylene, propylene and polyethylene. Our product portfolio consists of chemicals used in a wide variety of commercial and industrial end markets, including packaging, paints, coatings, adhesives, cosmetics, automotive components, plastic bottles and caps and wire and cable insulation. The following table shows our leading positions for our key products:

	North American Capacity
Product	Position	Share
Ethylene	#2	15	%
Propylene	#2	13	%
Polyethylene	#3	13	%

Large, Integrated Manufacturing Facilities

Our plants have an annual rated capacity, as of January 1, 2003, of approximately 11.6 billion pounds of ethylene and 5.7 billion pounds of polyethylene. Our petrochemicals segment is highly integrated with our polymers segment and with several manufacturing facilities of our owners and their affiliates, to whom we sell a significant amount of our production. For example, for the year ended December 31, 2002, approximately 93% of our ethylene production, based on sales dollars, was consumed by our polymers and oxygenated chemicals businesses or sold to our owners and their affiliates (including Occidental) at market-related prices.

The significant size, integration and geographic locations of our operations allow system-wide optimization while providing our customers with reliable and efficient product supply. As of December 31, 2002, we operated a 1,430 mile petrochemical pipeline system on the U.S. Gulf Coast; we had approximately 16 million barrels of storage capacity; and we owned or leased approximately 8,900 railcars. The combination of our pipeline system, storage capacity and railcar fleet enables us to efficiently transfer both raw materials and finished products. We also have two plants located in close proximity to U.S. Midwest customers, providing a freight cost advantage on sales to these customers relative to other U.S. Gulf Coast producers.

Low Cost Position

We continuously strive to lower overall costs through:

• Raw Material Flexibility—We operate olefins plants that have the flexibility to consume a wide range of raw materials in comparison to many olefins plants that have limited raw material flexibility. During periods of volatile energy and raw material prices, this flexibility can be especially valuable, as cost differences between the prices of raw materials can vary widely. The primary raw materials used in the production of olefins (crude-oil based liquid raw materials and natural gas liquids (“NGLs”)) are the largest component of total cost for the petrochemicals business. Crude-oil based liquids have had a

2

historical cost advantage over NGLs. For example, facilities using crude-oil based liquids historically generated approximately four cents additional variable margin on average per pound of ethylene produced compared to using ethane (an NGL). This margin advantage is based on an average of historical data over a period of years and is subject to fluctuations, which can be significant. During the second half of 2001 and in 2002, the advantage was significantly less than the historical average. For the first nine months of 2003, the average margin advantage has been higher than historical levels. We have the capability to realize this margin advantage due to our ability to process crude-oil based liquids at our Channelview, Corpus Christi and Chocolate Bayou, Texas facilities. Our Channelview facility is particularly flexible because it can process 100% crude-oil based liquids or up to 80% NGLs. Our Corpus Christi plant can process up to 70% crude-oil based liquids or up to 70% NGLs. Our Chocolate Bayou facility processes 100% crude-oil based liquids. In addition, our LaPorte facility can process natural gasoline and NGLs, including heavier NGLs such as butane.

• Production Optimization—We are able to optimize operating rates at our manufacturing facilities to respond to changing industry conditions. We seek to maximize operating rates at each of our facilities and may idle less efficient manufacturing capacity and shift production to more efficient facilities in order to maximize cash flow during weak industry conditions.

• Low Overhead Costs—Since our formation, we have been able to eliminate significant overhead costs by sharing services with Lyondell. Our selling, general and administrative expenses have declined 32% from $259 million in 1999 to an annualized rate of $175 million in 2003 based on the first nine months of 2003.

Experienced Management Team

We are managed by an experienced team of executive officers that benefit from the collective best practices and experiences of our owners. Lyondell manages the daily operation of our business, while significant decisions are subject to the approval of representatives of each owner. Our senior management team, led by Dan F. Smith, chief executive officer of Equistar and president and chief executive officer of Lyondell, consists of five individuals with an average of more than 25 years of experience in the chemical industry. Our partnership governance committee consists of six individuals, three from Lyondell and three from Millennium.

About Equistar Funding

Equistar Funding is a wholly owned subsidiary of Equistar. It is a Delaware corporation formed for the sole purpose of facilitating the financing activities of Equistar. Other than financing activities as a co-issuer of Equistar indebtedness, Equistar Funding has no material assets or operations. Equistar Funding is a co-issuer with Equistar of the outstanding notes and the new notes.

Recent Developments

We are in the process of implementing (1) a new $450 million, four-year accounts receivable sales facility that would replace our existing $100 million accounts receivable sales agreement and (2) a new $250 million, four-year inventory-based revolving credit facility that would replace our existing $354 million revolving credit facility. We have received a commitment letter from financial institutions to underwrite both the new accounts receivable sales facility and the inventory-based revolving credit facility. The facilities are expected to close in December 2003, subject to completion of definitive documentation and other customary closing conditions. As of September 30, 2003, the aggregate amount of funds available under these facilities would have been approximately $540 million. For additional information about the proposed new facilities, see “Description of Other Indebtedness.”

3

On November 13, 2003, Moody’s Investors Service (“Moody’s”) lowered our senior unsecured debt rating from B1 to B2, citing, among other things, the extended industry trough and concerns regarding capacity utilization rates over the next several years and the strength of the next industry peak. Our rating will remain under review pending completion of the financings described above. Upon completion of the financings, Moody’s indicated that it would confirm our rating and revise our outlook to stable. Standard & Poor’s rating service of The McGraw-Hill Companies (“Standard & Poor’s”) currently rates our senior unsecured debt as BB-. As a result of the recent downgrade by Moody’s, the counterparty to our $98 million railcar lease is permitted to terminate the lease on February 11, 2004. If the counterparty terminates the lease and we are unable to replace the lease, we intend to pay $98 million to purchase the railcars with borrowings from our revolving credit facility and/or available cash on hand. A further reduction of our debt rating to B3 by Moody’s, or B+ by Standard & Poor’s, would permit the counterparty to terminate our $100 million accounts receivable sales agreement. While we can give no assurances, we expect to replace both the existing accounts receivable sales agreement as described above and in “Description of Indebtedness” and substantially all of the amount of the railcar lease before the end of 2003.

4

Summary of the Exchange Offer

On November 21, 2003, we completed a private offering of the 10 ⁵/8% senior notes due 2011, which we generally refer to as the outstanding notes in this prospectus. We are now offering to issue registered and fully tradeable notes, which we generally refer to as the new notes in this prospectus, with substantially identical terms as your outstanding notes in exchange for properly tendered outstanding notes. The $450 million principal amount of our 10 ⁵/8% senior notes due 2011 issued on April 22, 2003 are not subject to this exchange offer; however, after the outstanding notes have been exchanged for new notes and the 10 ⁵/8% senior notes issued on April 22, 2003 have been similarly exchanged for registered notes, the registered notes issued in both exchange offers are expected to trade under the same CUSIP number.

This prospectus and the accompanying documents contain detailed information about us, the new notes and the exchange offer. You should read the discussion under the heading “The Exchange Offer” for further information regarding the exchange offer and resales of the new notes. You should also read the discussion under the headings “—Summary of Terms of the New Notes” and “Description of New Notes” for further information regarding the new notes.

The Exchange Offer	We are offering to issue to you new registered 10 5/8% senior notes due 2011 in exchange for your outstanding 10 5/8% senior notes due 2011.
Expiration Date	Unless sooner terminated, the exchange offer will expire at 5:00 p.m., New York City time, on             , 2004, or at a later date and time to which we extend it. We do not currently intend to extend the expiration date.
Conditions to the Exchange Offer	We will not be required to accept outstanding notes for exchange if the exchange offer would violate applicable law or if any legal action has been instituted or threatened that would impair our ability to proceed with the exchange offer. The exchange offer is not conditioned on any minimum aggregate principal amount of outstanding notes being tendered. Please read the section “The Exchange Offer—Conditions to the Exchange Offer” for more information regarding the conditions to the exchange offer.
Procedures for Tendering Outstanding Notes	If you wish to participate in the exchange offer, you must complete, sign and date the letter of transmittal and mail or deliver the letter of transmittal, together with your outstanding notes, to the exchange agent. If your outstanding notes are held through The Depository Trust Company, or DTC, you may effect delivery of the outstanding notes by book-entry transfer.
	In the alternative, if your outstanding notes are held through DTC and you wish to participate in the exchange offer, you may do so through the automated tender offer program of DTC. If you tender under this program, you will agree to be bound by the letter of transmittal that we are providing with this prospectus as though you had signed the letter of transmittal.
	By signing or agreeing to be bound by the letter of transmittal, you will represent to us, among other things, that:
	•      you are not our “affiliate,” as defined in Rule 405 of the Securities Act or a broker-dealer tendering outstanding notes acquired directly from us for your own account;

5

	•      if you are not a broker-dealer or are a broker-dealer but will not receive new notes for your own account, you are not engaged in and do not intend to participate in the distribution of the new notes;
	•      you have no arrangement or understanding with any person to participate in the distribution of the new notes or the outstanding notes within the meaning of the Securities Act;
	•      any new notes you receive will be acquired in the ordinary course of your business; and
	•      if you are a broker-dealer that will receive new notes for your own account in exchange for outstanding notes, those outstanding notes were acquired as a result of market-making activities or other trading activities, and you will deliver a prospectus, as required by law, in connection with any resale of those new notes. Please see “The Exchange Offer—Purpose and Effect of the Exchange Offer” and “The Exchange Offer—Your Representations to Us.”
Withdrawal Rights	You may withdraw outstanding notes that have been tendered at any time prior to the expiration date by sending a written or facsimile withdrawal notice to the exchange agent.
Procedures for Beneficial Owners	Only a registered holder of the outstanding notes may tender in the exchange offer. If you beneficially own outstanding notes registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender your outstanding notes in the exchange offer, you should promptly contact the registered holder and instruct it to tender the outstanding notes on your behalf.
	If you wish to tender your outstanding notes on your own behalf, you must either arrange to have your outstanding notes registered in your name or obtain a properly completed bond power from the registered holder before completing and executing the letter of transmittal and delivering your outstanding notes. The transfer of registered ownership may take considerable time.
Guaranteed Delivery Procedures	If you wish to tender your outstanding notes and cannot comply before the expiration date with the requirement to deliver the letter of transmittal and notes or use the applicable procedures under the automated tender offer program of DTC, you must tender your outstanding notes according to the guaranteed delivery procedures described in “The Exchange Offer—Guaranteed Delivery Procedures.” If you tender using the guaranteed delivery procedures, the exchange agent must receive the properly completed and executed letter of transmittal or facsimile thereof, together with your outstanding notes or a book-entry confirmation and any other documents required by the letter of transmittal, within three business days after the expiration date.

6

Consequences of Failure to Exchange	If you do not exchange your outstanding notes in the exchange offer, you will no longer be entitled to registration rights. You will not be able to offer or sell the outstanding notes unless they are later registered, sold pursuant to an exemption from registration or sold in a transaction not subject to the Securities Act or applicable state securities laws. Other than in connection with the exchange offer or as specified in the registration rights agreement, we are not obligated to, nor do we currently anticipate that we will, register the outstanding notes under the Securities Act. See “The Exchange Offer—Consequences of Failure to Exchange.”
U.S. Federal Income Tax Considerations	The exchange of new notes for outstanding notes in the exchange offer should not be a taxable event for U.S. federal income tax purposes. Please read “Material United States Federal Income Tax Consequences.”
Use of Proceeds	We will not receive any cash proceeds from the issuance of new notes.
Plan of Distribution	All broker-dealers who receive new notes in the exchange offer have a prospectus delivery obligation.
	Based on SEC no-action letters, broker-dealers who acquired the outstanding notes as a result of market-making or other trading activities may use this exchange offer prospectus, as supplemented or amended, in connection with resales of the new notes. We have agreed to make this prospectus available to any broker-dealer delivering a prospectus as required by law in connection with resales of the new notes for up to 180 days after the closing of the exchange offer.
	Broker-dealers who acquired the outstanding notes from us may not rely on SEC staff interpretations in no-action letters. Broker-dealers who acquired the outstanding notes from us must comply with the registration and prospectus delivery requirements of the Securities Act, including being named as selling noteholders, in order to resell the outstanding notes or the new notes.

7

The Exchange Agent

We have appointed The Bank of New York as exchange agent for the exchange offer. You should direct questions and requests for assistance, requests for additional copies of this prospectus or of the letter of transmittal and requests for the notice of guaranteed delivery to the exchange agent addressed as follows:

For Delivery by Mail, Overnight Delivery Only or by Hand:

The Bank of New York

101 Barclay Street

Floor 7 East

New York, NY 10286

Attn:                     

By Facsimile Transmission (for eligible institutions only):

(212) 298-1915

Attn:                     

To Confirm Receipt:

8

Summary of Terms of the New Notes

The new notes will be freely tradeable and otherwise substantially identical to the outstanding notes. The new notes will not have registration rights. The new notes will evidence the same debt as the outstanding notes, and the outstanding notes and the new notes will be governed by the same indenture.

Issuers	The new notes will be joint and several obligations of Equistar Chemicals, LP and Equistar Funding Corporation. None of Lyondell, Millennium, nor any of their subsidiaries or affiliates, other than Equistar and Equistar Funding, will be obligated to pay the new notes.
Securities Offered	$250 million principal amount of registered 10 5/8% Senior Notes due 2011. The new notes are being issued as additional 10 5/8% senior notes due 2011 under an indenture dated as of April 22, 2003. At the time your outstanding notes were issued, there were $450 million of 10 5/8% senior notes due 2011 already outstanding under that indenture. The new notes constitute “additional notes” under the indenture and will vote together with the existing notes as a single class. On November 19, 2003, we commenced an offer to exchange new registered 10 5/8% senior notes due 2011 for outstanding unregistered 10 5/8% senior notes due 2011 that we issued on April 22, 2003. That offer is expected to close in December 2003. The new notes and the existing 10 5/8% senior notes issued on April 22, 2003, once exchanged for registered notes, are expected to trade under the same CUSIP number.
Maturity Date	May 1, 2011.
Interest Payment Dates	Interest will be payable in cash on May 1 and November 1 of each year, beginning May 1, 2004.
Optional Redemption	We may redeem some or all of the new notes at any time prior to May 1, 2007 at a redemption price equal to 100% of the principal amount of the new notes, plus accrued interest and liquidated damages, if any, and a “make-whole” amount. On or after May 1, 2007, we may redeem the notes at the redemption prices described under “Description of New Notes—Optional Redemption.”
Change of Control	Upon the occurrence of a change of control event, as defined in “Description of New Notes,” you may require that we repurchase the notes at 101% of the principal amount of the notes on the date of repurchase plus accrued interest and liquidated damages, if any. See “Risk Factors—Risks Relating to Our Indebtedness and the New Notes—We may be unable to repurchase the new notes upon a change of control.” Transfers of interests in us among our owners (including, for this purpose, Occidental), as further described under “Description of New Notes,” will not constitute a change of control and, accordingly, you will not be able to require us to repurchase the new notes upon this type of transfer.

9

Ranking	The new notes will rank equally to our other unsecured and unsubordinated indebtedness, but will effectively be junior to all our secured indebtedness to the extent of the value of the assets securing that indebtedness. As of September 30, 2003, after giving effect to the issuance of the outstanding notes and the application of proceeds therefrom, (1) the notes would have ranked equally to $2.1 billion of our existing unsecured, unsubordinated indebtedness and (2) we would have had no secured debt outstanding. Any future borrowings under our existing credit facility or our proposed new revolving credit facility will be secured. See “Description of Other Indebtedness.”
Subsidiary Guarantees	Any subsidiary of Equistar that guarantees indebtedness of Equistar or any of its subsidiaries will, subject to specified exceptions, be required to guarantee the new notes. The new notes will not initially be guaranteed by any of our subsidiaries and will therefore effectively rank junior to all liabilities of our subsidiaries, including trade payables. As of September 30, 2003, our subsidiaries, other than Equistar Funding, had approximately $152 million of outstanding total liabilities, excluding intercompany liabilities, that are effectively senior to the new notes.
Covenants	The indenture governing the new notes limits our ability and the ability of our subsidiaries to:
	•      incur additional indebtedness;
	•      create liens;
	•      engage in sale and lease-back transactions;
	•      purchase or redeem capital stock;
	•      make investments or other specified restricted payments;
	•      sell assets;
	•      issue or sell stock of restricted subsidiaries;
	•      enter into transactions with equity holders or affiliates; or
	•      effect a consolidation or merger.
	These limitations are subject to a number of important qualifications and exceptions. Some of these covenants will no longer apply if the notes are rated “BBB-” or higher by Standard & Poor’s and “Baa3” or higher by Moody’s.
	Under our partnership agreement, we are required to distribute all of our surplus cash in excess of our estimated cash needs to our owners, and the indenture does not limit our ability to make distributions to our owners. However, we are required to pay additional interest on the new notes if we make a distribution to our owners and cannot satisfy certain financial tests. The additional interest will be payable in kind in the form of additional notes.
Form of New Notes	The new notes will be represented by one or more permanent global securities deposited with DTC. You will not receive certificates for your new notes unless one of the events described under the heading “Description of New Notes—Book-Entry, Delivery and Form” occurs. Instead, beneficial ownership interests in the new notes will be shown on, and transfers of beneficial ownership will be effected only through, book-entry records maintained by DTC.

10

Risk Factors

Please read and carefully consider the “Risk Factors” beginning on page 14 before participating in the exchange offer.

Principal Executive Offices

Our principal executive offices are located at 1221 McKinney Street, Suite 700, Houston, Texas 77010 and our telephone number at that address is (713) 652-7200.

11

Summary Historical Consolidated Financial and Operating Data

The following table presents summary historical consolidated financial and operating data. The historical consolidated financial data has been derived from our audited consolidated financial statements for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and from our unaudited financial statements for the nine months ended September 30, 2002 and 2003. The financial data presented below is condensed and may not contain all of the information that you should consider. You should read this selected financial data in conjunction with the consolidated financial statements, including the related notes, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

	For the years ended December 31,															For the nine months ended September 30,
	1998(a)			1999			2000			2001			2002			2002			2003
	(dollars in millions)
Income statement data:
Sales and other operating revenues	$	4,524		$	5,594		$	7,495		$	5,909		$	5,537		$	4,106		$	4,880
Cost of sales		3,928			5,002			6,908			5,755			5,388			3,938			4,754
Selling, general and administrative expenses		229			259			182			181			155			122			131
Operating income (loss)		282			162			334			(99	)		(44	)		18			(60	)
Interest expense		(156	)		(182	)		(185	)		(192	)		(205	)		(154	)		(159	)
Other income (expense), net (b)		—			46			—			5			2			3			(22	)
Net income (loss) (c)		143			32			153			(283	)		(1,299	)		(1,185	)		(235	)
Other operating data:
Depreciation and amortization (d)		268			300			308			319			298			221			230
Capital expenditures		200			157			131			110			118			43			62
Ratio of earnings to fixed charges (e)		1.7x			1.1x			1.7x			—			—			—			—
Balance sheet data (at end of period):
Cash and cash equivalents	$	66		$	108		$	18		$	202		$	27		$	22		$	128
Total assets		6,700			6,776			6,614			6,338			5,052			5,173			4,945
Total debt		2,220			2,261			2,248			2,337			2,228			2,320			2,254
Total partners’ capital		3,885			3,662			3,540			3,237			1,921			2,052			1,686
Sales volumes (in millions):
Selected petrochemical products:
Olefins (pounds)		16,716			18,574			18,490			16,236			16,851			12,789			11,620
Aromatics (gallons)		271			367			397			366			369			282			288
Polymer products (pounds)		6,488			6,388			6,281			5,862			6,098			3,945			4,628

(a) The financial operating data for 1998 includes the operating results of the business contributed to us by Occidental prospectively from May 15, 1998, the date of contribution. The business contributed to us by Occidental was accounted for using the purchase method of accounting.

(b) Other income (expense), net in 1999 and 2001 primarily consists of gains on asset sales, including the sale of our concentrates and compounds business in April 1999. Other income (expense), net in 2001 also includes a $3 million charge due to early extinguishment of debt. The charge was previously classified as an extraordinary item and was reclassified as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Other income (expense), net for the nine months ended September 30, 2003 primarily consists of charges related to early extinguishment of debt.

(c) The net loss for the year ended December 31, 2002 and the nine months ended September 30, 2002 includes a $1,053 million charge related to goodwill impairment.

(d) Effective January 1, 2002, we implemented SFAS No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, we reviewed goodwill for impairment and concluded that the entire

12

balance of goodwill was impaired, resulting in a $1,053 million charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. The conclusion was based on a comparison to our indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value. As a result of implementing SFAS No. 142, earnings in 2002 and subsequent years will be favorably affected by approximately $33 million annually because of the elimination of goodwill amortization. The following table presents our income (loss) before cumulative effect of accounting change and net loss for all periods presented as adjusted to eliminate goodwill amortization.

	For the years ended December 31,												For the nine months ended September 30,
	1998		1999		2000		2001			2002			2002			2003
	(dollars in millions)
Reported income (loss) before cumulative effect of accounting change	$	143	$	32	$	153	$	(283	)	$	(246	)	$	(132	)	$	(235	)
Add back: Goodwill amortization		31		33		33		33			—			—			—
Adjusted income (loss) before cumulative effect of accounting change	$	174	$	65	$	186	$	(250	)	$	(246	)	$	(132	)	$	(235	)
Reported net income (loss)	$	143	$	32	$	153	$	(283	)	$	(1,299	)	$	(132	)	$	(235	)
Add back: Goodwill amortization		31		33		33		33			—			—			—
Adjusted net income (loss)	$	174	$	65	$	186	$	(250	)	$	(1,299	)	$	(132	)	$	(235	)

(e) The ratio of earnings to fixed charges is computed by dividing earnings available for fixed charges by fixed charges. Earnings available for fixed charges consist of earnings before income taxes and cumulative effect of accounting change plus fixed charges, less capitalized interest. Fixed charges consist of interest, whether expensed or capitalized, and the portion of operating lease rental expense that represents the interest factor. Earnings were insufficient to cover fixed charges by $283 million in the year ended December 31, 2001, $246 million in the year ended December 31, 2002, $132 million for the nine months ended September 30, 2002 and $235 million for the nine months ended September 30, 2003.

13

RISK FACTORS

There are many risks that may affect your investment in the new notes. Some of these risks, but not all of them, are listed below. You should carefully consider these risks as well as the other information included or incorporated by reference in this prospectus before exchanging your outstanding notes.

Risks Relating to the Exchange Offer

If you fail to exchange your outstanding notes, the existing transfer restrictions will remain in effect and the market value of your outstanding notes may be adversely affected because they may be more difficult to sell.

If you do not exchange your outstanding notes for new notes under the exchange offer, then you will continue to be subject to the existing transfer restrictions on the outstanding notes. In general, the outstanding notes may not be offered or sold unless they are registered or exempt from registration under the Securities Act and applicable state securities laws. Except in connection with this exchange offer or as required by the registration rights agreement, we do not intend to register resales of the outstanding notes.

The tender of outstanding notes under the exchange offer will reduce the principal amount of the notes outstanding. This may have an adverse effect upon, and increase the volatility of, the market price of any outstanding notes that you continue to hold following completion of the exchange offer due to a reduction in liquidity.

Risks Relating to Our Indebtedness and the New Notes

The risks described in this “Risks Relating to Our Indebtedness and the New Notes” that apply to the new notes also apply to any outstanding notes not tendered for new notes in the exchange offer.

Our balance sheet is highly leveraged, which could adversely affect our ability to operate our business.

As of September 30, 2003, after giving effect to the sale of the outstanding notes and the application of the net proceeds as described under “Use of Proceeds,” we would have had outstanding debt, including current maturities, of approximately $2.3 billion. This debt represented approximately 58% of our total capitalization. Beginning December 31, 2003, we expect to consolidate an entity from which we lease certain railcars. The consolidation of this entity as of September 30, 2003 would have increased our debt by $101 million. In addition, as of September 30, 2003, after giving effect to the sale of the outstanding notes and the application of the net proceeds as described under “Use of Proceeds,” we would have had $337 million of available capacity (net of $17 million in outstanding letters of credit) under the revolving portion of our existing credit facility, and we may borrow thereunder, under our proposed new $250 million revolving credit facility or otherwise, to fund working capital or other needs in the future. For the year ended December 31, 2002, we had an operating loss of $44 million, and, for the nine months ended September 30, 2003, we had an operating loss of $60 million. We also have additional contractual commitments described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Financial Condition for the Years Ended December 31, 2002, 2001 and 2000.” Our level of debt and the limitations imposed on us by our existing or future debt agreements could have significant consequences on our business and future prospects, including the following:

• we may not be able to obtain necessary financing in the future for working capital, capital expenditures, acquisitions, debt service requirements or other purposes;

• our less leveraged competitors could have a competitive advantage because they have greater flexibility to utilize their cash flow to improve their operations;

• we may be exposed to risks inherent in interest rate fluctuations because some of our borrowings are at variable rates of interest, which could result in higher interest expense in the event of increases in interest rates; and

• we could be more vulnerable in the event of continued poor business conditions that would leave us less able to take advantage of significant business opportunities and to react to changes in market or industry conditions.

14

We will require a significant amount of cash to service our indebtedness, including the new notes, and our ability to generate cash depends on many factors beyond our control.

Our ability to make payments on and to refinance our indebtedness, including the new notes, will depend on our ability to generate cash in the future. Our ability to fund working capital and planned capital expenditures will also depend on our ability to generate cash in the future. We cannot assure you that:

• our business will generate sufficient cash flow from operations;

• future borrowings will be available under our current or future revolving credit facilities in an amount sufficient to enable us to pay our indebtedness on or before maturity; or

• we will be able to refinance any of our indebtedness on commercially reasonable terms, if at all.

Factors beyond our control will affect our ability to make these payments and refinancings. These factors include those discussed elsewhere in these risk factors and those listed in the “Forward-Looking Statements” section of this prospectus.

If, in the future, we cannot generate sufficient cash from our operations to meet our debt service obligations, we may need to reduce or delay capital expenditures or curtail research and development efforts. In addition, we may need to refinance our debt, obtain additional financing or sell assets, which we may not be able to do on commercially reasonable terms, if at all. We cannot assure you that our business will generate sufficient cash flow, or that we will be able to obtain funding, sufficient to satisfy our debt service obligations.

If we are not able to comply with the restrictive covenants in our debt agreements, we may be unable to repay the new notes.

Our credit facility and indentures relating to our debt securities impose restrictions on us. Our existing credit facility and the indentures governing our senior notes contain covenants that, subject to certain exceptions, restrict sale and lease back transactions, lien incurrence, debt incurrence, sales of assets, investments, non-regulatory capital expenditures, certain payments and mergers. Our new revolving credit facility and accounts receivable sales facility will also contain restrictive covenants. See “Description of Other Indebtedness” and “Description of New Notes.” In addition, our existing credit facility requires that we maintain specified financial ratios. As a result of continuing adverse conditions in the industry, in March 2002 and 2003, we obtained amendments to our existing credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive, with the exception that the maximum permitted debt ratios become more restrictive beginning September 30, 2004, the definition of total indebtedness became more restrictive at March 31, 2003 and the defined limitation on expenditures for property, plant and equipment was extended to apply through 2004. In addition, the financial ratio requirements become increasingly restrictive over time beginning in the fourth quarter 2003. If this facility is not replaced or amended, our ability to comply with its financial ratio requirements will be dependent upon significantly improved results of operations in 2004 and thereafter as compared to the first nine months of 2003. Although our proposed new revolving credit facility and accounts receivable sales facility are not expected to contain these or similar financial ratio requirements, we cannot assure you that we will be able to implement the new facilities and replace the existing facilities. A breach of our covenants would permit the lenders to declare the loans immediately payable and would permit the lenders under the credit facility to terminate future lending commitments. We would thereafter be unable to borrow under the credit facility to meet short term liquidity requirements. Moreover, if we were unable to pay the accelerated amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness under the credit facility. We have pledged substantially all of our personal property, including inventory and accounts receivable, as well as a portion of our real property, as security under the existing credit facility and will pledge our inventory and certain other personal property as security under our proposed new revolving credit facility. If the lenders accelerated their loans, our outstanding senior notes and the new notes would be in default and we cannot assure you that we would have sufficient assets to repay the notes.

Our partnership agreement requires that we distribute surplus cash to our owners, and the indenture for the new notes will not restrict such distributions to our owners.

Under our partnership agreement, we are required to estimate the future cash needs for our business and to distribute surplus cash to our owners. See “Description of the Partnership Agreement.” Our credit facility and

15

indentures do not contain any restrictions on our ability to make distributions to our owners in accordance with our partnership agreement, except that our credit facility prohibits distributions during any default under the facility. However, our credit facility, the indenture for our 10 ¹/8% notes and the indenture for the new notes require that we pay additional interest if distributions are made when our fixed charge coverage ratio, as defined in the indentures, is less than 1.75 to 1. Distributions to our owners could materially adversely impact our financial condition and our ability to service debt and satisfy our other cash obligations in the future.

Our debt rating has been reduced recently, which will permit the counterparty to a railcar lease to terminate that lease. Any debt rating reduction could increase borrowing costs and reduce access to capital and would allow the counterparty to our existing accounts receivable sales agreement to terminate that agreement.

Standard & Poor’s currently rates our senior unsecured debt as BB- and Moody’s currently rates our senior unsecured debt as B2. During 2003, Standard & Poor’s lowered our senior unsecured debt rating from BB to BB-. In its announcement regarding our rating, Standard & Poor’s cited our 70.5% ownership by Lyondell, Lyondell’s second quarter 2003 results, concerns about the timing of meaningful recovery in the petrochemical sector and Lyondell’s and our credit exposure to adverse developments in a still uncertain business environment. In the first quarter of 2003, both agencies changed their outlook for us from stable to negative. On November 13, 2003, Moody’s lowered our senior unsecured debt rating from B1 to B2, citing, among other things, the extended industry trough and concerns regarding capacity utilization rates over the next several years and the strength of the next industry peak. Moody’s has indicated that our rating will remain under review until we complete the financings described below.

One or more of the rating agencies may reduce our ratings in the future, whether as the result of the reasons cited by the agencies above, adverse developments affecting our business or events beyond our control. A downgrade in debt rating could affect our borrowing costs, our ability to refinance or restructure debt in the future and trade terms. A further reduction of our debt rating to B+ by Standard & Poor’s or to B3 by Moody’s would permit the counterparty to terminate our existing $100 million accounts receivable sales agreement. As a result of the recent downgrade by Moody’s, the counterparty to our $98 million railcar lease is permitted to terminate the lease on February 11, 2004. While we can give no assurances, we expect to replace the existing accounts receivable sales agreement and substantially all of the amount of the railcar lease before the end of 2003 and, at the same time, refinance the existing credit facility to increase our financial flexibility. See “Prospectus Summary—Recent Developments” and “Description of Other Indebtedness.” If we cannot replace our accounts receivable sales agreement or substantially all of the amount of the railcar lease, we could potentially have higher revolving credit borrowings, which would reduce our available liquidity and could increase our cost of borrowing.

The new notes will be effectively junior to all our secured indebtedness.

The new notes will be effectively junior to all indebtedness under our existing secured credit facility and to any indebtedness that may be incurred under our proposed new secured revolving credit facility. As of September 30, 2003, after giving effect to the issuance of the outstanding notes and the use of proceeds therefrom, we would have had no borrowings under our existing credit agreement and approximately $337 million (net of $17 million in outstanding letters of credit) available for borrowing under the revolving portion of our existing credit facility. In addition, subject to specified limitations, the indenture governing the outstanding notes and the new notes permits us to incur additional secured indebtedness and both the outstanding and the new notes will be effectively junior to any additional secured indebtedness we may incur.

The new notes will be structurally junior to indebtedness of our subsidiaries.

None of our subsidiaries will initially guarantee the new notes. As a result, the new notes are not the debt of our subsidiaries, other than Equistar Funding, and thus indebtedness and other liabilities, including trade payables, of those subsidiaries will effectively be senior to your claims against those subsidiaries. As of September 30, 2003 our subsidiaries, excluding Equistar Funding, had approximately $152 million of

16

outstanding total liabilities, excluding intercompany liabilities, that are effectively senior to the new notes. In addition, the indenture, subject to certain limitations, permits these subsidiaries to incur additional indebtedness and does not contain any limitation on the amount of other liabilities, such as trade payables, that may be incurred by these subsidiaries.

We may incur additional indebtedness ranking equally with the new notes.

If we incur any additional debt that ranks equally with the new notes, including trade payables, the holders of that debt will be entitled to share ratably with you in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding-up of us. This may have the effect of reducing the amount of proceeds paid to you.

We may be unable to repurchase the new notes upon a change of control.

Upon the occurrence of specified change of control events, as described in “Description of New Notes,” you may require us to repurchase all of your new notes at 101% of their principal amount, plus accrued interest. The indenture for our 10 ¹/8% notes contains a similar provision. The credit facility provides that certain change of control events will be a default that will permit the lenders to accelerate the maturity of all borrowings under the credit facility and terminate commitments to lend under the credit facility and will also restrict our ability to repurchase the new notes upon a change of control. Any of our future debt agreements may contain similar provisions. Accordingly, we will not be able to satisfy our obligations to repurchase your new notes unless we are able to refinance or obtain waivers under the credit facility and other indebtedness with similar provisions. In addition, even if we were able to refinance that indebtedness, the refinancing may not be on terms favorable to us. We cannot assure you that we will have the financial resources to repurchase your new notes, particularly if a change of control event triggers a similar repurchase requirement for, or results in the acceleration of, other indebtedness.

None of Equistar’s owners or their affiliates will have any liability for payments of principal or interest on the new notes.

Our ability to make payments on the new notes is solely dependent upon our ability to generate sufficient cash from operations. If we fail to fulfill our obligations under the new notes or the indenture, you will not have the right to recover against any of Equistar’s owners, whether the owner of general partner interests or limited partner interests or otherwise, or against their respective parents or other affiliates.

There is a risk that the new notes are, or will become, subject to the federal income tax contingent payment rules.

The new notes include contingent payment rights, such as the right to receive Additional Dividend Notes (as defined under “Description of New Notes”), that could cause the federal income tax contingent payment rules to apply. If those rules applied, holders generally would not be entitled to treat any gain on the sale of the new notes as capital gain and might be required to accrue interest income with respect to the new notes at a rate in excess of the stated interest rate. However, the contingent payment rules do not apply to a debt instrument as to which, at the issue date, the likelihood that any contingent payments will be made is remote or as to which the timing and amount of every combination of contingent payments that could possibly be made on the debt instrument is known and it is significantly more likely than not that the only payments that will be made are the scheduled payments of principal and stated interest. We believe that the new notes will qualify for at least one of these exceptions, but it is possible that the Internal Revenue Service and the relevant court would disagree. In addition, in the event a contingent payment became payable on the new notes, they might, solely for purposes of determining the amount and timing of future interest or original issue discount income for federal income tax purposes, be treated as reissued at that time. In that event, the new notes would become subject to the contingent payment rules as of that date unless an exception to those rules, such as the exception for remote contingencies described above, was satisfied at that time. In the event the new notes are, or become, subject to the contingent payment rules, they may be subject to different federal income tax reporting requirements than the $450 million

17

of 10 ⁵/8% senior notes issued on April 22, 2003 under the indenture. It is not clear what effect the trading of the new notes and the $450 million of 10 ⁵/8% senior notes issued on April 22, 2003 under the same CUSIP number would have in that event. See “Material United States Federal Income Tax Consequences.”

The portfolio interest exemption from United States income and withholding tax on income and gain of certain non-United States persons may not apply to some contingent interest income with respect to the new notes or gain on the disposition of the new notes.

There is a risk that non-United States holders of new notes will not be eligible for the portfolio interest exemption from United States income and withholding tax on certain income and gain on the new notes. The exemption does not apply to contingent interest or original issue discount on the new notes that is determined by reference to distributions we make on our equity interests. As a result, the portion of any interest or original issue discount on the new notes attributable to a non-United States holder’s right to receive Additional Dividend Notes upon our payment of certain permitted dividends may not be eligible for the exemption. This could include the portion of any accruals of original issue discount under the contingent payment rules (if those rules were to apply) attributable to the right to receive Additional Dividend Notes and any gain on the disposition of the new notes. Since we believe that only the stated interest payments on the outstanding notes currently are required to be accrued for federal income tax purposes, we do not currently intend to treat payments on the new notes as ineligible for the exemption. See “Material United States Federal Income Tax Consequences.”

There is no trading market for the new notes and there may never be one.

The new notes will be new securities for which currently there is no established trading market. For these and other reasons, we cannot assure you that a trading market will develop for the new notes. Even if a market for the new notes does develop, we cannot assure you that there will be liquidity in that market or that the new notes might not trade for less than their original value or face amount. If a liquid market for the new notes does not develop, you may be unable to resell the new notes for a long period of time, if at all. This means you may not be able to readily convert the new notes into cash, and the new notes may not be accepted as collateral for a loan.

Even if a market for the new notes develops, trading prices could be higher or lower than the initial offering prices. The prices of the new notes will depend on many factors, including prevailing interest rates, our operating results and the market for similar securities. Declines in the market prices for debt securities generally may also materially and adversely affect the liquidity of the new notes, independent of our financial performance.

Risks Relating to Our Business

Costs of raw materials and energy may result in increased operating expenses and reduced results of operations.

We purchase large amounts of raw materials and energy for our businesses. The cost of these raw materials and energy, in the aggregate, represents a substantial portion of our operating expenses. The prices of raw materials and energy generally follow price trends of, and vary with market conditions for, crude oil and natural gas, which may be highly volatile and cyclical. For example, during 2002, benchmark crude oil prices trended upward to $29.50 per barrel in December 2002, a 53% increase from the December 2001 low. During 2002, benchmark natural gas prices trended upward, increasing to $4.05 per million BTUs in December 2002, a 123% increase from the October 2001 low. Thus far in 2003, prices have also experienced increases from those 2001 and 2002 levels and volatility. Our results of operations have been and could be in the future significantly affected by increases and volatility in these costs. Price increases increase our working capital needs, and can therefore also adversely affect our liquidity and cash flow.

In addition, higher natural gas prices adversely affect the ability of many domestic chemical producers to compete internationally since U.S. producers are disproportionately reliant on natural gas and NGLs as an energy

18

source and as a raw material. In addition to the impact that this had on our exports, reduced competitiveness of U.S. producers also has increased the availability of chemicals in North America, as U.S. production that would otherwise have been sold overseas was instead offered for sale domestically, resulting in excess supply and lower prices in North America.

We sell commodity products in highly competitive markets and face significant price pressure.

We sell our products in highly competitive markets. Due to the commodity nature of most of our products, competition in these markets is based primarily on price and to a lesser extent on performance, product quality, product deliverability and customer service. As a result, we generally are not able to protect our market position for these products by product differentiation and may not be able to pass on cost increases to our customers. Accordingly, increases in raw material and other costs may not necessarily correlate with changes in prices for these products, either in the direction of the price change or in magnitude. Specifically, timing differences in pricing between raw material prices, which may change daily, and contract product prices, which in many cases are negotiated only monthly or less often, sometimes with an additional lag in effective dates for increases, have had and may continue to have a negative effect on profitability. Significant volatility in raw material costs tends to put pressure on product margins, as sales price increases generally tend to lag behind raw material cost increases. Conversely, when raw material costs decrease, customers tend to demand immediate relief in the form of lower sales prices.

The cyclicality and overcapacity of the petrochemical and polymer industries may cause significant fluctuation in our income and cash flow.

Our historical operating results reflect the cyclical and volatile nature of the supply-demand balance in the petrochemical and polymer industries. These industries historically have experienced alternating periods of inadequate capacity and tight supply, causing prices and profit margins to increase, followed by periods when substantial capacity is added, resulting in oversupply, declining capacity utilization rates and declining prices and profit margins. This cyclical pattern is most visible in the markets for ethylene and polyethylene, resulting in volatile profits and cash flow over the business cycle.

Currently, there is overcapacity in the petrochemical and polymer industries, as a number of our competitors in various segments of the petrochemical and polymer industries have added capacity. There can be no assurance that future growth in product demand will be sufficient to utilize current or additional capacity. Excess industry capacity has depressed, and may continue to depress, our volumes and margins. The global economic and political environment continues to be uncertain, contributing to low industry operating rates, adding to the volatility of raw material and energy costs, and forestalling the industry’s recovery from trough conditions, all of which is placing, and may continue to place, pressure on our results of operations. As a result of excess industry capacity and weak demand for products, as well as rising energy costs and raw material prices, our operating income has declined and may remain volatile.

External factors beyond our control can cause fluctuations in demand for our products and in our prices and margins, which may negatively affect income and cash flow.

External factors beyond our control can cause volatility in the price of raw materials and other operating costs, as well as significant fluctuations in demand for our products, and can magnify the impact of economic cycles on our businesses. Examples of external factors include:

• general economic conditions, which can be affected by various factors;

• international events and circumstances;

• competitor actions; and

• governmental regulation in the United States and abroad.

19

We believe that events in the Middle East have had a particular influence in recent months and may continue to do so. In addition, a number of our products are highly dependent on durable goods markets, such as the housing and automotive markets, which are themselves particularly cyclical. If the global economy does not improve, demand for our products and our income and cash flow would continue to be adversely affected. In addition, these risks have and may continue to increase volatility in prices for crude oil and natural gas and could result in increased raw material costs. Further, these risks could cause increased instability in the financial markets and adversely affect our ability to access capital.

We may reduce production at or idle a facility for an extended period of time or exit a business because of high raw material prices, an oversupply of a particular product and/or a lack of demand for that particular product, which makes production uneconomical. Any decision to permanently close facilities or exit a business would result in writing off the remaining book value of the assets involved. These temporary outages sometimes last for several quarters or, in certain cases, longer and cause us to incur costs, including the expenses of maintaining and restarting these facilities. It is possible that factors like increases in raw material costs or lower demand in the future will cause us to further reduce operating rates or idle facilities or exit uncompetitive businesses.

Our operations and assets are subject to extensive environmental, health and safety laws and regulations.

We cannot predict with certainty the extent of our future liabilities and costs under environmental, health and safety laws and regulations and we cannot assure you that they will not be material. In addition, we may face liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances at our facilities or chemicals that we otherwise manufacture, handle or own. Although these types of claims have not historically had a material impact on our operations, a significant increase in the success of these types of claims could materially adversely affect our business, financial condition, operating results or cash flow.

Our production facilities are generally required to have permits and licenses regulating air emissions, discharges to land or water and storage, treatment and disposal of hazardous wastes. Companies such as us that are permitted to treat, store or dispose of hazardous waste and maintain underground storage tanks pursuant to the Resource Conservation and Recovery Act (“RCRA”) also are required to meet certain financial responsibility requirements. We believe that we have all permits and licenses generally necessary to conduct our business or, where necessary, are applying for additional, amended or modified permits and that we meet applicable financial responsibility requirements.

We (together with the industries in which we operate) are subject to extensive national, state and local environmental laws and regulations concerning emissions to the air, discharges onto land or waters and the generation, handling, storage, transportation, treatment and disposal of waste materials. Many of these laws and regulations provide for substantial fines and potential criminal sanctions for violations. Some of these laws and regulations are subject to varying and conflicting interpretations. In addition, we cannot accurately predict future developments, such as increasingly strict environmental laws, and inspection and enforcement policies, as well as higher compliance costs therefrom, which might affect the handling, manufacture, use, emission or disposal of products, other materials or hazardous and non-hazardous waste. Some risk of environmental costs and liabilities is inherent in particular operations and products of ours, as it is with other companies engaged in similar businesses, and there is no assurance that material costs and liabilities will not be incurred. In general, however, with respect to the capital expenditures and risks described above, we do not expect that we will be affected differently from the rest of the chemicals industry where our facilities are located.

Environmental laws may have a significant effect on the nature and scope of cleanup of contamination at current and former operating facilities, the costs of transportation and storage of raw materials and finished products and the costs of the storage and disposal of wastewater. Also, U.S. “Superfund” statutes may impose joint and several liability for the costs of remedial investigations and actions on the entities that generated waste, arranged for disposal of the wastes, transported to or selected the disposal sites and the past and present owners

20

and operators of such sites. All such responsible parties (or any one of them, including us) may be required to bear all of such costs regardless of fault, legality of the original disposal or ownership of the disposal site.

The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”). As a result, in December 2000, the Texas Natural Resource Conservation Commission, now known as the Texas Commission on Environmental Quality (“TCEQ”), submitted a plan to the EPA to reach and demonstrate compliance with the ozone standard by November 2007. Ozone is a product of the reaction between volatile organic compounds and nitrogen oxides (“NOx”) in the presence of sunlight, and is a principal component of smog. Emission reduction controls for NOx must be installed at each of our six plants located in the Houston/Galveston region during the next several years. Recently adopted revisions by the regulatory agencies changed the required NOx emission reduction levels from 90% to 80%. Compliance with the previously proposed 90% reduction standards would have resulted in increased capital investment, estimated at between $200 million and $260 million, before the 2007 deadline. Under the revised 80% standard, we estimate that our incremental capital expenditures would decrease to between $165 million and $200 million before the 2007 deadline, and could result in higher annual operating costs. However, the savings from this revision could be offset by the costs of stricter proposed controls over highly reactive, volatile organic compounds, or HRVOCs. Additionally, the TCEQ plans to make a final review of these rules (which are also subject to federal approval), with final rule revisions to be adopted by May 2004. The timing and amount of NOx and HRVOC expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. We are still assessing the impact of these revisions and there can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

A significant portion of our products are sold to our owners and other related parties, and, if they are unable or otherwise cease to continue to purchase our products, our revenues, margins and cash flows could be adversely affected.

Sales to our owners and other related parties accounted for approximately 22% of revenues for the year ended December 31, 2002, which were primarily sales to Lyondell and Occidental. We expect to continue to derive a significant portion of our business from our owners. If they are unable or otherwise cease to purchase our products, our revenues, margins and cash flows could be adversely affected.

Operating problems in our business may adversely affect our income and cash flow.

The occurrence of material operating problems at our facilities, including, but not limited to, the events described below, may have a material adverse effect on the productivity and profitability of a particular manufacturing facility, or on us as a whole, during and after the period of such operational difficulties. Our income and cash flow are dependent on the continued operation of our various production facilities and the ability to complete construction projects on schedule.

Although we take precautions to enhance the safety of our operations and minimize the risk of disruptions, our operations, along with those of other members of the chemical industry, are subject to hazards inherent in chemical manufacturing and the related storage and transportation of raw materials, products and wastes. These hazards include:

• pipeline leaks and ruptures;

• explosions;

• fires;

• severe weather and natural disasters;

• mechanical failure;

• unscheduled downtime;

• labor difficulties;

21

• transportation interruptions;

• remediation complications;

• chemical spills;

• discharges or releases of toxic or hazardous substances or gases;

• storage tank leaks;

• other environmental risks; and

• potential terrorist acts.

Some of these hazards may cause personal injury and loss of life, severe damage to or destruction of property and equipment and environmental damage, and may result in suspension of operations and the imposition of civil or criminal penalties.

Furthermore, we are also subject to present and future claims with respect to workplace exposure, workers’ compensation and other matters. We maintain property, business interruption and casualty insurance which we believe is in accordance with customary industry practices, but we are not fully insured against all potential hazards incident to our business, including losses resulting from war risks or terrorist acts. As a result of market conditions, premiums and deductibles for certain insurance policies can increase substantially and, in some instances, certain insurance may become unavailable or available only for reduced amounts of coverage. If we were to incur a significant liability for which we were not fully insured, it could have a material adverse effect on our financial position.

We pursue acquisitions, dispositions and joint ventures and other transactions that may impact our results of operations and financial condition.

We seek opportunities to maximize efficiency or value through various transactions. These transactions may include various business combinations, purchases or sales of assets or contractual arrangements or joint ventures that are intended to result in the realization of synergies, the creation of efficiencies or the generation of cash to reduce debt. To the extent permitted under our credit facility and other debt agreements, some of these transactions may be financed by additional borrowings by us. Although these transactions are expected to yield longer-term benefits if the expected efficiencies and synergies of the transactions are realized, they could adversely affect our results of operations in the short term because of the costs associated with such transactions. Other transactions may advance future cash flows from some of our businesses, thereby yielding increased short-term liquidity, but consequently resulting in lower cash flows from these operations over the longer term.

Risks Relating to our Ownership and Relationship with our Owners

We cannot predict how a change in control of Lyondell or Millennium, or an exit of either of them, could affect our operations or business.

Lyondell or Millennium may transfer control of their interests in us or engage in mergers or other business combination transactions with a third party or with the other owner that could result in a change in control of any one of Lyondell, Millennium or us. Because of the unanimous approval requirements in our partnership governance structure, any transfer of an interest in us or change of control of any one of our owners could affect our governance. We cannot predict how a change of owners would affect our operations or business.

Unless waived by each of our owners, our partnership agreement provides that a direct or indirect transfer of an interest in us generally may occur only if the other owner is first offered the opportunity to purchase the interest and, if the transferee is a third party, the transferee has, or in the opinion of a nationally recognized investment bank could reasonably be expected to obtain, an “investment grade” debt rating. However, if interests are transferred in connection with a merger or sale of a majority of the other assets of Lyondell or Millennium, the other owner does not have a right of first option and the investment grade requirement is not applicable.

22

The types of transactions described above could involve third parties and/or either of Lyondell or Millennium. Our owners have discussed, and from time to time may continue to discuss, whether in connection with their ordinary course dialogue regarding our business or otherwise, transactions which if consummated could result in a transfer or modification, either directly or indirectly, of their ownership interest in us. For example, in August 2002, Lyondell purchased Occidental’s 29.5% ownership interest in us. We cannot be certain that our owners will not sell, transfer or otherwise modify their ownership interest in us, whether in transactions involving third parties and/or the other owner.

Our credit facility provides that an event of default occurs if Lyondell and/or Millennium or their successors cease to collectively hold at least a 50% interest in us. An event of default under our credit facility would permit the lenders to declare amounts outstanding under the credit facility immediately due and payable, which would result in an event of default under the indenture for our existing senior notes and the new notes offered hereby, and would permit the lenders under our credit facility to terminate future lending commitments. Moreover, if we were unable to pay the accelerated amounts, the lenders could proceed against the collateral granted to them to secure the indebtedness under the credit facility. We have pledged substantially all of our personal property, including inventory and accounts receivable and other property, as well as a portion of our real property, as security under the credit facility. If the lenders accelerated their loans, our outstanding senior notes and the new notes offered hereby would be in default. Our outstanding senior notes and the new notes offered hereby are unsecured and rank junior in right of payment to our secured debt under the credit facility.

Lyondell and Millennium control all important decisions affecting our governance and our operations and their interests may differ from our and your interests.

Circumstances may occur in which the interests of our owners could be in conflict with your interests as a noteholder. In particular, our owners may have an interest in pursuing transactions that, in their judgment, enhance the value of their investment in us even though such transactions may involve risks to you as noteholders. Further conflicts of interest may arise between you and our owners when we are faced with decisions that could have different implications for you and our owners, including financial budgets, potential competition, the issuance or disposition of securities, the payment of distributions by us, regulatory and legal positions and other matters. Because our owners control us, these conflicts could be resolved in a manner adverse to the noteholders.

In addition, conflicts of interest may arise between us and one or more of our owners when we are faced with decisions that could have different implications for us and our owners. Although our partnership agreement requires that any transaction or dealing between us and an owner or one of its affiliates be approved on our behalf by the disinterested owner, this does not address all conflicts of interest that may arise. For example, our owners are permitted, in certain circumstances, to compete with us. Because our owners control us, conflicts of interest arising because of competition between us and an owner could be resolved in a manner adverse to us. All of our executive officers are also executive officers of Lyondell. Pursuant to our partnership agreement, our chief executive officer is designated by Lyondell. It is possible that there will be situations where our owners’ interests are in conflict with our interests, and our owners, acting through the partnership governance committee or through our executive officers, could resolve these conflicts in a manner adverse to us.

We rely on Lyondell to provide important administrative and management services to us.

We are party to a shared services arrangement with Lyondell pursuant to which Lyondell provides us with many services that are essential to the administration and management of our business, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. See “Related Party Transactions—Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.” Accordingly, we depend to a significant degree on Lyondell for the administration of our business. If Lyondell did not fulfill its obligations under the shared services arrangement, it would disrupt our business and could have a material adverse effect on our business and results of operations.

23

The agreements that we have with our owners and their affiliates, while approved by the disinterested owner, may not be on the same terms as if we had entered into a contract with a third party.

We have entered into various agreements with our owners and their respective affiliates (including Occidental) that are material to the conduct of our business, and we expect to enter into additional agreements with them in the future. For example, we have entered into various product supply agreements with each of our owners and certain of their affiliates pursuant to which we sell a substantial amount of our products. Moreover, we are party to a shared services arrangement with Lyondell pursuant to which Lyondell provides us with many important administrative services. Our partnership agreement requires that agreements between us and an owner must first be approved on our behalf by the disinterested owner. Although we believe this process helps ensure that these arrangements are entered into on an arm’s length basis, we cannot assure you that each of these agreements is on the same terms as if we had entered into a contract with a third party.

Important decisions require the approval of both our owners, and a failure to agree could result in deadlock.

Under the terms of the partnership agreement, our partnership governance committee manages and controls our business, property and affairs, including the determination and implementation of our strategic direction. Our partnership governance committee consists of six members, called representatives, three appointed by each owner. Under the partnership agreement, many important decisions, including decisions relating to changes in our scope of business, our strategic plan, certain capital expenditures and business combinations, among other specified matters, require the unanimous agreement of at least two representatives of each of our owners. It is possible that, as to unanimous consent items, our partnership governance committee may not reach agreement regarding matters that are very important to us and could be deadlocked. The partnership agreement does not include procedures for resolving deadlocks, unless the deadlock relates to approval of our updated strategic plan. If deadlocks cannot be resolved, inaction may result, which could, among other things, result in us losing business opportunities.

24

USE OF PROCEEDS

The exchange offer is intended to satisfy our obligations under the registration rights agreement that we entered into in connection with the private offering of the outstanding notes. We will not receive any cash proceeds from the issuance of the new notes. In consideration for issuing the new notes, we will receive in exchange a like principal amount of outstanding notes. The outstanding notes surrendered in exchange for the new notes will be retired and canceled, and cannot be re-issued. Accordingly, issuance of the new notes will not result in any change in our capitalization.

We used the net proceeds from the sale of the outstanding notes of approximately $256 million to:

• prepay the approximately $173 million outstanding balance of our senior secured term loan bearing a variable interest rate equal to LIBOR plus 350 basis points; and

• repay $83 million of outstanding revolving loans under our revolving credit facility, bearing a variable interest rate equal to 30 day LIBOR.

CAPITALIZATION

The following table sets forth our capitalization as of September 30, 2003 on a historical basis. You should read this table in conjunction with “Management Discussion and Analysis of Financial Condition and Results of Operations,” “Selected Historical Consolidated Financial and Operating Data” and our consolidated financial statements and the notes thereto included in this prospectus.

	September 30, 2003
	(unaudited) (dollars in millions)
	Historical		As Adjusted
Cash and cash equivalents	$	128	$	182
Long-term debt, including current maturities:
Credit facility:
Revolving loans (a)	$	29	$	—
Term loans		173		—
6.50% notes due 2006		150		150
10.125% senior notes due 2008		700		700
8.75% notes due 2009		599		599
10.625% senior notes due 2011		450		450
10.625% Senior notes due 2011 (b)		—		262
7.55% debentures due 2026		150		150
Other		3		3
Total debt		2,254		2,314
Partners’ capital		1,686		1,683	(c)
Total capitalization	$	3,940	$	3,997

(a) The total committed revolver capacity is currently $354 million. Amounts available under the revolving credit facility are reduced to the extent of outstanding letters of credit provided under the credit facility, which totaled $17 million as of September 30, 2003. As of November 21, 2003, the day the outstanding notes were delivered to the initial purchasers, $90 million was outstanding under our revolving credit facility. The $90 million outstanding under our revolving credit facility was paid using the net proceeds from the offering of the outstanding notes as described under “Use of Proceeds” and $7 million of cash. We are currently in the process of refinancing the revolving portion of our credit facility.

(b) The $250 million principal amount of the notes is shown with the premium of $12 million. The premium will be amortized as a credit to interest expense over the term of the notes. As a result of the premium, the effective interest rate on the notes is 9.5%.

(c) Reflects the expected charge of approximately $3 million related to the write-off of unamortized debt issuance costs upon repayment of the term loan with proceeds of the offering.

25

SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table presents selected historical consolidated financial and operating data. The historical consolidated financial data has been derived from our audited consolidated financial statements for the years ended December 31, 1998, 1999, 2000, 2001 and 2002 and from our unaudited financial statements for the nine months ended September 30, 2002 and 2003.

The selected historical consolidated financial data presented below is condensed and may not contain all of the information that you should consider. You should read this selected financial data in conjunction with the consolidated financial statements, including the related notes, and the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” section of this prospectus.

	For the years ended December 31,															For the nine months ended September 30,
	1998(a)			1999			2000			2001			2002			2002			2003
	(dollars in millions)
Income statement data:
Sales and other operating revenues	$	4,524		$	5,594		$	7,495		$	5,909		$	5,537		$	4,106		$	4,880
Cost of sales		3,928			5,002			6,908			5,755			5,388			3,938			4,754
Selling, general and administrative expenses		229			259			182			181			155			122			131
Operating income (loss)		282			162			334			(99	)		(44	)		18			(60	)
Interest expense		(156	)		(182	)		(185	)		(192	)		(205	)		(154	)		(159	)
Other income (expense), net (b)		—			46			—			5			2			3			(22	)
Net income (loss) (c)		143			32			153			(283	)		(1,299	)		(1,185	)		(235	)
Other operating data:
Depreciation and amortization (d)		268			300			308			319			298			221			230
Capital expenditures		200			157			131			110			118			43			62
Ratio of earnings to fixed charges (e)		1.7x			1.1x			1.7x			—			—			—			—
Balance sheet data (at end of period):
Cash and cash equivalents	$	66		$	108		$	18		$	202		$	27		$	22		$	128
Total assets		6,700			6,776			6,614			6,338			5,052			5,173			4,945
Total debt		2,220			2,261			2,248			2,337			2,228			2,320			2,254
Total partners’ capital		3,885			3,662			3,540			3,237			1,921			2,052			1,686
Sales volumes (in millions):
Selected petrochemical products:
Olefins (pounds)		16,716			18,574			18,490			16,236			16,851			12,789			11,620
Aromatics (gallons)		271			367			397			366			369			282			288
Polymer products (pounds)		6,488			6,388			6,281			5,862			6,098			3,945			4,628

(a) The financial operating data for 1998 includes the operating results of the business contributed to us by Occidental prospectively from May 15, 1998, the date of contribution. The business contributed to us by Occidental was accounted for using the purchase method of accounting.

(b) Other income (expense), net in 1999 and 2001 primarily consists of gains on asset sales, including the sale of our concentrates and compounds business in April 1999. Other income (expense), net in 2001 also includes a $3 million charge due to early extinguishment of debt. The charge was previously classified as an extraordinary item and was reclassified as a result of the adoption of Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Other income (expense), net for the nine months ended September 30, 2003 primarily consists of charges related to early extinguishment of debt.

(c) The net loss for 2002 and the nine months ended September 30, 2003 includes a $1,053 million charge related to goodwill impairment.

26

(d) Effective January 1, 2002, we implemented SFAS No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, we reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1,053 million charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. The conclusion was based on a comparison to our indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value. As a result of implementing SFAS No. 142, earnings in 2002 and subsequent years will be favorably affected by approximately $33 million annually because of the elimination of goodwill amortization. The following table presents our income (loss) before cumulative effect of accounting change and net loss for all periods presented as adjusted to eliminate goodwill amortization.

	For the years ended December 31,												For the nine months ended September 30,
	1998		1999		2000		2001			2002			2002			2003
	(dollars in millions)
Reported income (loss) before cumulative effect of accounting change	$	143	$	32	$	153	$	(283	)	$	(246	)	$	(132	)	$	(235	)
Add back: Goodwill amortization		31		33		33		33			—			—			—
Adjusted income (loss) before cumulative effect of accounting change	$	174	$	65	$	186	$	(250	)	$	(246	)	$	(132	)	$	(235	)
Reported net income (loss)	$	143	$	32	$	153	$	(283	)	$	(1,299	)	$	(132	)	$	(235	)
Add back: Goodwill amortization		31		33		33		33			—			—			—
Adjusted net income (loss)	$	174	$	65	$	186	$	(250	)	$	(1,299	)	$	(132	)	$	(235	)

(e) The ratio of earnings to fixed charges is computed by dividing earnings available for fixed charges by fixed charges. Earnings available for fixed charges consist of earnings before income taxes and cumulative effect of accounting change plus fixed charges, less capitalized interest. Fixed charges consist of interest, whether expensed or capitalized, and the portion of operating lease rental expense that represents the interest factor. Earnings were insufficient to cover fixed charges by $283 million in the year ended December 31, 2001 and $246 million in the year ended December 31, 2002, $132 million for the nine months ended September 30, 2002 and $235 million for the nine months ended September 30, 2003.

27

THE EXCHANGE OFFER

Participation in the exchange offer is voluntary, and you should carefully consider whether to accept. You are urged to consult your financial and tax advisors in making your own decisions on what action to take.

We are offering to issue registered new 10 ⁵/8% senior notes due 2011 in exchange for a like principal amount of our unregistered outstanding 10 ⁵/8% senior notes due 2011 issued on November 21, 2003. We may extend, delay or terminate the exchange offer in our sole discretion. Holders of outstanding notes who wish to tender their notes will need to complete and timely submit the exchange offer documentation related to the exchange. Our $450 million of 10 ⁵/8% senior notes due 2011 issued on April 22, 2003 are not subject to this exchange offer; however, after the outstanding notes have been exchanged for new notes and the 10 ⁵/8% senior notes issued on April 22, 2003 have been similarly exchanged for registered notes, the registered notes issued in both exchange offers are expected to trade under the same CUSIP number.

Purpose and Effect of the Exchange Offer

We sold the outstanding notes in a transaction that was exempt from or not subject to the registration requirements of the Securities Act. In connection with the sale of the outstanding notes, we entered into a registration rights agreement with the initial purchasers of the outstanding notes in which we agreed to file a registration statement relating to an offer to exchange the outstanding notes for new notes within 120 days of the closing of the offering and to use our reasonable best efforts to have it declared effective within 210 days of issuing the outstanding notes. We are offering the new notes under this prospectus to satisfy those obligations under the registration rights agreement.

If we fail to comply with the applicable deadlines for filing the registration statement or completion of the exchange offer, we may be required to pay liquidated damages to holders of the outstanding notes. Please read the section captioned “Registration Rights Agreement” for more details regarding the registration rights agreement.

To receive transferable new notes in exchange for your outstanding notes in the exchange offer, you, as the holder of that outstanding note, will be required to make the following representations:

• you are not our “affiliate,” as defined in Rule 405 of the Securities Act, or a broker-dealer tendering outstanding notes acquired directly from us for your own account;

• you are not a broker-dealer or are a broker-dealer but will not receive new notes for your own account in exchange for outstanding notes, you are not engaged in and do not intend to participate in a distribution of new notes;

• you have no arrangement or understanding with any person to participate in a distribution of the new notes or the outstanding notes within the meaning of the Securities Act;

• you are acquiring the new notes in the ordinary course of your business; and

• if you are a broker-dealer that will receive new notes for your own account in exchange for outstanding notes, you represent that the outstanding notes to be exchanged for new notes were acquired by you as a result of market-making activities or other trading activities and you acknowledge that you will deliver a prospectus meeting the requirements of the Securities Act in connection with the resale of any new notes. It is understood that you are not admitting that you are an “underwriter” within the meaning of the Securities Act by acknowledging that you will deliver, and by delivery of, a prospectus.

Resales of New Notes

Based on interpretations of the SEC staff in “no action letters” issued to third parties, we believe that each new note issued under the exchange offer may be offered for resale, resold and otherwise transferred by the holder of that new note without compliance with the registration and prospectus delivery provisions of the Securities Act if:

• you are not our “affiliate” within the meaning of Rule 405 under the Securities Act;

28

• you acquire such new notes in the ordinary course of your business; and

• you are not engaged in, and do not intend to participate in, and have no arrangement or understanding to participate in, the distribution of new notes.

However, the SEC has not considered the legality of our exchange offer in the context of a “no action letter,” and there can be no assurance that the staff of the SEC would make a similar determination with respect to our exchange offer as it has in other interpretations to other parties.

If you tender outstanding notes in the exchange offer with the intention of participating in any manner in a distribution of the new notes, you:

• cannot rely on these interpretations by the SEC staff; and

• must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

Unless an exemption from registration is otherwise available, any security holder intending to distribute new notes should be covered by an effective registration statement under the Securities Act containing the selling security holder’s information required by Item 507 or Item 508, as applicable, of Regulation S-K under the Securities Act. This prospectus may be used for an offer to resell, resale or other retransfer of new notes only as specifically described in this prospectus. Failure to comply with the registration and prospectus delivery requirements by a holder subject to these requirements could result in that holder incurring liability for which it is not indemnified by us. With respect to broker-dealers, only those that acquired the outstanding notes for their account as a result of market-making activities or other trading activities may participate in the exchange offer. Each broker-dealer that receives new notes for its own account in exchange for outstanding notes acquired as a result of market-making activities or other trading activities may be deemed to be an “underwriter” within the meaning of the Securities Act and must deliver a prospectus in connection with any resale of such notes. We have agreed to make this prospectus available in connection with resales of the notes by such broker-dealers for up to 180 days from the consummation of the exchange offer. Please read the section captioned “Plan of Distribution” for more details regarding the transfer of new notes.

Terms of the Exchange Offer

Upon the terms and subject to the conditions described in this prospectus and in the letter of transmittal, we will accept for exchange any outstanding notes properly tendered and not withdrawn before the expiration date. The material terms and conditions of the exchange offer are described in this prospectus. We will issue $1,000 principal amount of new notes in exchange for each $1,000 principal amount of outstanding notes surrendered under the exchange offer. Outstanding notes may be tendered only in integral multiples of $1,000. The exchange offer is not conditioned upon any minimum aggregate principal amount of outstanding notes being tendered for exchange.

As of the date of this prospectus, $250 million aggregate principal amount of 10 ⁵/8% senior notes due 2011 issued November 21, 2003 are outstanding. This prospectus and the letter of transmittal are being sent to all registered holders of outstanding notes. There will be no fixed record date for determining registered holders of outstanding notes entitled to participate in the exchange offer.

We intend to conduct the exchange offer according to the provisions of the registration rights agreement, the applicable requirements of the Securities Act and the Securities Exchange Act of 1934 and the rules and regulations of the SEC. Outstanding notes that are not tendered for exchange in the exchange offer will remain outstanding and continue to accrue interest and will be entitled to the rights and benefits the holders have under the indenture governing the notes. However, these outstanding notes will not be freely tradeable. Other than in

29

connection with the exchange offer and as specified in the registration rights agreement, we are not obligated to, nor do we currently anticipate that we will register the outstanding notes under the Securities Act. See “—Consequences of Failure to Exchange” below.

By signing or agreeing to be bound by the letter of transmittal, you acknowledge that, upon request, you will execute and deliver any additional documents deemed by the exchange agent or us to be necessary or desirable to complete the exchange, assignment and transfer of the outstanding notes tendered by you, including the transfer of such outstanding notes on the account books maintained by DTC.

We will be deemed to have accepted for exchange properly tendered outstanding notes when we have given oral or written notice of the acceptance to the exchange agent and complied with the applicable provisions of the registration rights agreement. The exchange agent will act as agent for the tendering holders for the purposes of receiving the new notes.

If you tender outstanding notes in the exchange offer, you will not be required to pay brokerage commissions or fees or, subject to the instructions in the letter of transmittal, transfer taxes with respect to the exchange of outstanding notes. We will pay all charges and expenses, other than certain applicable taxes described below, in connection with the exchange offer. It is important for holders to read the section labeled “—Fees and Expenses” for more details regarding fees and expenses incurred in the exchange offer.

We will return any outstanding notes that we do not accept for exchange for any reason without expense to the tendering holder as promptly as practicable after the expiration or termination of the exchange offer.

Expiration Date

The exchange offer will expire at 5:00 p.m., New York City time on              , 2004 unless, in our sole discretion, we extend the exchange offer.

Extensions, Delay in Acceptance, Termination or Amendment

We expressly reserve the right, at any time or at various times, to extend the period of time during which the exchange offer is open. During any extensions, all outstanding notes previously tendered will remain subject to the exchange offer, and we may accept them for exchange. We do not currently intend to extend the expiration date.

To extend the exchange offer, we will notify the exchange agent orally or in writing of any extension. We will also make a public announcement of the extension no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date. Without limiting the manner in which we may choose to make public announcements of any delay in acceptance, extension, termination or amendment of the exchange offer, we will have no obligation to publish, advertise or otherwise communicate any public announcement, other than by making a timely release to the Dow Jones News Service.

If any of the conditions described below under “—Conditions to the Exchange offer” have not been satisfied, we reserve the right, in our sole discretion:

• to delay accepting for exchange any outstanding notes;

• to extend the exchange offer; or

• to terminate the exchange offer,

by giving oral or written notice of a delay, extension or termination to the exchange agent. Subject to the terms of the registration rights agreement, we also reserve the right to amend the terms of the exchange offer in any manner.

30

Any delay in acceptance, extension, termination or amendment will be followed as promptly as practicable by oral or written notice to the registered holders of the outstanding notes. If we amend the exchange offer in a manner we determine to constitute a material change, we will promptly disclose the amendment by means of a prospectus supplement. The supplement will be distributed to the registered holders of the outstanding notes. Depending upon the significance of the amendment and the manner of disclosure to the registered holders, we may extend the exchange offer if the exchange offer would otherwise expire during that period.

Conditions to the Exchange Offer

Despite any other term of the exchange offer, if in our reasonable judgment the exchange offer, or the making of any exchange by a holder of outstanding notes, would violate applicable law or any applicable interpretation of the staff of the SEC (due to a change in its current interpretations) or would be impaired by any action or proceeding that has been instituted or threatened in any court or by or before any governmental agency with respect to the exchange offer:

• we will not be required to accept for exchange, or exchange any new notes for, any outstanding notes; and

• we may terminate the exchange offer as provided in this prospectus before accepting any outstanding notes for exchange.

In addition, we will not be obligated to accept for exchange the outstanding notes of any holder that has not made to us the following representations:

• the representations described under “—Purpose and Effect of the Exchange offer,” “—Procedures for Tendering” and “Plan of Distribution;” and

• other representations as may be reasonably necessary under applicable SEC rules, regulations or interpretations to make available to us an appropriate form for registration of the new notes under the Securities Act.

We expressly reserve the right to amend or terminate the exchange offer, and to reject for exchange any outstanding notes not previously accepted for exchange, upon the occurrence of any of the conditions to the exchange offer specified above. We will give oral or written notice of any extension, amendment, nonacceptance or termination to the holders of the outstanding notes as promptly as practicable.

These conditions are for our sole benefit, and we may assert them or waive them in whole or in part at any time or at various times in our sole discretion. If we fail at any time to exercise any of these rights, this failure will not mean that we have waived our rights. Each right will be deemed an ongoing right that we may assert at any time or at various times.

In addition, we will not accept for exchange any outstanding notes tendered and will not issue new notes in exchange for any outstanding notes, if at that time any stop order has been threatened or is in effect with respect to the registration statement of which this prospectus constitutes a part or the qualification of the indenture under the Trust Indenture Act of 1939.

Procedures for Tendering

How to Tender Generally

Only a registered holder of outstanding notes may tender their outstanding notes in the exchange offer. If you are a beneficial owner of outstanding notes and wish to have the registered owner tender on your behalf, please see “—How to Tender if You Are a Beneficial Owner” below. To tender in the exchange offer, you must either comply with the procedures for manual tender or comply with the automated tender offer program procedures of DTC described below under “—Tendering Through DTC’s Automated Tender Offer Program.”

31

To complete a manual tender, you must:

• complete, sign and date the letter of transmittal, or a facsimile of the letter of transmittal;

• have the signature on the letter of transmittal guaranteed if the letter of transmittal so requires;

• mail or deliver the letter of transmittal or a facsimile of the letter of transmittal to the exchange agent before the expiration date; and

• deliver and the exchange agent must receive, before the expiration date:

— the outstanding notes along with the letter of transmittal or

— a timely confirmation of book-entry transfer of the outstanding notes into the exchange agent’s account at DTC according to the procedure for book-entry transfer described below under “—Book-Entry Transfer.”

If you wish to tender your outstanding notes and cannot comply with the requirement to deliver the letter of transmittal and your outstanding notes (including by book-entry transfer) or use the automated tender offer program of DTC before the expiration date, you must tender your outstanding notes according to the guaranteed delivery procedures described below.

To be tendered effectively, the exchange agent must receive any physical delivery of the letter of transmittal and other required documents at its address provided above under “Prospectus Summary—The Exchange Agent” before the expiration date. To complete a tender through DTC’s automated tender offer program, the exchange agent must receive, prior to the expiration date, a timely confirmation of book-entry transfer of such outstanding notes into the exchange agent’s account at DTC according to the procedure for book-entry transfer described below and a properly transmitted agent’s message.

Any tender by a holder that is not withdrawn before the expiration date will constitute an agreement between the holder and us according to the terms and subject to the conditions described in this prospectus and in the letter of transmittal.

The method of delivery of outstanding notes, the letter of transmittal and all other required documents to the exchange agent is at your election and risk. Rather than mail these items, we recommend that you use an overnight or hand delivery service. In all cases, you should allow sufficient time to assure delivery to the exchange agent before the expiration date. You should not send the letter of transmittal or outstanding notes to us. You may request your broker, dealer, commercial bank, trust company or other nominee to perform the deliveries on your behalf.

Book-Entry Transfer

The exchange agent will make a request to establish an account with respect to the outstanding notes at DTC for purposes of the exchange offer promptly after the date of this prospectus. Any financial institution participating in DTC’s system may make book-entry delivery of outstanding notes by causing DTC to transfer the outstanding notes into the exchange agent’s account at DTC according to DTC’s procedures for transfer. Holders of outstanding notes who are unable to deliver confirmation of the book-entry tender of their outstanding notes into the exchange agent’s account at DTC or all other documents required by the letter of transmittal to the exchange agent on or before the expiration date must tender their outstanding notes according to the guaranteed delivery procedures described below.

Tendering Through DTC’s Automated Tender Offer Program

The exchange agent and DTC have confirmed that any financial institution that is a participant in DTC’s system may use DTC’s automated tender offer program to tender its outstanding notes. Participants in the program may, instead of physically completing and signing the letter of transmittal and delivering it to the exchange agent, transmit their acceptance of the exchange offer electronically. They may do so by causing DTC to transfer the outstanding notes to the exchange agent according to its procedures for transfer. DTC will then send an agent’s message to the exchange agent.

32

The term “agent’s message” means a message transmitted by DTC, received by the exchange agent and forming part of the book-entry confirmation, stating that:

• DTC has received an express acknowledgment from a participant in its automated tender offer program that is tendering outstanding notes that are the subject of book-entry confirmation;

• the participant has received and agrees to be bound by the terms of the letter of transmittal or, in the case of an agent’s message relating to guaranteed delivery, that the participant has received and agrees to be bound by the applicable notice of guaranteed delivery; and

• the agreement may be enforced against the participant.

How to Tender if You Are a Beneficial Owner

If you beneficially own outstanding notes that are registered in the name of a broker, dealer, commercial bank, trust company or other nominee and you wish to tender those notes, you should contact the registered holder promptly and instruct it to tender on your behalf. If you are a beneficial owner and wish to tender on your own behalf, you must, before completing and executing the letter of transmittal and delivering your outstanding notes, either:

• make appropriate arrangements to register ownership of the outstanding notes in your name; or

• obtain a properly completed bond power from the registered holder of outstanding notes.

The transfer of registered ownership may take considerable time and may not be completed before the expiration date.

Signatures and Signature Guarantees

You must have signatures on a letter of transmittal or a notice of withdrawal described below guaranteed by:

• a member firm of a registered national securities exchange;

• a member of the National Association of Securities Dealers, Inc.;

• a commercial bank or trust company having an office or correspondent in the United States; or

• an “eligible guarantor institution” within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934.

The above must be a member of one of the recognized signature guarantee programs identified in the letter of transmittal, unless the outstanding notes are tendered:

• by a registered holder who has not completed the box entitled “Special Issuance Instructions” or “Special Delivery Instructions” on the letter of transmittal and the new notes are being issued directly to the registered holder of the outstanding notes tendered in the exchange for those new notes; or

• for the account of a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution.

When Endorsements or Bond Powers are Needed

If the letter of transmittal is signed by a person other than the registered holder of any outstanding notes, the outstanding notes must be endorsed or accompanied by a properly completed bond power. The bond power must be signed by the registered holder as the registered holder’s name appears on the outstanding notes and a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States, or an eligible guarantor institution must guarantee the signature on the bond power.

33

If the letter of transmittal or any outstanding notes or bond powers are signed by trustees, executors, administrators, guardians, attorneys-in-fact, officers of corporations or others acting in a fiduciary or representative capacity, those persons should so indicate when signing. They should also submit evidence of their authority to deliver the letter of transmittal satisfactory to us unless we waive this requirement.

Determinations Under the Exchange Offer

We will determine in our sole discretion all questions as to the validity, form, eligibility, time of receipt, acceptance of tendered outstanding notes and withdrawal of tendered outstanding notes. Our determination will be final and binding. We reserve the absolute right to reject any outstanding notes not properly tendered or any outstanding notes our acceptance of which would, in the opinion of our counsel, be unlawful. We also reserve the absolute right to waive any defects, irregularities or conditions of tender as to particular outstanding notes. Our interpretation of the terms and conditions of the exchange offer, including the instructions in the letter of transmittal, will be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of outstanding notes must be cured within the time we shall determine. Neither we, the exchange agent nor any other person will be under any duty to give notification of defects or irregularities with respect to tenders of outstanding notes, and none of the aforementioned will incur liability for failure to give notification. Tenders of outstanding notes will not be deemed made until any defects or irregularities have been cured or waived. Any outstanding notes received by the exchange agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned to the tendering holder, unless otherwise provided in the letter of transmittal, as soon as practicable following the expiration date.

When We Will Issue New Notes

In all cases, we will issue new notes for outstanding notes that we have accepted for exchange under the exchange offer only after the exchange agent timely receives:

• outstanding notes or a timely book-entry confirmation of the outstanding notes into the exchange agent’s account at DTC; and

• a properly completed and duly executed letter of transmittal and all other required documents or a properly transmitted agent’s message.

Return of Outstanding Notes Not Accepted or Exchanged

If we do not accept any tendered outstanding notes for exchange for any reason described in the terms and conditions of the exchange offer or if outstanding notes are submitted for a greater principal amount than the holder desires to exchange, the unaccepted or nonexchanged outstanding notes will be returned without expense to their tendering holder. In the case of outstanding notes tendered by book-entry transfer into the exchange agent’s account at DTC according to the procedures described below, the nonexchanged outstanding notes will be credited to an account maintained with DTC. These actions will occur as promptly as practicable after the expiration or termination of the exchange offer.

Your Representations to Us

By signing or agreeing to be bound by the letter of transmittal, you will represent that, among other things:

• you are not an “affiliate,” as defined in Rule 405 of the Securities Act, of us or a broker-dealer tendering outstanding notes acquired directly from us for your own account;

• if you are not a broker-dealer or are a broker-dealer but will not receive new notes for your own account in exchange for outstanding notes, you are not engaged in and do not intend to participate in a distribution of new notes within the meaning of the Securities Act;

• you have no arrangement or understanding with any person to participate in a distribution of the outstanding notes or the new notes within the meaning of the Securities Act;

• you are acquiring the new notes in the ordinary course of your business; and

34

• if you are a broker-dealer that will receive new notes for your own account in exchange for outstanding notes, you represent that the outstanding notes to be exchanged for new notes were acquired by you as a result of market-making activities or other trading activities and you acknowledge that you will deliver a prospectus meeting the requirements of the Securities Act in connection with the resale of any new notes. It is understood that you are not admitting that you are an “underwriter” within the meaning of the Securities Act by acknowledging that you will deliver, and by delivery of, a prospectus.

Guaranteed Delivery Procedures

If you wish to tender your outstanding notes but your outstanding notes are not immediately available or you cannot deliver your outstanding notes, the letter of transmittal or any other required documents to the exchange agent or comply with the applicable procedures under DTC’s automated tender offer program before the expiration date, you may tender if:

• the tender is made through a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., a commercial bank or trust company having an office or correspondent in the United States or an eligible guarantor institution;

• before the expiration date, the exchange agent receives from the member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., commercial bank or trust company having an office or correspondent in the United States, or eligible guarantor institution either a properly completed and duly executed notice of guaranteed delivery by facsimile transmission, mail or hand delivery or a properly transmitted agent’s message and notice of guaranteed delivery,

— stating your name and address, the registered number(s) of your outstanding notes and the principal amount of outstanding notes tendered,

— stating that the tender is being made, and

— guaranteeing that, within three business days after the expiration date, the letter of transmittal or facsimile thereof, together with the outstanding notes or a book-entry confirmation and any other documents required by the letter of transmittal will be deposited by the eligible guarantor institution with the exchange agent; and

• the exchange agent receives the properly completed and executed letter of transmittal or facsimile thereof, as well as all tendered outstanding notes in proper form for transfer or a book-entry confirmation, and all other documents required by the letter of transmittal, within three business days after the expiration date.

Upon request to the exchange agent, the exchange agent will send you a notice of guaranteed delivery if you wish to tender your outstanding notes using the guaranteed delivery procedures described above.

Withdrawal of Tenders

Except as otherwise provided in this prospectus, you may withdraw your tender at any time before 5:00 p.m., New York City time, on the expiration date unless previously accepted for exchange. For a withdrawal to be effective:

• the exchange agent must receive a written notice of withdrawal at one of the addresses listed above under “Prospectus Summary—The Exchange Agent;” or

• the withdrawing holder must comply with the appropriate procedures of DTC’s automated tender offer program system.

Any notice of withdrawal must:

• specify the name of the person who tendered the outstanding notes to be withdrawn (the “Depositor”);

• identify the outstanding notes to be withdrawn, including the registration number or numbers and the principal amount of the outstanding notes;

35

• be signed by the Depositor in the same manner as the original signature on the letter of transmittal used to deposit those outstanding notes or be accompanied by documents of transfer sufficient to permit the trustee for the outstanding notes to register the transfer into the name of the Depositor withdrawing the tender; and

• specify the name in which the outstanding notes are to be registered, if different from that of the Depositor.

If outstanding notes have been tendered under the procedure for book-entry transfer described above, any notice of withdrawal must specify the name and number of the account at DTC to be credited with the withdrawn outstanding notes and otherwise comply with the procedures of DTC.

We will determine, in our sole discretion, all questions as to the validity, form, eligibility and time of receipt of notice of withdrawal, and our determination shall be final and binding on all parties. We will deem any outstanding notes so withdrawn not to have been validly tendered for exchange for purposes of the exchange offer.

Any outstanding notes that have been tendered for exchange but that are not exchanged for any reason will be returned to their holder without cost to the holder or, in the case of outstanding notes tendered by book-entry transfer into the exchange agent’s account at DTC according to the procedures described above, the outstanding notes will be credited to an account maintained with DTC for the outstanding notes. This return or crediting will take place as soon as practicable after withdrawal, rejection of tender or termination of the exchange offer. Holders may re-tender properly withdrawn outstanding notes by following one of the procedures described under “—Procedures for Tendering” above at any time on or before the expiration date.

Fees and Expenses

We will bear the expenses of soliciting tenders. The principal solicitation is being made by mail; however, we may make additional solicitation by telephone, electronically or in person by the exchange agent, our officers and regular employees and those of our affiliates.

We have not retained any dealer-manager in connection with the exchange offer and will not make any payments to broker-dealers or others soliciting acceptances of the exchange offer. We will, however, pay the exchange agent reasonable and customary fees for its services and reimburse it for its related reasonable out-of-pocket expenses. We may also pay brokerage houses and other custodians, nominees and fiduciaries the reasonable out-of-pocket expenses incurred by them in forwarding copies of this prospectus, letters of transmittal and related documents to the beneficial owners of the outstanding notes and in handling or forwarding tenders for exchange.

We will pay the cash expenses to be incurred in connection with the exchange offer, including:

• SEC registration fees;

• fees and expenses of the exchange agent and trustee;

• accounting and legal fees and printing costs; and

• related fees and expenses.

Transfer Taxes

We will pay all transfer taxes, if any, applicable to the exchange of outstanding notes under the exchange offer. A tendering holder, however, will be required to pay any transfer taxes, whether imposed on the registered holder or any other person, if:

• certificates representing outstanding notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be issued in the name of, any person other than the registered holder of outstanding notes tendered;

36

• tendered outstanding notes are registered in the name of any person other than the person signing the letter of transmittal; or

• a transfer tax is imposed for any reason other than the exchange of outstanding notes under the exchange offer.

If satisfactory evidence of payment of any transfer taxes payable by a note holder is not submitted with the letter of transmittal, the amount of the transfer taxes will be billed directly to that tendering holder.

Consequences of Failure to Exchange

If you do not exchange their outstanding notes for new notes under the exchange offer your notes will remain subject to the existing restrictions on transfer. In general, you may not offer or sell the outstanding notes unless they are registered under the Securities Act or if the offer or sale is exempt from registration under the Securities Act and applicable state securities laws. Except as required by registration rights agreement, we do not intend to register resales of the outstanding notes under the Securities Act.

In addition, if you fail to exchange your outstanding notes, the market value of your outstanding notes may be adversely affected because they may be more difficult to sell. The tender of outstanding notes under the exchange offer will reduce the outstanding aggregate principal amount of the outstanding notes. This may have an adverse effect upon, and increase the volatility of, the market price of any outstanding notes that you continue to hold due to a reduction in liquidity. See “Risk Factors—Risks Relating to the Exchange Offer—If you fail to exchange your outstanding notes, the existing transfer restrictions will remain in effect and the market value of your outstanding notes may be adversely affected because they may be more difficult to sell.”

Based on interpretations of the SEC staff, you may offer for resale, resell or otherwise transfer new notes issued in the exchange offer without compliance with the registration and prospectus delivery provisions of the Securities Act, if:

• you are not our “affiliate” within the meaning of Rule 405 under the Securities Act;

• you acquired the new notes in the ordinary course of your business; and

• you have no arrangement or understanding with respect to the distribution of the new notes to be acquired in the exchange offer.

If you tender in the exchange offer for the purpose of participating in a distribution of the new notes,

• you cannot rely on the applicable interpretations of the SEC; and

• you must comply with the registration and prospectus delivery requirements of the Securities Act in connection with a secondary resale transaction.

Accounting Treatment

We will not recognize a gain or loss for accounting purposes upon the consummation of the exchange offer. We will amortize expenses of the exchange offer over the term of the new notes under accounting principles generally accepted in the United States of America.

Other

Participation in the exchange offer is voluntary, and you should carefully consider whether to accept, You are urged to consult your financial and tax advisors in making your decision on what action to take. We may, in the future, seek to acquire untendered outstanding notes in open market or privately negotiated transactions, through subsequent exchange offers or otherwise. We have no present plans to acquire any outstanding notes that are not tendered in the exchange offer or to file a registration statement to permit resales of any untendered outstanding notes.

37

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion should be read in conjunction with information contained in our consolidated financial statements and the notes thereto included in this prospectus.

Results of Operations for the Nine Months Ended September 30, 2003 and 2002

In addition to comparisons of current operating results with the same period in the prior year, we have included, as additional disclosure, certain “trailing quarter” comparisons of third quarter 2003 operating results to second quarter 2003 operating results. Our businesses are highly cyclical, in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into our current business direction.

References to industry benchmark prices or costs, including the weighted average cost of ethylene production, are generally to industry prices and costs reported by Chemical Marketing Associates, Incorporated (“CMAI”), except that crude oil and natural gas benchmark price references are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies.

Overview

Our petrochemicals segment produces olefins, including ethylene, propylene, and butadiene; aromatics, including benzene and toluene; and oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and methyl tertiary butyl ether (“MTBE”). Our polymers segment produces polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear-low density polyethylene (“LLDPE”) and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders.

In the first nine months of 2003, the chemical industry experienced high and volatile raw material and energy costs, weak demand and excess industry capacity. These factors combined to put downward pressure on industry product margins and sales volumes during 2003.

Benchmark crude oil and natural gas prices generally have been indicators of the level and direction of movement of raw material and energy costs for us. Olefins are produced from two major raw material groups:

• crude-oil based liquids (“liquids”), including naphthas, condensates, and gas oils, the prices of which are generally related to crude oil prices; and

• natural gas liquids (“NGL’s”), principally ethane and propane, the prices of which are generally affected by natural gas prices.

We have the ability to shift our ratio of raw materials used in production of olefins to take advantage of the relative costs of liquids and NGL’s.

38

Raw material and energy costs have averaged significantly higher in 2003 than in the first nine months of 2002, reflecting rapid increases early in 2003. The following table shows the average benchmark prices for crude oil and natural gas for the applicable 2003 and 2002 periods, as well as benchmark sales prices for ethylene and co-product propylene, which we produce and sell. The benchmark weighted average cost of ethylene production is based on the estimated ratio of liquid and NGL raw materials used in U.S. ethylene production and is subject to revision by CMAI.

	Average Benchmark Price
	Three months ended September 30,		Nine months ended September 30,
	2003	2002	2003	2002
Crude oil—dollars per barrel	30.20	28.30	31.10	25.41
Natural gas—dollars per million BTUs	4.95	3.19	5.51	2.97
Weighted average cost of ethylene production—cents per pound	18.85	14.60	19.54	14.15
Ethylene—cents per pound	27.50	23.00	28.75	21.64
Propylene— cents per pound	19.33	19.83	21.83	17.83

In response to the higher raw material and energy costs, we implemented significant sales price increases in the first nine months of 2003 for substantially all of our petrochemicals and polymers products. The magnitude of these price increases had a negative effect on product demand, and contributed to us experiencing lower sales volumes, particularly in the second quarter 2003. Although demand recovered during the third quarter 2003, sales volumes were lower in total for the first nine months of 2003 compared to the first nine months of 2002. U.S. demand for ethylene in the third quarter 2003 was an estimated 2.9% below the third quarter 2002, but increased an estimated 5.7% compared to the second quarter 2003. For the first nine months of 2003, U.S. ethylene demand was an estimated 3.6% lower than in the first nine months of 2002.

On March 31, 2003, we completed transactions involving a 15-year propylene supply arrangement and the sale of our Bayport polypropylene production facility in Pasadena, Texas. We received total cash proceeds of $194 million, including the value of the polypropylene inventory sold. Cash proceeds of $159 million of the total represented a partial prepayment under the long-term propylene supply arrangement.

Net Loss—We had a net loss in the third quarter 2003 of $40 million compared to net income of $22 million in the third quarter 2002. The decrease of $62 million is principally due to higher costs, which were only partially offset by higher sales prices. Costs were impacted primarily by higher prices for raw materials and energy, particularly natural gas. In addition, our third quarter 2003 results included an $11 million charge for the write-off of a polymer research and development (“R&D”) facility as a result of a refocusing of polymer R&D efforts. See Note 6 to the September 30, 2003 Consolidated Financial Statements.

We had a net loss in the first nine months of 2003 of $235 million compared to a loss before the cumulative effect of an accounting change of $132 million in the first nine months of 2002. The higher net loss was primarily due to the effects of lower sales volumes, which were only partly offset by the benefit from higher average product margins, for the first nine months of 2003. The first nine months of 2003 included an $11 million charge for the write-off of the polymer R&D facility, $19 million of refinancing costs and a $12 million loss on the sale of the polypropylene plant, while the first nine months of 2002 included the negative impact of certain fixed price natural gas and NGL purchase contracts. Our costs under these contracts were approximately $33 million higher than market-based costs would have been.

Third Quarter 2003 versus Second Quarter 2003

We had a third quarter 2003 net loss of $40 million compared to a net loss of $49 million in the second quarter 2003. The third quarter 2003 included the $11 million charge for the write-off of the polymer R&D facility, while the second quarter 2003 included $19 million of refinancing costs. Additionally, the third quarter

39

2003 benefited from increased sales volumes of ethylene and our derivative products, which were approximately 435 million pounds, or 21%, higher than in the second quarter. However, this volume improvement was generally offset by lower third quarter 2003 product margins, due to lower product sales prices and an increase in the cost of producing ethylene from liquid raw materials.

Segment Data

The following tables reflect selected actual sales volume data, including intersegment sales volumes, and summarized financial information for our business segments.

	For the three months ended September 30,						For the nine months ended September 30,
In millions	2003			2002			2003			2002
Selected petrochemicals products:
Olefins (pounds)		3,976			4,259			11,620			12,789
Aromatics (gallons)		96			92			288			282
Polymers products (pounds)		1,405			1,527			3,945			4,628
Millions of dollars
Sales and other operating revenues:
Petrochemicals segment	$	1,491		$	1,362		$	4,508		$	3,673
Polymers segment		517			503			1,476			1,393
Intersegment eliminations		(366	)		(357	)		(1,104	)		(960	)
Total	$	1,642		$	1,508		$	4,880		$	4,106
Cost of sales:
Petrochemicals segment	$	1,421		$	1,263		$	4,377		$	3,515
Polymers segment		506			480			1,481			1,383
Intersegment eliminations		(366	)		(357	)		(1,104	)		(960	)
Total	$	1,561		$	1,386		$	4,754		$	3,938
Other operating expenses:
Petrochemicals segment	$	4		$	3		$	12		$	7
Polymers segment		30			17			76			51
Unallocated		35			31			98			92
Total	$	69		$	51		$	186		$	150
Operating income (loss):
Petrochemicals segment	$	66		$	96		$	119		$	151
Polymers segment		(19	)		6			(81	)		(41	)
Unallocated		(35	)		(31	)		(98	)		(92	)
Total	$	12		$	71		$	(60	)	$	18

Petrochemicals Segment

Revenues—Revenues of $1.5 billion in the third quarter 2003 were 9% higher than revenues of $1.4 billion in the third quarter 2002 due to higher sales prices partly offset by lower segment sales volumes. Benchmark ethylene prices averaged 20% higher in the third quarter 2003 compared to the third quarter 2002 in response to the higher cost of ethylene production, while benchmark propylene sales prices averaged 3% lower. Segment sales volumes in the third quarter 2003 were 5% below the third quarter 2002, due to lower production of co-products, such as propylene, and lower sales to the polymers segment.

40

Revenues of $4.5 billion in the first nine months of 2003 increased 23% compared to revenues of $3.7 billion in the first nine months of 2002 due to higher sales prices partly offset by lower segment sales volumes. Benchmark ethylene prices averaged 33% higher in the first nine months of 2003 compared to the first nine months of 2002 in response to significant increases in the cost of ethylene production, while benchmark propylene sales prices averaged 22% higher. Segment sales volumes decreased 8% in the first nine months of 2003 compared to the first nine months of 2002 due to lower co-product production and lower sales to the polymers segment.

Cost of Sales—Cost of sales of $1.4 billion in the third quarter 2003 increased 13% compared to $1.3 billion in the third quarter 2002. The costs of both liquid- and NGL-based raw materials as well as energy averaged higher in the third quarter 2003 compared to the third quarter 2002.

Cost of sales of $4.4 billion in the first nine months of 2003 increased 25% compared to $3.5 billion in the first nine months of 2002 due to higher costs of liquid- and NGL-based raw materials and energy in the first nine months of 2003 compared to the first nine months of 2002.

Operating Income—Operating income of $66 million in the third quarter 2003 decreased $30 million compared to operating income of $96 million in the third quarter 2002. The decrease reflects lower product margins as well as 5% lower sales volumes. Product margins deteriorated as the cost of energy, particularly natural gas, and raw materials increased more than average sales prices.

The operating income for the segment of $119 million in the first nine months of 2003 decreased $32 million compared to operating income of $151 million in the first nine months of 2002. The first nine months of 2002 included the effect of certain fixed price natural gas and NGL purchase contracts entered into in early 2001. Our costs under these fixed-price contracts, which largely expired by the end of the first quarter 2002, were approximately $33 million higher than market-based contracts would have been. The negative effect of these contracts in the first nine months of 2002 was offset in the first nine months of 2003 by lower margins coupled with the negative effect of 8% lower sales volumes.

Polymers Segment

Revenues—Revenues of $517 million in the third quarter 2003 were 3% higher than revenues of $503 million in the third quarter 2002. The increase was due to higher average sales prices, which were partially offset by an 8% decrease in sales volumes. Polymers sales volumes in the 2003 quarter were approximately 80 million pounds lower than the comparable 2002 quarter as a result of the first quarter 2003 sale of the Bayport polypropylene production facility.

Revenues of $1.5 billion in the first nine months of 2003 increased 6% compared to revenues of $1.4 billion in the first nine months of 2002. The increase was due to higher average sales prices partly offset by a 15% decrease in sales volumes. Average sales prices increased in response to higher raw material costs, primarily ethylene, compared to the first nine months of 2002. The lower polymers sales volumes reflected lower demand in 2003 and the sale of the Bayport polypropylene production facility.

Cost of Sales—Cost of sales of $506 million in the third quarter 2003 were 5% greater than the $480 million in the third quarter 2002, reflecting higher raw material costs offset by the effect of the 8% lower sales volumes. During the third quarter 2003, the benchmark cost of ethylene averaged 20% higher compared to the third quarter 2002.

Cost of sales of $1.5 billion in the first nine months of 2003 increased 7% compared to $1.4 billion in the first nine months of 2002. This increase reflected higher raw material costs, primarily ethylene, offset by the effect of the 15% decrease in sales volumes. Benchmark ethylene costs were 33% higher in the first nine months of 2003 compared to the first nine months of 2002.

41

Other Operating Expenses—Other operating expenses were $30 million in the third quarter 2003 compared to $17 million in the third quarter 2002, and were $76 million in the first nine months of 2003 compared to $51 million in the first nine months of 2002. The increases were primarily due to the $11 million third quarter 2003 charge related to the write-off of the polymer R&D facility and the $12 million loss on the sale of the Bayport polypropylene production facility in the first quarter 2003.

Operating Loss—The third quarter 2003 polymers segment operating loss of $19 million compares to third quarter 2002 operating income of $6 million. The third quarter 2003 includes the $11 million write-off of the polymer R&D facility. The third quarter 2003 operating loss also reflects lower sales volumes and lower product margins as raw material cost increases exceeded sales price increases.

For the first nine months of 2003, the polymers segment had an operating loss of $81 million compared to an operating loss of $41 million in the first nine months of 2002. The higher operating loss in the first nine months of 2003 was primarily due to the $11 million write-off of the polymer R&D facility and the $12 million loss on the sale of the polypropylene production facility. The negative effect of the 15% decrease in sales volumes was only partially offset by higher polymer product margins. Margins increased in the first nine months of 2003 compared to the first nine months of 2002 as higher average sales prices more than offset higher raw material costs.

Unallocated Items

Cumulative Effect of Accounting Change—Effective January 1, 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, we reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. See Note 3 to the September 30, 2003 Consolidated Financial Statements.

Results of Operations for the Years Ended December 31, 2002, 2001 and 2000

In addition to comparisons of 2002 annual operating results with the prior year, we have included, as additional disclosure, certain “trailing quarter” comparisons of fourth quarter 2002 operating results to third quarter 2002 operating results. Our businesses are highly cyclical, in addition to experiencing some less significant seasonal effects. Trailing quarter comparisons may offer important insight into our current business direction.

References to industry benchmark prices or costs, including the weighted average cost of ethylene, are generally to industry prices and costs reported by Chemical Marketing Associates, Incorporated (“CMAI”), except that crude oil and natural gas benchmark price references are to industry prices reported by Platts, a reporting service of The McGraw-Hill Companies.

Overview

For the year 2002, U.S. ethylene demand was estimated to be 2.8% higher than for 2001. Nonetheless, the 2002 demand growth was insufficient to absorb excess worldwide ethylene industry capacity and to fully offset the effects of a 9.0% contraction in U.S. ethylene demand in 2001 compared to 2000.

42

Crude oil and natural gas prices generally have been indicators of the level and direction of movement of our raw material and energy costs. The following table shows the average benchmark prices for crude oil and natural gas for the three-year comparison period as well as benchmark sales prices for ethylene and co-product propylene, which we produce and sell. The benchmark weighted average cost of ethylene production is based on the estimated ratio of petroleum liquids, or heavy liquids, and natural gas liquids (“NGLs”), or light raw materials, used in U.S. ethylene production and is subject to revision by CMAI based on the actual ratio of heavy liquids to NGLs.

	Average Benchmark Price for the Year and Percent Change Versus Prior Year Average
	2002	Percent Change		2001	Percent Change		2000
Crude oil—dollars per barrel	26.12	2	%	25.73	(14	)%	30.06
Natural gas—dollars per million BTUs	3.22	(25	)%	4.28	10	%	3.88
Weighted average cost of ethylene—cents per pound	15.10	(13	)%	17.41	(11	)%	19.62
Ethylene—cents per pound	22.23	(16	)%	26.33	(13	)%	30.19
Propylene—cents per pound	18.00	3	%	17.42	(23	)%	22.63

The considerable volatility in raw material prices during the three-year period is not apparent in the annual average raw material prices shown in the table above. For example, the benchmark price of crude oil trended upward from a low of $27.10 per barrel in January 2000 to a high of $34.30 per barrel in November 2000, a 27% increase. Benchmark crude oil prices then trended downward to a low of $19.30 per barrel in December 2001, a 44% decrease from the November 2000 high. During 2002, benchmark crude oil prices trended upward to $29.50 per barrel in December 2002, a 53% increase from the December 2001 low. Benchmark natural gas prices rose from $2.34 per million BTUs in January 2000 to a historical high of $9.84 per million BTUs in January 2001, a 320% increase. Benchmark natural gas prices then trended downward to a low of $1.82 per million BTUs in October 2001, an 81% decrease from the January 2001 spike. During 2002, benchmark natural gas prices resumed an upward trend, increasing to $4.05 per million BTUs in December 2002, a 123% increase from the October 2001 low.

Significant volatility in raw material costs tends to put pressure on product margins, as sales price increases generally tend to lag behind raw material cost increases. Conversely, when raw material costs decrease, customers tend to demand immediate relief in the form of lower sales prices. These dynamics are particularly pronounced during periods of excess industry capacity and contributed to the trough conditions experienced by the chemical industry in 2001 and 2002.

Net Income (Loss)—We had a 2002 net loss of $246 million, before the cumulative effect of an accounting change, compared to a 2001 net loss of $283 million. The 2001 period included $33 million of goodwill amortization, $22 million of shutdown costs for our Port Arthur, Texas polyethylene facility and a $3 million charge due to debt retirement. Apart from these items, the $21 million increase in the net loss primarily reflected a $129 million decrease in petrochemicals segment operating income and $13 million of higher interest expense, partly offset by a $112 million improvement in the polymers segment operating loss. Petrochemicals segment operating income decreased as sales prices decreased more than raw material costs, resulting in lower petrochemicals product margins in 2002 compared to 2001. The polymers segment operating loss was reduced as raw material costs, primarily ethylene and propylene, decreased more than the decreases in average polymers product sales prices, resulting in higher polymers product margins in 2002 compared to 2001.

We had a net loss in 2001 of $283 million compared to net income of $153 million for 2000. The significant decrease of $436 million primarily reflected lower petrochemicals segment margins as well as lower volumes for both the petrochemicals and polymers segments. The lower petrochemicals margins were due to lower sales prices, which decreased more than raw material costs, in 2001 compared to 2000. The lower sales prices and

43

volumes reflected weaker industry demand in 2001. The polymers segment 2001 operating loss was comparable to 2000. Results for 2001 also included the $22 million of costs associated with the shutdown of the Port Arthur, Texas polyethylene facility in the first quarter 2001. Both periods included goodwill amortization.

Fourth Quarter 2002 versus Third Quarter 2002

We had a net loss of $114 million in the fourth quarter 2002 compared to net income of $22 million in the third quarter 2002. Fourth quarter 2002 performance was primarily impacted by higher raw material costs. The benchmark cost of ethylene production increased by approximately 3 cents per pound, or 22%, in the fourth quarter 2002 compared to the third quarter 2002. During the fourth quarter 2002 these cost increases were only partly offset by a 1 cent per pound reported increase in benchmark ethylene sales prices. We also were affected by a scheduled maintenance turnaround of the Chocolate Bayou, Texas olefins plant in the fourth quarter 2002. This heavy liquid cracking plant has significant co-product production capabilities and normally further processes olefins by-product volumes from our other plants. We were not able to utilize this capability during the turnaround.

Segment Data

The following tables reflect selected sales volume data, including intersegment sales volumes, and summarized financial information for our business segments.

	For the year ended December 31,
In millions	2002			2001			2000
Selected petrochemicals products:
Olefins (pounds)		16,851			16,236			18,490
Aromatics (gallons)		369			366			397
Polymers products (pounds)		6,098			5,862			6,281
Millions of dollars
Sales and other operating revenues:
Petrochemicals segment	$	4,957		$	5,384		$	7,031
Polymers segment		1,868			1,980			2,351
Intersegment eliminations		(1,288	)		(1,455	)		(1,887	)
Total	$	5,537		$	5,909		$	7,495
Cost of sales:
Petrochemicals segment	$	4,801		$	5,100		$	6,330
Polymers segment		1,875			2,088			2,465
Unallocated—facility closing costs		—			22			—
Intersegment eliminations		(1,288	)		(1,455	)		(1,887	)
Total	$	5,388		$	5,755		$	6,908
Other operating expenses:
Petrochemicals segment	$	10		$	9		$	7
Polymers segment		67			78			71
Unallocated		116			166			175
Total	$	193		$	253		$	253
Operating income (loss):
Petrochemicals segment	$	146		$	275		$	694
Polymers segment		(74	)		(186	)		(185	)
Unallocated		(116	)		(188	)		(175	)
Total	$	(44	)	$	(99	)	$	334

44

Petrochemicals Segment

Revenues—Revenues of $5.0 billion in 2002 decreased 8% compared to revenues of $5.4 billion in 2001 as lower 2002 average sales prices were only partly offset by a 4% increase in sales volumes. Our sales prices in 2002 averaged 11% lower than in 2001, reflecting lower raw material costs and low demand growth coupled with excess industry capacity. Benchmark ethylene sales prices averaged 22.2 cents per pound in 2002, a 16% decrease compared to 2001. These lower ethylene sales prices were slightly offset by higher 2002 propylene sales prices. Benchmark propylene sales prices averaged 3% higher in 2002 than in 2001.

Revenues of $5.4 billion in 2001 decreased 23% compared to revenues of $7.0 billion for 2000 as a result of lower average sales prices and lower sales volumes in 2001. Benchmark ethylene sales prices averaged 13% lower in 2001 compared to 2000, while benchmark propylene sales prices averaged 23% lower. Our sales volumes decreased 12% compared to 2000 due to weaker business conditions in 2001.

Cost of Sales—Cost of sales of $4.8 billion in 2002 decreased 6% compared to $5.1 billion in 2001, or 2% less than the percent decrease in revenues. While the costs of natural gas and NGL raw materials decreased from historically high levels experienced in 2001, other raw material costs, such as heavy liquids, did not decrease similarly.

Cost of sales of $5.1 billion in 2001 decreased 19% compared to $6.3 billion in 2000 due to the effect of the 12% decrease in sales volumes and lower average raw material costs. Benchmark crude oil prices, which affect the cost of raw materials, averaged 14% lower in 2001 compared to 2000.

Operating Income—Operating income of $146 million in 2002 decreased $129 million from $275 million in 2001 as sales prices decreased more than raw material costs, resulting in lower product margins. The effect of the lower 2002 product margins was only partly offset by the benefit of a 4% increase in sales volumes, which was in line with industry demand growth.

Operating income of $275 million in 2001 decreased $419 million from $694 million in 2000. The decrease was primarily due to lower product margins and, to a lesser extent, lower sales volumes. The lower margins primarily reflected lower sales prices for ethylene and for co-products, such as propylene and benzene, in 2001 compared to 2000. The lower prices and volumes were due to weaker market demand in 2001 compared to 2000.

Polymers Segment

Revenues—Revenues of $1.9 billion in 2002 decreased 6% compared to revenues of $2.0 billion in 2001 due to a 9% decrease in average sales prices offset by a 4% increase in sales volumes. Lower sales prices in 2002 reflected generally lower raw material costs compared to 2001. Sales volumes increased due to stronger demand in 2002 compared to 2001.

Revenues of $2.0 billion in 2001 decreased 16% compared to revenues of $2.4 billion in 2000 due to a decrease in average sales prices and a 7% decrease in sales volumes. The decreases in sales prices and volumes were both due to weaker demand in 2001.

Cost of Sales—Cost of sales of $1.9 billion in 2002 decreased 10% compared to $2.1 billion in 2001, or 4% more than the percent decrease in revenues noted above. The decrease during 2002 reflected lower raw material costs, primarily ethylene, and lower energy costs, partly offset by the 4% increase in sales volumes. Benchmark ethylene prices were 16% lower and were only partly offset by a 3% increase in benchmark propylene prices in 2002 compared to 2001.

Cost of sales of $2.1 billion in 2001 decreased 15% compared to $2.5 billion in 2000 due to lower raw material costs in 2001 and the 7% decrease in sales volumes. Benchmark prices of ethylene and propylene, the principal raw materials for polymers, averaged 13% and 23% lower, respectively, in 2001 than in 2000.

45

Operating Loss—The operating loss of $74 million in 2002 decreased $112 million compared to the operating loss of $186 million in 2001. The $112 million improvement was due to higher polymers product margins and, to a lesser extent, higher sales volumes. Margins improved in 2002 compared to 2001, as decreases in sales prices were less than the decreases in polymers raw material costs.

The 2001 operating loss of $186 million was comparable to the operating loss of $185 million in 2000 as the effect of lower polymers sales prices was offset by lower raw material costs.

Unallocated Items

The following discusses costs and expenses that were not allocated to the petrochemicals or polymers segments.

Cost of Sales—We discontinued production at our higher-cost Port Arthur, Texas polyethylene facility in February 2001 and shut down the facility. During 2001, we recorded a $22 million charge, which included environmental remediation liabilities of $7 million, other exit costs of $3 million and severance and pension benefits of $7 million for approximately 125 people employed at the Port Arthur facility. The remaining $5 million balance primarily related to the write down of certain assets. See Note 3 to the December 31, 2002 Consolidated Financial Statements.

Other Operating Expenses—These include unallocated general and administrative expenses and, in 2001 and 2000, goodwill amortization. Unallocated expenses were $116 million in 2002, $166 million in 2001 and $175 million in 2000. The decrease from 2001 to 2002 was primarily due to goodwill amortization of $33 million that ceased in 2002. See Note 2 to the December 31, 2002 Consolidated Financial Statements.

The following discusses items that are not included in operating income, but that affected our net income. See Note 15 to the December 31, 2002 Consolidated Financial Statements.

Other Income (Expense), Net—As part of a 2001 refinancing, we wrote off unamortized debt issuance costs and amendment fees of $3 million related to the early repayment of a $1.25 billion bank credit facility. The charge was previously reported as an extraordinary loss on early extinguishment of debt.

Cumulative Effect of Accounting Change—Upon implementation of Statement of Financial Accounting Standards (“SFAS”) No. 142, we reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge that was reported as the cumulative effect of an accounting change as of January 1, 2002. See Note 2 to the December 31, 2002 Consolidated Financial Statements.

Financial Condition for the Nine Months Ended September 30, 2003 and 2002

Operating Activities—Operating activities provided cash of $98 million in the first nine months of 2003 and used cash of $118 million in the first nine months of 2002. During the first nine months of 2003, we received $159 million as a partial prepayment for propylene to be delivered over a period of 15 years in connection with the long-term propylene supply arrangement entered into in March 2003. In consideration of discounts offered to certain customers for early payment for product delivered in September 2003, some receivable amounts were collected in September 2003 that otherwise would have been expected to be collected in October 2003, including $33 million from Occidental. In addition, by managing the main components of working capital – receivables, inventory and payables – we minimized the working capital impact of higher sales prices in the 2003 period. In the 2002 period, similar increases in sales prices resulted in a use of cash of $139 million due to higher receivables balances, which were partially offset by a $78 million increase in payables. The increases in cash flow during 2003 were partially offset by expenditures for scheduled maintenance turnarounds that were $55 million higher in the first nine months of 2003 than in the first nine months of 2002. We make significant semi-annual interest payments in the first and third quarters of each year. Accordingly, accrued interest liabilities are typically lower at the end of the first and third quarters of the year compared to the end of the year.

46

Investing Activities—Investing activities provided cash of $7 million in the first nine months of 2003 and used cash of $49 million in the first nine months of 2002. On March 31, 2003, concurrent with entering into the long-term propylene supply arrangement, we sold a polypropylene production facility in Pasadena, Texas, for cash proceeds of $35 million. We recognized a $12 million loss on the sale. In May 2003 and August 2003, we sold certain railcars in two transactions for a total of $34 million and leased the railcars from the buyers under operating lease agreements.

Our capital expenditures were $62 million in the first nine months of 2003 and $43 million in the first nine months of 2002. The level of expenditures in both periods reflects continuing cash conservation efforts. Our capital budget for 2003 is $97 million, primarily for regulatory and environmental compliance projects.

Financing Activities—Cash used by financing activities was $4 million in the first nine months of 2003 and $16 million in the first nine months of 2002. In April 2003, we issued $450 million of 10.625% senior notes due in 2011. The proceeds, net of related fees, were used to prepay $300 million of 8.5% notes due in the first quarter 2004, approximately $122 million of the $296 million of outstanding term loans under our credit facility and prepayment premiums of approximately $17 million.

In September 2003, $29 million of our medium term notes matured and were repaid using funds borrowed under our revolving credit facility.

In March 2003, we used a portion of the total cash proceeds of $194 million from the 15-year propylene supply arrangement and the sale of the polypropylene production facility to repay $104 million of borrowing under the revolving credit facility. We used the remaining net proceeds to enhance liquidity and for general business purposes. In connection with these transactions, the commitment under the revolving credit facility was reduced by $96 million, to $354 million.

The first nine months of 2002 included the scheduled retirement of $100 million 9.125% notes. This was partly funded by temporarily borrowing a net $89 million under the revolving credit facility, which was repaid in the fourth quarter 2002.

As a result of continuing adverse conditions in the industry and our debt service obligations, we made no distributions to our partners in the first nine months of 2003 nor were any made in 2002.

We obtained amendments to our credit facility and receivables sales agreement in March 2003. See “—Liquidity and Capital Resources—Long-Term Debt” and “—Liquidity and Capital Resources—Receivables Sale” below.

Liquidity and Capital Resources—At September 30, 2003, our long-term debt, including current maturities, totaled $2.3 billion, or approximately 57% of our total capitalization. We had cash on hand of $128 million at September 30, 2003. The September 30, 2003 cash position reflects, among other things, our continued focus on minimizing working capital levels and on other cash conservation efforts, such as limiting capital expenditures and controlling operating costs. As of September 30, 2003, $29 million of borrowing was outstanding under the $354 million revolving credit facility, which matures in August 2006. Amounts available under the revolving credit facility are further reduced to the extent of outstanding letters of credit provided under the credit facility, which totaled $17 million as of September 30, 2003.

Standard & Poor’s rating service (“S&P”) currently rates our senior unsecured debt as BB- and Moody’s Investors Service (“Moody’s”) currently rates our senior unsecured debt as B2. During 2003, S&P lowered our senior unsecured debt rating from BB to BB-. In its most recent announcement regarding our rating, S&P cited our 70.5% ownership by Lyondell, Lyondell’s second quarter 2003 results, concerns about the timing of meaningful recovery in the petrochemical sector and Lyondell’s and our credit exposure to adverse developments in a still uncertain business environment. In the first quarter of 2003, both agencies changed our outlook from

47

stable to negative. On September 22, 2003, Moody’s placed our ratings under review for a possible one or two notch downgrade citing their concern about the pace at which Lyondell will be able to reduce debt over the 2004-2005 time frame given continuing demand weakness and excess capacity in key markets. As described under “Prospectus Summary—Recent Developments,” on November 13, 2003, Moody’s lowered our senior unsecured debt rating from B1 to B2, citing, among other things, the extended industry trough and concerns regarding capacity utilization rates over the next several years and the strength of the next industry peak. Our rating will remain under review pending completion of the financings described below.

One or more of the rating agencies may reduce our ratings in the future, whether as the result of reasons cited by the agencies, adverse developments affecting our business or events beyond our control. A downgrade in debt rating could affect our borrowing costs, our ability to refinance or restructure debt in the future and trade terms. A reduction of our debt rating to B+ by S&P or to B3 by Moody’s would permit the counterparty to terminate our $100 million receivables sales agreement. As a result of the recent downgrade by Moody’s, the counterparty to our $101 million railcar lease is permitted to terminate the lease as of February 11, 2004. See “—Receivables Sale” below and Note 4 to the September 30, 2003 Consolidated Financial Statements. The outstanding amount under this lease as of the date of this prospectus is $98 million. We expect to replace the existing receivables agreement and the railcar lease before the end of 2003 and, at the same time, refinance the existing credit facility to increase our financial flexibility.

Our management believes that conditions will be such that cash balances, cash generated by operating activities and funds under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, other contractual obligations, necessary capital expenditures and ongoing operations. Future operating performance could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. If future operating cash flows are less than currently anticipated due to raw material prices or other factors, we may need to further reduce or delay capital expenditures, sell assets, or reduce operating expenses.

Long-Term Debt—As a result of continuing adverse conditions in the industry, in March 2003, we obtained amendments to our credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive, with the exception that the maximum permitted debt ratios become more restrictive beginning September 30, 2004, the definition of total indebtedness became more restrictive at March 31, 2003 and the defined limitation on expenditures for property, plant and equipment was extended to apply through 2004. In addition, the financial ratio requirements become increasingly restrictive over time beginning in the fourth quarter 2003. The amended credit facility and the indentures governing our senior notes contain covenants that, subject to certain exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, sales of assets, investments, non-regulatory capital expenditures, certain payments, and mergers. In addition, the credit facility requires us to maintain specified financial ratios. The breach of these covenants would permit the lenders under our credit facility and the indentures governing the senior notes to declare the loans immediately payable and would permit the lenders under our credit facility to terminate future lending commitments. We were in compliance with all covenants under our debt instruments as of September 30, 2003.

Deferred Revenues—On March 31, 2003, we received an advance of $159 million, representing a partial prepayment for product to be delivered under a long-term product supply arrangement, primarily at cost-based prices. We will recognize this deferred revenue over 15 years, as the associated product is delivered. See Note 7 to the September 30, 2003 Consolidated Financial Statements.

Receivables Sale—During October 2002, we entered into an agreement with an independent issuer of receivables-backed commercial paper under which we sold receivables and received cash proceeds of $100 million. The agreement has annual renewal provisions for up to three years upon mutual consent of the parties. Under the terms of the agreement, we agreed to maintain a senior unsecured debt rating of at least B1 by Moody’s and BB- by S&P. In March 2003, we obtained an amendment to reduce the minimum required debt rating of Moody’s to at least B2. With the debt rating downgrade by S&P earlier in 2003, the S&P debt rating of

48

BB- is at the minimum required by the agreement. With the debt rating downgrade by Moody’s on November 13, 2003, which is described under “Prospectus Summary—Recent Developments,” the Moody’s debt rating of B2 is the minimum required by the agreement. If we do not maintain the minimum ratings, the counterparty would be permitted to terminate the receivables agreement. See Note 4 to the September 30, 2003 Consolidated Financial Statements. As discussed, we are in the process of restructuring our financing to replace the existing receivables agreement, and expect the process to be completed during the fourth quarter of 2003.

Financial Condition for the Years Ended December 31, 2002, 2001 and 2000

Operating Activities—Operating activities provided cash of $55 million in 2002, $230 million in 2001 and $339 million in 2000. The $175 million decrease in operating cash flow in 2002 compared to 2001 was due to higher cash expenditures in 2002 for maintenance, interest, employee benefits and railcar leases. These were partly offset by the decreases in working capital levels described below and a $37 million lower net loss, after adjusting for the $1.1 billion non-cash charge related to the cumulative effect of an accounting change in the 2002 period.

During 2002, changes in other assets and liabilities, net in the Consolidated Statements of Cash Flows indicated a use of cash of $66 million, while in 2001 such changes indicated cash provided of $40 million. The $106 million difference between 2002 and 2001 was primarily due to higher cash expenditures for maintenance turnarounds, interest, employee benefits and railcar leases in 2002 than in 2001. Spending for maintenance turnarounds was $34 million higher in 2002, primarily due to a scheduled turnaround at the Chocolate Bayou, Texas plant. Our interest payments were $30 million higher in 2002 compared to 2001, as a result of the refinancing of our debt during August 2001. As a result of the refinancing, monthly interest payments on variable-rate debt were converted to semi-annual interest payments on fixed rate debt, with the first payment occurring in 2002. Additionally, interest rates on the fixed rate debt were higher than interest rates on the previous variable-rate debt. Cash expenditures related to employee benefits and compensation, including contributions to our pension plans, were $22 million higher in 2002 than in 2001. In addition, we made payments totaling $34 million, discussed below under “—Operating Leases,” related to our railcar leases. These higher 2002 cash outlays were partially offset by receipt of a $25 million customer advance related to a new, long-term processing agreement. The above items total to a net $95 million and explain a substantial portion of the $106 million year-to-year variance in the effect of changes in other assets and liabilities, net.

The major controllable components of our working capital—receivables, inventory and payables—decreased $69 million during 2002 compared to a $154 million decrease during 2001. The $69 million decrease during 2002 was primarily due to the sale of $81 million of receivables under an agreement we entered into in October 2002. See “—Receivables Sale” below. Had the sale not occurred, the components of working capital would have increased $12 million as sales prices increased from December 31, 2001 levels, putting upward pressure on working capital levels in 2002. In 2001, sales prices steadily decreased from December 31, 2000 levels, helping to reduce working capital levels.

Cash flow from operations decreased to $230 million in 2001 compared to $339 million in 2000. The $109 million decrease primarily reflected a $283 million net loss in 2001 compared to net income of $153 million in 2000. This was partly offset by a $222 million net reduction in receivables, which occurred despite the termination of a $130 million receivables securitization program in August 2001. The net reduction in receivables reflected the effects of lower sales prices as well as improved collection efficiency in 2001.

Investing Activities—Our capital expenditures were $118 million in 2002, $110 million in 2001 and $131 million in 2000. The 2002 expenditures included $47 million of purchases of previously leased railcars, discussed below under “—Operating Leases.” Excluding the railcar purchases, our reduced level of expenditures in 2002 and 2001 reflected lower discretionary spending in view of the continuing poor business environment. Capital expenditures in 2002 and 2001 primarily included reliability improvement as well as regulatory compliance projects.

49

Our capital budget for 2003 is $97 million. The increase over 2002 spending, excluding the 2002 railcar purchases, is primarily to ensure regulatory and environmental compliance. See “—Environmental Matters” below.

During the second quarter 2002, we contributed $6 million to a mutual insurance company formed by us and other companies in the industry to provide catastrophic business interruption and excess property damage insurance coverage for its members.

Financing Activities—Financing activities used cash of $106 million in 2002, provided cash of $61 million in 2001, and used cash of $302 million in 2000. Financing activities in 2002 included the scheduled retirement of $100 million principal amount of the 9.125% notes and $4 million principal amount of our term loan and medium-term notes. The scheduled retirements were financed by the sale of accounts receivable discussed under “—Receivables Sale” below.

We obtained amendments to our credit facility in late March 2002, making certain financial ratio requirements less restrictive, making the covenant limiting acquisitions more restrictive and adding a covenant limiting certain non-regulatory capital expenditures. The amendment increased the interest rate on the credit facility by 0.5% per annum.

In August 2001, we completed a $1.5 billion debt refinancing. The refinancing included an amended credit facility consisting of a $500 million secured revolving credit facility maturing in August 2006 and a $300 million secured term loan maturing in August 2007. The refinancing also included the issuance of $700 million of new unsecured 10.125% senior notes maturing in August 2008. The refinancing replaced a $1.25 billion credit facility, $820 million of which was outstanding. A portion of the net proceeds was also used to repay $90 million of our medium-term notes that matured on August 30, 2001. The remaining net proceeds were used for general business purposes. The amended credit facility also made certain financial ratio requirements less restrictive. We previously had amended our credit facility in March 2001, easing certain financial ratio requirements.

As a result of continuing adverse conditions in the industry and our debt service obligations, we made no distributions to partners in 2002 and 2001, compared to distributions of $280 million in 2000.

Liquidity and Capital Resources—At December 31, 2002, our long-term debt, including current maturities, totaled $2.2 billion, or approximately 55% of our total capitalization. In addition, we had cash on hand of $27 million. The $450 million revolving credit facility, which matures in August 2006, was undrawn at December 31, 2002. Amounts available under the revolving credit facility are reduced to the extent of certain outstanding letters of credit provided under the credit facility, which totaled $16 million as of December 31, 2002.

During 2002, our debt rating was lowered by two major rating agencies, Standard & Poor’s and Moody’s. Moody’s reduced our noninvestment grade corporate debt rating from a Ba1 to a Ba3. Standard & Poor’s reduced our corporate rating from an investment grade BBB- to a noninvestment grade BB. Both agencies cited Lyondell’s acquisition of Occidental’s interest in us as the reason for the downgrade. The agencies stated that the acquisition resulted in a concentration of credit risk with Lyondell, which owns a 70.5% interest in us and whose debt currently has a noninvestment grade credit rating. Standard & Poor’s also cited current trough conditions in the industry and our $1.1 billion goodwill write off.

In January 2003, Moody’s changed the rating outlook for both Equistar and Lyondell to negative from stable. Moody’s cited its belief that our credit profile is limited by the financial strength of Lyondell, whose outlook was changed primarily as a result of concerns regarding one of its other major joint ventures. The lowering of our credit rating could affect our borrowing costs, our ability to refinance in the future and could result in termination of the receivables sales agreement—see “—Receivables Sale” below.

50

Management believes that conditions will be such that cash balances, cash generated by operating activities and funds under the credit facility will be adequate to meet anticipated future cash requirements, including scheduled debt repayments, other contractual obligations, necessary capital expenditures and ongoing operations. Future operating performance could be affected by general economic, financial, competitive, legislative, regulatory, business and other factors, many of which are beyond our control. If future operating cash flows are less than currently anticipated due to raw material prices or other factors, we may need to reduce or delay capital expenditures, sell assets, or reduce operating expenses.

In addition to long-term debt, we are required to make payments relating to various types of obligations, some of which were incurred in lieu of financing to obtain the rights to use certain assets. The following table summarizes our minimum payments as of December 31, 2002 relating to long-term debt, purchase obligations and operating leases for the next five years and thereafter.

			Payments Due By Period
Millions of dollars	Total		2003		2004		2005		2006		2007		Thereafter
Long-term debt	$	2,228	$	32	$	303	$	4	$	153	$	284	$	1,452
Purchase obligations		2,558		164		168		169		157		151		1,749
Operating leases—
Minimum lease payments		554		73		65		53		41		35		287
Residual value guarantees		83		—		61		22		—		—		—
Total	$	5,423	$	269	$	597	$	248	$	351	$	470	$	3,488

Long-Term Debt—The credit facility and the indenture governing our senior notes contain covenants that, subject to certain exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, sales of assets, investments, non-regulatory capital expenditures, certain payments, and mergers. In addition, the bank credit facility requires us to maintain specified financial ratios. The financial ratio requirements under our credit facility become increasingly restrictive on a quarterly basis. The breach of these covenants could permit the lenders under our credit facility and the indenture governing the senior notes to declare the loans immediately payable and could permit the lenders under our credit facility to terminate future lending commitments. See Note 10 to the December 31, 2002 Consolidated Financial Statements for a description of our long-term debt and credit facility.

We were in compliance with all covenants under our debt instruments as of December 31, 2002. As a result of continuing adverse conditions in the industry, in March 2003, we obtained amendments to our credit facility to provide additional financial flexibility by easing certain financial ratio requirements.

Purchase Obligations—We are a party to various unconditional obligations to purchase products and services, as summarized in the above table. These primarily include commitments for steam and power from a new co-generation facility, which reached full capacity in mid-2002. These commitments are designed to assure sources of supply and are not expected to be in excess of normal requirements. See the “Commitments” section of Note 14 to the December 31, 2002 Consolidated Financial Statements.

Operating Leases—We lease various facilities and equipment, including railcars, under noncancelable operating lease arrangements for various periods.

During 2002, we leased certain railcars, under three operating leases, from unaffiliated entities established for the purpose of serving as lessors with respect to these leases. One of these operating leases remains outstanding at December 31, 2002. This lease includes an option for us to purchase the railcars during the lease term. If we do not exercise the purchase option, the affected railcars will be sold upon termination of the lease. In the event the sales proceeds are less than the related guaranteed residual value, we will pay the difference to the lessor, but no more than the guaranteed residual value. As described above, our debt rating was lowered during

51

2002, allowing the early termination of this railcar lease by the lessor. As a result, we renegotiated the lease during 2002, resulting in a payment of additional fees and a $17 million prepayment, which is being amortized over the remaining lease term through 2004. The prepayment reduced the guaranteed residual value under the lease, and reduced future lease payments. The guaranteed residual value at December 31, 2002 was $83 million.

The other two railcar leases contained financial and other covenants substantially the same as those contained in our credit facility discussed under “—Long-Term Debt” above. Under one of the leases, we amended the covenants to incorporate the March 2002 amendment to the credit facility. The amendment required the payment of additional fees and a $17 million prepayment, which was amortized in full through December 2002, when the lease was terminated and we entered into a new lease arrangement with another lessor. The new lease covered a substantial portion of the subject railcars, and we purchased the remaining railcars for $10 million. The new operating lease contains standard terms and does not guarantee a residual value or contain financial or other non-standard covenants.

Under the third railcar lease, the covenants were automatically updated with the March 2002 amendment to the credit facility. This lease terminated in November 2002, and we purchased the railcars for $37 million. We may pursue leases for a portion of the purchased railcars. See Note 11 to the December 31, 2002 Consolidated Financial Statements for related operating lease disclosures.

Advance from Customer—In addition to the items reflected in the table above, in December 2002, we received a $25 million initial advance from a customer in connection with a long-term product processing agreement under which we are obligated to deliver product at cost-based prices. The advance was treated as deferred revenue and included in other liabilities. We will amortize the deferred revenue to earnings over the nine-year term of the contract.

Receivables Sale—During October 2002, we entered into an agreement with an independent issuer of receivables-backed commercial paper under which we sold receivables and received cash proceeds of $100 million. Under the terms of the agreement, we agreed to sell, on an ongoing basis and without recourse, designated accounts receivable as existing receivables are collected. The agreement has annual renewal provisions for up to three years and is subject to maintaining a debt rating of at least B1 by Moody’s and BB- by Standard & Poor’s. We are seeking an amendment to reduce the minimum required debt ratings and expect the amendment to be effective prior to March 31, 2003. Upon entering into the agreement, the commitment under the revolving credit facility was reduced by $50 million, to $450 million, in accordance with the terms of the revolving credit facility and would not be restored if the receivables agreement were terminated. We used the proceeds of the sold receivables to reduce borrowing under the revolving credit facility and for general corporate purposes. As of December 31, 2002, the balance of our accounts receivable sold, which is not reflected in the table above, was $81 million.

Pension Obligations—We maintain several defined benefit pension plans, as described in Note 13 to the December 31, 2002 Consolidated Financial Statements. At December 31, 2002, the projected benefit obligation for our plans exceeded the fair value of plan assets by $68 million. Subject to future actuarial gains and losses, as well as actual asset earnings, we will be required to fund the $68 million, with interest, in future years. The minimum required contribution is not expected to be more than approximately $25 million per year over the next five years. Pension contributions were $18 million, $7 million and $31 million for the years 2002, 2001 and 2000, and are estimated to be approximately $16 million for 2003.

Related Party Transactions

We make significant sales of product to Lyondell, Occidental Chemical (“Occidental Chemical”), LYONDELL-CITGO Refining LP (“LCR”), affiliates of Millennium Chemicals Inc (“Millennium”), Oxy Vinyls, LP (“Oxy Vinyls”) and provide services and raw materials to Lyondell Methanol Company, L.P. (“LMC”), which is wholly owned by Lyondell effective May 1, 2002. In turn, we make significant purchases of raw materials and products from LCR and receive significant administrative services from Lyondell.

52

Prior to August 22, 2002, we were owned 41% by Lyondell, 29.5% by Millennium, and 29.5% by Occidental. On August 22, 2002, Lyondell completed the purchase of Occidental’s interest in us, increasing its ownership interest in us to 70.5%. As a result of this transaction, Occidental has two representatives on Lyondell’s board of directors and, as of December 31, 2002, Occidental owned approximately 22% of Lyondell.

In view of Occidental’s relationship to Lyondell, which owns 70.5% of us, Occidental’s transactions with us subsequent to August 22, 2002 will continue to be reported as related party transactions in our Consolidated Statements of Income and Consolidated Balance Sheets.

We believe that all such aforementioned related party transactions are effected on terms substantially no more or less favorable than those that would have been agreed upon by unrelated parties on an arm’s length basis. See the section captioned “Related Party Transactions” herein and Note 5 to the December 31, 2002 Consolidated Financial Statements for a description of related party transactions.

Critical Accounting Policies

We apply those accounting policies that management believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the U.S. Our more critical accounting policies include those related to long-lived assets, including the costs of major maintenance turnarounds and repairs, and accruals for long-term employee benefit costs such as pension and postretirement costs. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its estimates used in the preparation of the financial statements based on its latest assessment of the current and projected business and general economic environment. Our significant accounting policies are summarized in Note 2 to the December 31, 2002 Consolidated Financial Statements.

Long-Lived Assets—With respect to long-lived assets, key assumptions include the estimates of useful asset lives and the recoverability of the carrying values of fixed assets and intangible assets as well as the existence of any obligations associated with the retirement of fixed assets. Such estimates could be significantly modified and/or the carrying values of the assets could be impaired by such factors as new technological developments, new chemical industry entrants with significant raw material or other cost advantages, uncertainties associated with the U.S. and world economies, the cyclical nature of the chemical industry, and uncertainties associated with governmental regulatory actions.

Due to temporary decreases in demand for our products, certain facilities may remain idle until market conditions improve. Assets that are temporarily idled are tested for impairment at the time they are temporarily idled. Fixed assets with a net book value of $160 million were temporarily idled at December 31, 2002. Those assets continue to be depreciated over their remaining useful lives. No impairments were recorded in 2002, 2001 or 2000 for temporarily idled facilities.

We defer the costs of turnaround maintenance and repair activities in excess of $5 million, amortizing such costs over the period until the next expected major turnaround of the affected unit. During 2002, 2001 and 2000, cash expenditures of $49 million, $15 million and $29 million, respectively, were deferred and are being amortized, generally over a period of 5 years. Amortization in 2002, 2001 and 2000, of previously deferred turnaround costs was $24 million, $20 million and $24 million, respectively.

The estimated useful lives of long-lived assets range from 3 to 30 years. Depreciation and amortization of these assets, including amortization of deferred turnaround costs, under the straight-line method over their estimated useful lives totaled $298 million in 2002. If the useful lives of the assets were found to be shorter than originally estimated, depreciation charges would be accelerated.

Additional information on long-lived assets, deferred turnaround costs and related depreciation and amortization appears in Note 8 to the December 31, 2002 Consolidated Financial Statements.

53

Long-Term Employee Benefit Costs—The costs to us of long-term employee benefits, particularly pension and postretirement medical and life benefits, are incurred over long periods of time, and involve many uncertainties over those periods. The net periodic benefit cost attributable to current periods is based on several assumptions about such future uncertainties, and is sensitive to changes in those assumptions. It is management’s responsibility, often with the assistance of independent experts, to select assumptions that in its judgment represent best estimates of those uncertainties. It also is management’s responsibility to review those assumptions periodically to reflect changes in economic or other factors that affect those assumptions.

The current benefit service costs, as well as the existing liabilities, for pensions and other postretirement benefits are measured on a discounted present value basis. The discount rate is a current rate, related to the rate at which the liabilities could be settled. Our assumed discount rate is based on average rates published by Moody’s and Merrill Lynch for high-quality (Aa rating) 10-year fixed income securities. For the purpose of measuring the benefit obligations at December 31, 2002, we lowered our assumed discount rate from 7.0% to 6.5%, reflecting the general decline in market interest rates during 2002. The 6.5% rate also will be used to measure net periodic benefit cost during 2003. A further one percentage point reduction in the assumed discount rate for us would increase our benefit obligation by approximately $50 million, and would reduce our net income by approximately $6 million.

The benefit obligation and the periodic cost of postretirement medical benefits also are measured based on assumed rates of future increase in the per capita cost of covered health care benefits. As of December 31, 2002, the assumed rate of increase was 10.0% for 2003 through 2004, 7.0% for 2005 through 2007 and 5.0% thereafter. A one percentage point change in the health care cost trend rate assumption would have no significant effect on either the benefit liability or the net periodic cost, due to limits on our maximum contribution level under the medical plan.

The net periodic cost of pension benefits included in expense also is affected by the expected long-term rate of return on plan assets assumption. Investment returns that are recognized currently in net income represent the expected return on plan assets rate applied to a market-related value of plan assets which, for us, is defined as the market value of assets. The expected return on plan assets rate is normally changed less frequently than the assumed discount rate, and reflects long-term expectations, rather than current fluctuations in market conditions. Our expected long-term asset return on plan assets rate of 9.5% has been based on the average level of earnings that our independent pension investment advisor had advised could be expected to be earned over time. The expectation was based on an asset allocation of 50% US equity securities (11% expected return), 20% non-US equity securities (11.7% expected return), and 30% fixed income securities (6.5% expected return) that had been recommended by the advisor, and was adopted for the plans. The actual rate of return on plan assets may differ from the expected rate due to the volatility normally experienced in capital markets. Management’s goal is to manage the investments over the long term to achieve optimal returns with an acceptable level of risk and volatility. Based on the market value of plan assets at December 31, 2002, a one percentage point decrease in this assumption for us would decrease our net income by approximately $1 million.

Over the three-year period ended December 31, 2002, our actual return on plan assets was a loss averaging 7.1% per year. Net periodic pension cost recognized each year includes the expected asset earnings, rather than the actual earnings or loss. As a result of asset earnings significantly below the expected return on plan assets rate over the three-year period, the level of unrecognized investment losses, together with the net actuarial gains and losses, is $76 million at December 31, 2002. This unrecognized amount, to the extent it exceeds 10% of the projected benefit obligation for the respective plan, will be recognized as additional net periodic benefit cost over the average remaining service period of the participants in each plan. This annual amortization charge will be approximately $7 million per year based on the December 31, 2002 unrecognized amount.

We are currently in the process of obtaining an updated asset allocation study from the independent pension investment advisor upon which we may update plan asset allocations and expected return on plan assets rates. In view of market returns in the last three years, it is likely that we will decrease our assumption for expected return on plan assets for 2003.

54

Additional information on the key assumptions underlying these benefit costs appears in Note 12 to the December 31, 2002 Consolidated Financial Statements.

Accounting Changes

In 2003, we began classifying gains or losses that result from the early extinguishment of debt as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income and Comprehensive Income reflect these changes for all periods presented.

Beginning in the third quarter 2003, we implemented Statement of Financial Accounting Standards (“SFAS”) No. 150—Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement establishes standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that certain financial instruments be classified as liabilities or, in some circumstances, as assets. Our adoption of the provisions of SFAS No. 150 had no material impact on our consolidated financial statements.

The application of FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, as amended by the newly issued FASB Staff Position FIN 46-6, “Effective Date of FASB Interpretation No. 46, Consolidation of Variable Interest Entities,” would result in the consolidation, as of December 31, 2003, of an entity from which we lease certain railcars. The consolidation of this entity as of September 30, 2003 would have resulted in a net increase in property, plant and equipment of $111 million, a decrease in prepaid expense and accrued liabilities of approximately $8 million and $3 million, respectively, a $101 million increase in debt and a $5 million credit to be reported as the cumulative effect of the accounting change.

Effective January 1, 2002, we implemented Statement of Financial Accounting Standards (“SFAS”) No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Implementation of SFAS No. 141 and SFAS No. 144 did not have a material effect on our consolidated financial statements.

Upon implementation of SFAS No. 142, we reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge to earnings that was reported as the cumulative effect of an accounting change as of January 1, 2002. As a result of implementing SFAS No. 142, income in 2002 and subsequent years is favorably affected by $33 million annually because of the elimination of goodwill amortization.

Other Recent Accounting Pronouncements

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets. In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. SFAS No. 146 was effective for activities initiated after December 31, 2002. Adoption of SFAS No. 143 and SFAS No. 146 did not have a material impact on our consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), Guarantor’s Accounting and Disclosure Requirements. FIN No. 45 expands required disclosures for certain types of guarantees for the period ended December 31, 2002 and requires recognition of a liability at fair value for guarantees granted after December 31, 2002. We have provided required disclosures with respect to guarantees in Notes 11 and 12 to the December 31, 2002 Consolidated Financial Statements.

55

Environmental Matters

Various environmental laws and regulations impose substantial requirements upon our operations. Our policy is to be in compliance with such laws and regulations, which include, among others, the Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA” or “Superfund”) as amended, the Resource Conservation and Recovery Act (“RCRA”) and the Clean Air Act Amendments. We do not specifically track all recurring costs associated with managing hazardous substances and pollution in ongoing operations. Such costs are included in cost of sales. We also make capital expenditures to comply with environmental regulations. Such capital expenditures totaled approximately $14 million, $16 million and $6 million for 2002, 2001 and 2000, respectively. Capital expenditures increased in 2002 and 2001 as a result of new emission reduction rules, discussed below, and we currently estimate 2003 expenditures at approximately $30 million, prior to including any expenditures for proposed revisions to emission control standards for highly reactive, volatile organic compounds (“HRVOC”). We are still completing our assessment of the impact of the proposed HRVOC emission standards.

The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”). Emission reduction controls for nitrogen oxides (“NOx”) must be installed at each of our six plants located in the Houston/Galveston region during the next several years. Recently adopted revisions by the regulatory agencies changed the required NOx reduction levels from 90% to 80%. Compliance with the previously proposed 90% reduction standards would have resulted in increased capital investment, estimated at between $200 million and $260 million, before the 2007 deadline, as well as higher annual operating costs for us. Under the revised 80% standard, we estimate that capital expenditures would decrease to between $165 million and $200 million, of which $45 million had been incurred as of September 30, 2003. However, the savings from this revision could be offset by the costs of stricter proposed controls over HRVOCs. We are still assessing the impact of the proposed HRVOC regulations and there can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. The timing and amount of these expenditures are also subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. During 2003, the U.S. House of Representatives and the U.S. Senate each passed new versions of an omnibus energy bill. The Senate version of the new energy bill would ban the use of MTBE as a fuel additive in gasoline sold in the United States and the U.S. House of Representatives version would not ban the use of MTBE. The two new energy bills are not law and are being reconciled through the conference process. At this time, the final form and timing of that reconciliation is uncertain. Our MTBE sales represented approximately 3% of our total revenues for 2002 and for the first nine months of 2003.

At the state level, a number of states have legislated future MTBE bans. Of these, a number are mid-West states that use ethanol as the oxygenate of choice. Bans in these states should not have an impact on MTBE demand. However, Connecticut, California and New York have bans of MTBE in place effective January 1, 2004. We estimate that, in 2002, California represented 32% of the U.S. MTBE industry demand and 19% of the worldwide MTBE industry demand, while Connecticut and New York combined represented 12% of the U.S. MTBE industry demand and 7% of the worldwide MTBE industry demand.

At this time, we cannot predict the impact that these initiatives will have on MTBE margins or volumes longer term. However, in 2003, several major oil companies have substantially reduced or discontinued the use of MTBE in gasoline produced for California markets. We estimate that the 2002 California-market MTBE volumes of these companies represented approximately 21% of U.S. MTBE industry demand and 13% of worldwide

56

MTBE industry demand. We intend to continue marketing MTBE in the U.S. However, should it become necessary or desirable to reduce MTBE production, we would need to convert raw materials used in MTBE to production of other products. It may be desirable to make capital expenditures to add the flexibility to produce alternative gasoline blending components. The profit contribution related to alternative gasoline blending components is likely to be lower than that historically realized on MTBE.

Our accrued liability for environmental remediation as of September 30, 2003 was $1 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of possible loss in excess of the liability recorded for environmental remediation.

57

DISCLOSURE OF MARKET AND REGULATORY RISK

Commodity Price Risk

A substantial portion of our products and raw materials are commodities whose prices fluctuate as market supply and demand fundamentals change. Accordingly, product margins and the level of our profitability tend to fluctuate with changes in the business cycle. We try to protect against such instability through various business strategies. These include increasing the olefins plants’ raw material flexibility, entering into multi-year processing and sales agreements, and forward integration into olefins derivatives products whose pricing is more stable.

We have, from time to time, entered into over-the-counter derivatives, primarily price swap contracts, related to crude oil to help manage our exposure to commodity price risk with respect to crude oil-related raw material purchases. As of December 31, 2002 and 2001, there were no outstanding over-the-counter derivatives. Our exposure has not changed materially in the nine months ended September 30, 2003.

Interest Rate Risk

Our interest rate risk at December 31, 2002 was limited to the $296 million then-outstanding balance of our variable-rate term loan due 2007 and any borrowing under the revolving credit facility, which was undrawn at December 31, 2002. The associated interest rate risk is not material. Sensitivity analysis was used for purposes of this analysis. Our exposure has not changed materially in the nine months ended September 30, 2003.

Regulatory Risk

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

New air pollution standards promulgated by federal and state regulatory agencies in the U.S., including those specifically targeting the eight-county Houston/Galveston region, will affect a substantial portion of our operating facilities. Compliance with these standards will result in increased capital investment during the next several years and higher annual operating costs for us. Recently adopted revisions by the regulatory agencies would change the required nitrogen oxides, or NOx, reduction levels from 90% to 80%. However, any potential resulting savings from this proposed revision could be offset by the costs of stricter proposed controls over HRVOCs. We are still assessing the impact of these proposed regulations and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. See “Clean Air Act” section of Note 9 to the September 30, 2003 Consolidated Financial Statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

58

ABOUT EQUISTAR CHEMICALS, LP

Overview

We are one of the world’s largest producers of basic chemicals, with total 2002 revenues of $5.5 billion and assets of $5.1 billion at the end of 2002. We are North America’s second largest producer of ethylene, the world’s most widely used petrochemical. We also are the third largest producer of polyethylene in North America.

Our petrochemicals segment manufactures and markets olefins, oxygenated products, aromatics and specialty products. Our olefins products are primarily ethylene, propylene and butadiene. Olefins and their co-products are basic building blocks used to create a wide variety of products. Our oxygenated products include ethylene oxide (“EO”) and its derivatives, ethylene glycol (“EG”), ethanol, and MTBE. Oxygenated products have uses ranging from paint to cleaners to polyester fibers to gasoline additives. Our aromatics are benzene and toluene.

Our polymers segment manufactures and markets polyolefins, including high-density polyethylene, low-density polyethylene, linear low-density polyethylene, polypropylene and performance polymers. Polyethylene is used to produce packaging film, trash bags and lightweight high-strength plastic bottles for milk, juices, shampoos and detergents. Polypropylene is used in a variety of products including plastic caps and other closures, rigid packaging, automotive components, and carpet facing and backing. Our performance polymers include enhanced grades of polyethylene such as wire and cable insulating resins and polymeric powders. For additional segment information, see Note 16 of Notes to the December 31, 2002 Consolidated Financial Statements.

We were formed in October 1997 as a Delaware limited partnership. We began operations in December 1997 when Lyondell contributed substantially all of the assets of its petrochemicals and polymers business segments to us and Millennium contributed substantially all of the assets of Millennium Petrochemicals’ ethylene, polyethylene and related products, performance polymers and ethanol businesses to us. In May 1998, Lyondell, Millennium, Equistar and Occidental consummated a series of transactions to expand Equistar through the addition of Occidental’s petrochemical assets. From May 1998 to August 2002, our owners were subsidiaries of Lyondell, Millennium and Occidental, with Lyondell owning a 41% interest in us, and each of Millennium and Occidental owning a 29.5% interest in us. On August 22, 2002, Lyondell purchased Occidental’s 29.5% interest in us. Lyondell financed its purchase of Occidental’s interest in us by selling the following to a subsidiary of Occidental: (1) 34 million shares of newly issued Lyondell Series B common stock, (2) five-year warrants to acquire five million shares of Lyondell original common stock and (3) a right to receive contingent payments based on our cash distributions related to 2002 and 2003. As a result of these transactions, Lyondell owns a 70.5% interest in us, and Millennium owns the remaining 29.5% interest in us.

Petrochemicals Segment

Overview

Petrochemicals are fundamental to many segments of the economy, including the production of consumer products, housing and automotive components and other durable and nondurable goods. We produce a variety of petrochemicals, including olefins, oxygenated products, aromatics and specialty products, at eleven facilities located in five states. Olefins include ethylene, propylene and butadiene. Oxygenated products include EO and derivatives, EG, ethanol, and MTBE. Aromatics produced are benzene and toluene. Our petrochemical products are used to manufacture polymers and intermediate chemicals, which are used in a variety of consumer and industrial products. Ethylene is the most significant petrochemical in terms of worldwide production volume and is the key building block for polyethylene and a large number of other chemicals, plastics and synthetics.

Our Chocolate Bayou, Corpus Christi and two Channelview, Texas olefins plants use crude-oil based liquid raw materials, including naphtha, condensates and gas oils, to produce ethylene. The use of crude-oil based liquid

59

raw materials results in the production of a significant amount of co-products such as propylene, butadiene, benzene and toluene, and specialty products, such as dicyclopentadiene (“DCPD”), isoprene, resin oil and piperylenes. Based upon independent third-party surveys, management believes that our Channelview facility is one of the lowest cash production cost olefins facilities in the United States. Our Morris, Illinois; Clinton, Iowa; Lake Charles, Louisiana; and the LaPorte (Deer Park), Texas plants are designed to consume primarily NGLs, including ethane, propane and butane, to produce ethylene with some co-products such as propylene. The Corpus Christi and Channelview plants also may consume NGL’s to produce ethylene, depending upon the relative economic advantage of the alternative raw materials. A comprehensive pipeline system connects the Gulf Coast plants with major olefins customers. Raw materials are sourced both internationally and domestically and are shipped via vessel and pipeline. Our Lake Charles, Louisiana facility has been temporarily idled since the first quarter of 2001. Olefins accounted for approximately 59% of our total revenues in 2002, 60% in 2001 and 63% in 2000.

We produce EO and its primary derivative, EG, at facilities located in Bayport (Pasadena), Texas and through a 50/50 joint venture with DuPont in Beaumont, Texas. The Bayport facility also produces other derivatives of EO, principally ethers and ethanolamines. EG is used in antifreeze, polyester fibers, resins and films. EO and its derivatives are used in many consumer and industrial end uses, such as detergents and surfactants, brake fluids and polyurethane seating and bedding foams.

We produce synthetic ethanol at our Tuscola, Illinois plant by a direct hydration process that combines water and ethylene. We also own and operate a facility in Newark, New Jersey for denaturing ethanol by the addition of certain chemicals. In addition, we produce small volumes of diethyl ether, a by-product of our ethanol production, at our Tuscola facility. These ethanol products are ingredients in various consumer and industrial products as described more fully in the table below. In March 2002, we permanently shut down our Anaheim, California ethanol denaturing facility.

The following table outlines our primary petrochemical products, annual processing capacity as of January 1, 2003, and the primary uses for such products. Unless otherwise specified, annual processing capacity was calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below.

60

Product	Annual Capacity	Primary Use
OLEFINS:
Ethylene	11.6 billion pounds (a)	Ethylene is used as a raw material to manufacture polyethylene, EO, ethanol, ethylene dichloride and ethylbenzene.
Propylene	5 billion pounds (a) (b)	Propylene is used to produce polypropylene, acrylonitrile and propylene oxide.
Butadiene	1.2 billion pounds	Butadiene is used to manufacture styrene-butadiene rubber and polybutadiene rubber, which are used in the manufacture of tires, hoses, gaskets and other rubber products. Butadiene is also used in the production of paints, adhesives, nylon clothing, carpets and engineered plastics.
OXYGENATED PRODUCTS:
Ethylene Oxide (EO)	1.1 billion pounds ethylene oxide equivalents, 400 million pounds as pure ethylene oxide	EO is used to produce surfactants, industrial cleaners, cosmetics, emulsifiers, paint, heat transfer fluids and ethylene glycol.
Ethylene Glycol (EG)	1 billion pounds	EG is used to produce polyester fibers and film, polyethylene terephthalate (“PET”) resin, heat transfer fluids and automobile antifreeze.
Ethylene Oxide Derivatives	225 million pounds	EO derivatives are used to produce paint and coatings, polishes, solvents and chemical intermediates.
Ethanol	50 million gallons	Ethanol is used in the production of solvents as well as household, medicinal and personal care products.
MTBE	284 million gallons (18,500 barrels/day)(c)	MTBE is a gasoline component for reducing emissions in reformulated gasoline and enhancing octane value.
AROMATICS:
Benzene	310 million gallons	Benzene is used to produce styrene, phenol and cyclohexane. These products are used in the production of nylon, plastics, rubber and polystyrene. Polystyrene is used in insulation, packaging and drink cups.
Toluene	66 million gallons	Toluene is used as an octane enhancer in gasoline, as a chemical feedstock for benzene and/or paraxylene production, and a core ingredient in toluene diisocyanate, a compound used in urethane production.
SPECIALTY PRODUCTS:
Dicyclopentadiene (DCPD)	130 million pounds	DCPD is a component of inks, adhesives and polyester resins for molded parts such as tub and shower stalls and boat hulls.
Isoprene	145 million pounds	Isoprene is a component of premium tires, adhesive sealants and other rubber products.
Resin Oil	150 million pounds	Resin oil is used in the production of hot-melt-adhesives, inks, sealants, paints and varnishes.
Piperylenes	100 million pounds	Piperylenes are used in the production of adhesives, inks and sealants.
Alkylate	337 million gallons (d)	Alkylate is a premium gasoline blending component used by refiners to meet Clean Air Act standards for reformulated gasoline.
Diethyl Ether	5 million gallons	Diethyl ether is used in laboratory reagents, gasoline and diesel engine starting fluid, liniments, analgesics and smokeless gunpowder.

61

(a) Includes 850 million pounds/year of ethylene capacity and 200 million pounds/year of propylene capacity at our Lake Charles, Louisiana facility. Our Lake Charles facility has been temporarily idled since the first quarter of 2001.

(b) Does not include refinery-grade material or production from the product flexibility unit at our Channelview facility, which can convert ethylene and other light petrochemicals into propylene. This facility has an annual processing capacity of one billion pounds per year of propylene.

(c) Includes up to 44 million gallons/year of capacity processed by us for LYONDELL-CITGO Refining LP (“LCR,” a joint venture of which Lyondell owns a 58.75% interest) and returned to LCR.

(d) Includes up to 172 million gallons/year of capacity processed by us for LCR and returned to LCR.

Raw Materials

The raw materials cost for olefins production is the largest component of total cost for the petrochemicals business. Olefins plants with the flexibility to consume a wide range of raw materials historically have had lower variable costs than olefins plants that are restricted in their raw material processing capability to NGLs. The primary raw materials used in the production of olefins are crude-oil based liquids (also referred to as “heavy raw materials”) and NGLs (also referred to as “light raw materials”). Crude-oil based liquids generally are delivered by ship or barge. NGLs are delivered to our facilities primarily via pipeline. Crude-oil based liquids have had a historical cost advantage over NGLs such as ethane and propane, assuming the co-products were recovered and sold. For example, facilities using crude-oil based liquids historically have generated approximately four cents additional variable margin on average per pound of ethylene produced compared to using ethane. This margin advantage is based on an average of historical data over a period of years and is subject to short-term fluctuations, which can be significant. During the second half of 2001 and in 2002, the advantage was significantly less than the historical average. For the first nine months of 2003, the average margin advantage has been higher than historical levels. We have the capability to realize this margin advantage due to our ability to process crude-oil based liquids at our Channelview, Corpus Christi and Chocolate Bayou, Texas facilities.

Our Channelview facility is particularly flexible because it can process 100% crude-oil based liquids or up to 80% NGLs. Our Corpus Christi plant can process up to 70% crude-oil based liquids or up to 70% NGLs. Our Chocolate Bayou facility processes 100% crude-oil based liquids. Our LaPorte facility can process natural gasoline and NGLs, including heavier NGLs such as butane. Our three other olefins facilities process only NGLs.

As described above, we believe that our raw material flexibility is a key advantage in the production of olefins. As a result, although the majority of our crude-oil based liquids requirements are purchased via contractual arrangements from a variety of domestic and international sources, we also purchase crude-oil based liquids on the spot market from domestic and international sources in order to maintain our raw material flexibility and to take advantage of raw material pricing opportunities. Similarly, we purchase a majority of our NGLs requirements via contractual arrangements from a variety of sources, but also purchase NGLs on the spot market. We also obtain a portion of our crude-oil based liquids requirements from LCR at market-related prices. We purchase all of our methanol requirements from Lyondell and its subsidiaries at a mix of cost-based and market-based prices. Also, we purchase large amounts of natural gas to be used as energy for consumption in our business via market-based contractual arrangements with a variety of sources.

Our raw materials are, in general, commodity chemicals with numerous suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for our petrochemicals business segment. For additional discussion regarding the effects of raw material pricing on recent operating performance, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Marketing and Sales

Ethylene produced by our Clinton and Morris facilities generally is consumed as a raw material by the polymers operations at those sites, or is transferred to Tuscola from Morris by pipeline for the production of

62

ethanol. Ethylene produced by our LaPorte facility is consumed as a raw material by our polymers operations and Millennium’s vinyl acetate operations in LaPorte and also is distributed by pipeline for other internal uses and to third parties. Ethylene and propylene produced at the Channelview, Chocolate Bayou, Corpus Christi and Lake Charles olefins plants are generally distributed by pipeline or via exchange agreements to our Gulf Coast polymer and EO and EG facilities as well as to our affiliates and third parties. Our Lake Charles facility has been temporarily idled since the first quarter of 2001. For the year ended December 31, 2002, approximately 93% of our ethylene production, based on sales dollars, was consumed by our polymers or oxygenated products businesses or sold to our owners and their affiliates at market-related prices.

With respect to sales to unaffiliated parties, we sell a majority of our olefins products to customers with whom we have had long-standing relationships. These sales generally are made under written agreements that typically provide for monthly negotiation of price; customer purchases of a specified minimum quantity; and three- to six-year terms with automatic one- or two-year term extension provisions. Some contracts may be terminated early if deliveries have been suspended for several months. No single customer accounted for 10% or more of our total revenues in 2002.

EO and EG typically are sold under three- to five-year contracts, with monthly pricing based on current market conditions. Lyondell provides sales services for us outside of North America for EO derivatives. Glycol ethers are sold primarily into the solvent and distributor markets at current market prices, as are ethanolamines and brake fluids. Ethanol and ethers primarily are sold under one-year contracts at market prices.

We license MTBE technology under a license from a subsidiary of Lyondell and sell a significant portion of MTBE produced at one of our two Channelview units to Lyondell at market-related prices. The production from the second unit is processed by us and returned to LCR for gasoline blending. MTBE produced at Chocolate Bayou is sold at market-related prices to Lyondell for resale.

We sell most of our aromatics production under contracts that have initial terms ranging from one to three years and that typically contain automatic one-year term extension provisions. These contracts generally provide for monthly price adjustments based upon current market prices. Benzene produced by LCR is sold directly to us at market-related prices. We serve as LCR’s sole agent to market toluene produced by LCR.

We at times purchase ethylene, propylene, benzene and butadiene for resale, when necessary, to satisfy customer demand for these products above production levels. Volumes of ethylene, propylene, benzene and butadiene purchases made for resale can vary significantly from period to period. However, purchased volumes have not historically had a significant impact on profitability.

Most of the ethylene and propylene production of the Channelview, Chocolate Bayou, Corpus Christi and Lake Charles facilities is shipped via a 1,430-mile pipeline system which has connections to numerous Gulf Coast ethylene and propylene consumers. This pipeline system, some of which is owned and some of which is leased by us, extends from Corpus Christi to Mont Belvieu to Port Arthur, Texas as well as around the Lake Charles, Louisiana area. In addition, exchange agreements with other olefins producers allow access to customers who are not directly connected to our pipeline system. Some ethylene is shipped by railcar from Clinton, Iowa to Morris, Illinois. A pipeline owned and operated by a third party is used to transport ethylene from Morris, Illinois to Tuscola, Illinois. Some propylene is shipped by ocean-going vessel. Ethylene oxide is shipped by railcar, and its derivatives are shipped by railcar, truck, isotank or ocean-going vessel. Butadiene, aromatics and other petrochemicals are distributed by pipeline, railcar, truck, barge or ocean-going vessel.

We have recently entered into a long-term propylene supply arrangement with a subsidiary of Sunoco. Beginning April 1, 2003, we supply 700 million pounds of propylene annually to Sunoco for a period of 15 years, and a majority of the propylene to be supplied is provided under a cost-based formula. This supply arrangement replaces a previous contract under which we supplied 400 million pounds of propylene annually to Sunoco.

63

Competition and Industry Conditions

The bases for competition in our petrochemicals products are price, product quality, product deliverability and customer service. We compete with other large domestic producers of petrochemicals, including BP p.l.c. (“BP”), Chevron Phillips Chemical Company LP (“Chevron Phillips”), The Dow Chemical Company (“Dow”), Exxon Mobil Corporation (“ExxonMobil”), Huntsman Chemical Company, NOVA Chemicals Corporation (“NOVA Chemicals”) and Shell Chemical Company (“Shell”). Industry consolidation, including the combinations of British Petroleum and Amoco, Exxon and Mobil, and Dow and Union Carbide Corporation and the formation of Chevron Phillips, has brought North American production capacity under control of fewer, although larger and stronger, competitors.

Our combined rated ethylene capacity at January 1, 2003 was approximately 11.6 billion pounds of ethylene per year, or approximately 15% of total North American production capacity. Based on published rated production capacities, we believe we are the second largest producer of ethylene in North America. North American ethylene rated capacity at January 1, 2003 was approximately 79 billion pounds per year. Approximately 78% of the total ethylene production capacity in North America is located along the Gulf Coast.

Petrochemicals profitability is affected by raw materials costs and the level of demand for petrochemicals and derivatives, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. Ethylene markets continue to be affected by excess capacity as a result of recent capacity additions, which have not yet been absorbed by demand growth. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to predict accurately the changes in raw material costs, market conditions and other factors that will affect petrochemical industry margins in the future. The petrochemicals industry historically has experienced significant volatility in profitability due to fluctuations in capacity utilization.

Our other major commodity chemical products also experience cyclical market conditions similar to, although not necessarily coincident with, those of olefins.

Polymers Segment

Overview

Through facilities located at nine plant sites in four states, our polymers segment manufactures a wide variety of polyolefins, including polyethylene, polypropylene and various performance polymers. Polyolefins are used in a variety of consumer and industrial products, including packaging film, trash bags, automotive parts, plastic bottles and caps and compounds for wire and cable insulation.

We manufacture polyethylene using a variety of technologies at five facilities in Texas and at our Morris, Illinois and Clinton, Iowa facilities. The Morris and Clinton facilities enjoy a freight cost advantage over Gulf Coast producers in delivering products to customers in the U.S. Midwest and on the East Coast of the United States. Polyethylene accounted for approximately 27% of our total revenues in 2002, 27% in 2001 and 26% in 2000.

We produce performance polymer products, which include enhanced grades of polyethylene and polypropylene, at several of our polymers facilities. We believe that, over a business cycle, average selling prices and profit margins for performance polymers tend to be higher than average selling prices and profit margins for higher-volume commodity polyethylenes. We also produce wire and cable insulating resins and compounds at LaPorte, Texas; and Morris, Illinois, and wire and cable insulating compounds at Fairport Harbor, Ohio; and Tuscola, Illinois. Wire and cable insulating resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications. In August 2002, we permanently shutdown our Peachtree City, Georgia wire and cable insulating compounds facility. Our Morris, Illinois facility manufactures polypropylene using propylene produced as a co-product of our ethylene production as well as

64

propylene purchased from unaffiliated parties. Polypropylene is sold for various applications in the automotive, housewares and appliance industries. On March 31, 2003, we sold our Bayport polypropylene manufacturing unit in Pasadena, Texas to a subsidiary of Sunoco.

The following table outlines our polymers and performance polymers products, annual processing capacity at January 1, 2003, and the primary uses for such products. Unless otherwise specified, annual processing capacity was calculated by estimating the number of days in a typical year that a production unit of a plant is expected to operate, after allowing for downtime for regular maintenance, and multiplying that number by an amount equal to the unit’s optimal daily output based on the design raw material mix. Because the processing capacity of a production unit is an estimated amount, actual production volumes may be more or less than the capacities set forth below.

65

Product	Annual Capacity	Primary Uses
POLYETHYLENE:
High density polyethylene (HDPE)	3.1 billion pounds	HDPE is used to manufacture grocery, merchandise and trash bags; food containers for items from frozen desserts to margarine; plastic caps and closures; liners for boxes of cereal and crackers; plastic drink cups and toys; dairy crates; bread trays; pails for items from paint to fresh fruits and vegetables; safety equipment such as hard hats; house wrap for insulation; bottles for household and industrial chemicals and motor oil; milk, water, and juice bottles; and large (rotomolded) tanks for storing liquids such as agricultural and lawn care chemicals.
Low density polyethylene (LDPE)	1.5 billion pounds	LDPE is used to manufacture food packaging films; plastic bottles for packaging food and personal care items; dry cleaning bags; ice bags; pallet shrink wrap; heavy-duty bags for mulch and potting soil; boil-in-bag bags; coatings on flexible packaging products; and coatings on paper board such as milk cartons. Ethylene vinyl acetate is a specialized form of LDPE used in foamed sheets, bag-in-box bags, vacuum cleaner hoses, medical tubing, clear sheet protectors and flexible binders.
Linear low density polyethylene (LLDPE)	1.1 billion pounds	LLDPE is used to manufacture garbage and lawn-leaf bags; industrial can liners; housewares; lids for coffee cans and margarine tubs, dishpans, home plastic storage containers, kitchen trash containers; large (rotomolded) toys like outdoor gym sets; drip irrigation tubing; protective coating for telephone wires, and film; shrink wrap for multi-packaging canned food, bag-in-box bags, produce bags, and pallet stretch wrap.
POLYPROPYLENE:
Polypropylene	280 million pounds (a)	Polypropylene is used to manufacture fibers for carpets, rugs and upholstery; housewares; automotive battery cases; automotive fascia, running boards and bumpers; grid-type flooring for sports facilities; fishing tackle boxes; and bottle caps and closures.
PERFORMANCE POLYMERS:
Wire and Cable Insulating Resins and Compounds	(b)	Wire and cable insulating resins and compounds are used to insulate copper and fiber optic wiring in power, telecommunication, computer and automobile applications.
Polymeric Powders	(b)	Polymeric powders are component products in structural and bulk molding compounds, parting agents and filters for appliance, automotive and plastics processing industries.
Polymers for Adhesives, Sealants and Coatings	(b)	Polymers are components in hot-melt-adhesive formulations for case, carton and beverage package sealing, glue sticks, automotive sealants, carpet backing and adhesive labels.
Reactive Polyolefins	(b)	Reactive polyolefins are functionalized polymers used to bond non-polar and polar substrates in barrier food packaging, wire and cable insulation and jacketing, automotive gas tanks and metal coating applications.

(a) Adjusted to reflect the sale on March 31, 2003 of the Bayport polypropylene manufacturing unit, which had 400 million pounds/year of polypropylene capacity.

(b) These are enhanced grades of polyethylene and are included in the capacity figures for HDPE, LDPE and LLDPE above, as appropriate.

66

Raw Materials

The primary raw materials for our polymers segment are ethylene and propylene. With the exception of the Chocolate Bayou polyethylene plant, our polyethylene and polypropylene production facilities can receive their ethylene and propylene directly from our petrochemical facilities via our olefins pipeline system, by third-party pipelines or from on-site production. Most of the raw materials consumed by our polymers segment are produced internally by our petrochemicals segment. The polyethylene plants at Chocolate Bayou, LaPorte and Bayport, Texas are connected by pipeline to third parties and can receive ethylene via exchanges or purchases. The polypropylene facility at Morris, Illinois also receives propylene from third parties. On March 31, 2003, we sold our Bayport polypropylene manufacturing unit to Sunoco.

Our raw materials are, in general, commodity chemicals with numerous bulk suppliers and ready availability at competitive prices. Historically, raw material availability has not been an issue for our polymers business segment. For additional discussion regarding the effects of raw material pricing on recent operating results, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Marketing and Sales

Our polymers products are primarily sold to an extensive base of established customers. Approximately 45% of our polymers products volumes are sold to customers under term contracts, typically having a duration of one to three years. The remainder generally is sold without contractual term commitments. In either case, in most of the continuous supply relationships, prices are subject to change upon mutual agreement between us and the customer. No single customer accounted for 10% or more of our total revenues in 2002.

Polymers are primarily distributed via railcar. We own or lease, pursuant to long-term lease arrangements, approximately 7,500 railcars for use in our polymers business. We sell the vast majority of our polymers products in the United States and Canada, and such sales primarily are through our own sales organization. We generally engage sales agents to market our polymers in the rest of the world.

Competition and Industry Conditions

The bases for competition in our polymers products are price, product performance, product quality, product deliverability and customer service. We compete with other large producers of polymers, including BP Solvay Polyethylene, Chevron Phillips, Dow, Eastman Chemical Company, ExxonMobil, Formosa Plastics, Huntsman Chemical Company, NOVA Chemicals, TotalFinaElf and Westlake Polymers. Industry consolidation, including the combinations of British Petroleum and Amoco, Exxon and Mobil, and Dow and Union Carbide Corporation, the formation of Chevron Phillips, and the polymers business combinations between BP and Solvay, has brought North American production capacity under control of fewer, although larger and stronger, competitors.

Based on published rated industry capacities, we are the third largest producer of polyethylene in North America. We also believe that we are a leading domestic producer of polyolefins powders, wire and cable insulating resins and compounds, and polymers for adhesives. The combined rated capacity of our polyethylene units as of January 1, 2003 was approximately 5.7 billion pounds per year, or approximately 13% of total industry capacity in North America. There are 15 other North American producers of polyethylene, including BP Solvay Polyethylene, Chevron Phillips, Dow, ExxonMobil and NOVA Chemicals. On March 31, 2003, we sold our Bayport polypropylene manufacturing unit to a subsidiary of Sunoco.

Polymers profitability is affected by raw material costs and the worldwide level of demand for polymers, along with vigorous price competition among producers which may intensify due to, among other things, the addition of new capacity. In general, demand is a function of economic growth in the United States and elsewhere in the world, which fluctuates. It is not possible to predict accurately the changes in raw material costs, market conditions and other factors, which will affect polymers industry margins in the future.

67

Properties Owned or Leased by Us

Our principal manufacturing facilities and principal products as of September 30, 2003 are set forth below. All of these facilities are wholly owned by us unless otherwise noted.

Location	Principal Products
Beaumont, Texas (a)*	EG
Channelview, Texas (b)*	Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene, Resin Oil, Piperylenes, Alkylate and MTBE
Corpus Christi, Texas*	Ethylene, Propylene, Butadiene and Benzene
Chocolate Bayou, Texas (c)*	HDPE
Chocolate Bayou, Texas (c) (d)*	Ethylene, Propylene, Butadiene, Benzene, Toluene, DCPD, Isoprene, Resin Oil and MTBE
LaPorte (Deer Park), Texas*	Ethylene, Propylene, LDPE, LLDPE, Wire and Cable Insulating Resins and Polymers for Adhesives, Sealants and Coatings
Matagorda, Texas*	HDPE
Bayport (Pasadena), Texas*	EO, EG and Other EO Derivatives
Bayport (Pasadena), Texas (e)*	LDPE
Victoria, Texas (d)*	HDPE
Lake Charles, Louisiana (f)*	Ethylene and Propylene
Morris, Illinois*	Ethylene, Propylene, LDPE, LLDPE and Polypropylene
Tuscola, Illinois*	Ethanol, Diethyl Ether, Wire and Cable Insulating Compounds and Polymeric Powders
Clinton, Iowa*	Ethylene, Propylene, LDPE, HDPE and Reactive Polyolefins
Fairport Harbor, Ohio (g)	Wire and Cable Insulating Compounds
Newark, New Jersey	Denatured Alcohol

* As of January 1, 2003, facilities which received the OSHA Star Certification, which is the highest safety designation issued by the U.S. Department of Labor.

(a) The Beaumont facility is owned by PD Glycol, a partnership owned 50% by us and 50% by DuPont.

(b) The Channelview facility has two ethylene processing units. LMC owns a methanol plant located within the Channelview facility on property LMC leases from us. A third party owns and operates a facility on land leased from us that is used to purify hydrogen from LMC’s methanol plant. We also operate a styrene maleic anhydride unit and a polybutadiene unit, which are owned by a third party and are located on property leased from us within the Channelview facility.

(c) Millennium and Occidental each contributed a facility located in Chocolate Bayou. These facilities are not on contiguous property.

(d) The land is leased, and the facility is owned.

(e) This facility is operated for us by Sunoco.

(f) The Lake Charles facility has been temporarily idled since the first quarter of 2001. The facilities and land are leased from an affiliate of Occidental, Occidental Chemical Corporation, under a lease that expires in May 2004 and has renewal provisions for two additional one-year periods at our option.

(g) The building and land are leased.

In March 2002, we permanently shut down our Anaheim, California ethanol denaturing facility. In August 2002, we permanently shut down our Peachtree City, Georgia wire and cable insulating compounds facility.

68

We own a storage facility, a tract of land with four brine ponds and a tract of vacant land in Mont Belvieu, Texas, located approximately 15 miles east of the Channelview facility. Storage capacity for up to approximately 13 million barrels of NGLs, ethylene, propylene and other hydrocarbons is provided in caverns within the salt dome at the Mont Belvieu facility. There are an additional 3 million barrels of ethylene and propylene storage and four brine ponds operated by us on leased property in Markham, Texas.

We use an extensive olefins pipeline system, some of which we own and some of which we lease, extending from Corpus Christi to Mont Belvieu to Port Arthur and around the Lake Charles area. We own other pipelines in connection with our Chocolate Bayou, Matagorda, Victoria, Corpus Christi and the LaPorte facilities. We use a pipeline owned and operated by an unaffiliated party to transport ethylene from our Morris facility to our Tuscola facility.

We own and lease several pipelines connecting the Channelview facility, the LCR refinery and the Mont Belvieu storage facility. These pipelines are used to transport feedstocks, butylenes, hydrogen, butane, MTBE and unfinished gasolines. We also own a barge docking facility near the Channelview facility capable of berthing eight barges and related terminal equipment for loading and unloading raw materials and products. We own or lease pursuant to long-term lease arrangements approximately 8,900 railcars for use in our petrochemicals and polymers businesses.

Lyondell provides office space to us for our executive offices and headquarters in downtown Houston, Texas as part of a shared services arrangement. See “Related Party Transactions—Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.” In addition, we own facilities which house the Morris, Cincinnati and Chocolate Bayou research operations. We also lease sales facilities and lease storage facilities, primarily in the Gulf Coast area, from various parties for the handling of products.

Employee Relations

As of September 30, 2003, we employed approximately 3,300 full-time employees. In addition to our own employees, we use the services of Lyondell employees pursuant to a Shared Services Agreement and also use the services of independent contractors in the routine conduct of our business. Approximately 5% of our employees are covered by collective bargaining agreements. We believe that our relations with our employees are good. See “Related Party Transactions—Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental.”

Research and Technology; Patents and Trademarks

We conduct research and development principally at our Cincinnati, Ohio technical center, with additional facilities located in Morris, Illinois and Chocolate Bayou, Texas. Our research and development expenditures were $38 million for 2002, $39 million for 2001 and $38 million for 2000, all of which were expensed as incurred.

We maintain a growing patent portfolio that is continuously supplemented by new patent applications related to our petrochemicals and polymers businesses. As of September 30, 2003, we owned approximately 215 United States patents and approximately 335 worldwide patents. We have numerous trademarks and trademark registrations in the United States and other countries, including the Equistar logo. We do not regard our business as being materially dependent upon any single patent or trademark.

Legal Proceedings

On January 19, 2001, Equistar and LCR, individually, and Lyondell, individually and as part of the BCCA Appeal Group (a group of industry participants), filed a lawsuit against the TCEQ in State District Court in Travis County, Texas to encourage the adoption of the plaintiffs’ alternative plan to achieve the same air quality

69

improvement as the TCEQ plan, with less negative economic impact on the region. In June 2001, the parties entered into a consent order with respect to the lawsuit. Pursuant to the consent order, the TCEQ agreed to review, by June 2002, the scientific data for ozone formation in the Houston/Galveston region. In October 2001, the EPA approved the original TCEQ plan, and the BCCA Appeal Group filed a timely petition for judicial review of that action in the United States Fifth Circuit Court of Appeals in January 2002. In December 2002, the TCEQ adopted revised NOx and HRVOC rules in response to this litigation. On March 5, 2003, the plaintiffs’ filed a voluntary dismissal of the case brought in State District Court in Travis County, Texas. On October 28, 2003, the United States Fifth Circuit Court of Appeals affirmed the EPA approval of the original December 2000 TCEQ plan (the 90% reduction requirement). Since the TCEQ adopted revised rules regarding NOx (the 80% reduction requirement) and HRVOCs in December 2002 in response to this litigation, the Fifth Circuit Court of Appeals decision is not expected to have a material adverse effect on our business or financial condition. For a discussion of the impact of these rules, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters.”

In addition, we are, from time to time, a defendant in lawsuits, some of which are not covered by insurance. Many of these suits make no specific claim for relief. Although final determination of legal liability and the resulting financial impact with respect to any such litigation cannot be ascertained with any degree of certainty, we do not believe that any ultimate uninsured liability resulting from the legal proceedings in which we currently are involved (directly or indirectly) will individually, or in the aggregate, have a material adverse effect on our business or financial condition.

From time to time we receive notices from federal, state or local governmental entities of alleged violations of environmental laws and regulations pertaining to, among other things, the disposal, emission and storage of chemical and petroleum substances, including hazardous wastes. Although we have not been the subject of significant penalties to date, such alleged violations may become the subject of enforcement actions or other legal proceedings and may (individually or in the aggregate) involve monetary sanctions of $100,000 or more (exclusive of interest and costs).

In April 1997, the Illinois Attorney General’s Office filed a complaint in Grundy County, Illinois Circuit Court seeking monetary sanctions for releases into the environment at Millennium’s Morris, Illinois plant in alleged violation of state regulations. The Morris, Illinois plant was contributed to us on December 1, 1997 in connection with our formation. We have reached a tentative settlement with the State of Illinois, which includes a civil penalty in the amount of $175,000, and are finalizing the settlement consent decree with the State of Illinois. We do not believe that the ultimate resolution of this complaint will have a material adverse effect on our business or financial condition.

In May 2003, the TCEQ notified us that it is seeking a civil penalty of $167,000 in connection with alleged exceedances of permitted emissions at certain cooling towers at our Channelview plant. We do not believe that the ultimate resolution of this matter will have a material adverse effect on our business or financial condition.

In August 2003, the EPA notified us that it is seeking a civil penalty arising from a 1999 inspection relating to alleged violations of Clean Air Act regulations at our Lake Charles plant. We have reached a tentative settlement with the EPA, which includes a civil penalty in the amount of $195,000, and are finalizing the settlement consent decree with the EPA. We do not believe that the ultimate resolution of this matter will have a material adverse effect on our business or financial condition.

Lyondell, Millennium Petrochemicals and Occidental and certain of its subsidiaries have each agreed to provide certain indemnifications to us with respect to the petrochemicals and polymers businesses they each contributed. In addition, we have agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions. Lyondell, Millennium Petrochemicals and Occidental each remain liable under these indemnification arrangements to the same extent following Lyondell’s acquisition of Occidental’s interest in us as they were before. See “Related Party Transactions—Asset Contributions by Lyondell and Affiliates of Millennium and Occidental” for more information regarding these indemnification obligations.

70

OUR MANAGEMENT

A Partnership Governance Committee manages and controls our business, property and affairs, including the determination and implementation of our strategic direction. The general partners exercise their authority to manage and control us only through the Governance Committee, subject to delegation to the executive officers discussed below. The Governance Committee consists of six members, called representatives, three appointed by each general partner. The participation rights of any general partner’s representatives may be curtailed to the extent that the general partner or its affiliates cause a default under the partnership agreement. See “Description of the Partnership Agreement” below.

Partnership Governance Committee

The following biographical information is furnished with respect to each of the members of the Governance Committee. The information includes age as of September 30, 2003, present position, if any, with us, period served as a member of the Governance Committee, and other business experience during at least the past five years.

Dan F. Smith, 57

Mr. Smith has been a member and Co-Chairman of the Governance Committee since December 1997 and has been our Chief Executive Officer since December 1997. Mr. Smith has been a director of Lyondell since October 1988. He has been President of Lyondell since August 1994 and Chief Executive Officer of Lyondell since December 1996. Mr. Smith was Chief Operating Officer of Lyondell from May 1993 to December 1996. Prior thereto, Mr. Smith held various senior executive positions with Lyondell and Atlantic Richfield Company (“ARCO”), including Executive Vice President and Chief Financial Officer of Lyondell, Vice President, Corporate Planning of ARCO and Senior Vice President in the areas of management, manufacturing, control and administration for Lyondell and the Lyondell Division of ARCO. Mr. Smith is a director of Cooper Industries, Inc. Mr. Smith also is a member of the Board and the Executive Committee for the American Chemistry Council and is past Chairman of the Operating Board and a member of the Executive Committee for the American Plastics Council.

Robert E. Lee, 47

Mr. Lee has been a member and Co-Chairman of the Governance Committee since July 2003. Mr. Lee has served as President and Chief Executive Officer of Millennium since July 2003. He was Executive Vice President-Growth and Development of Millennium from March 2001 to July 2003. He was President and Chief Executive Officer of Millennium Inorganic Chemicals from June 1997 to March 2001. From October 1996 (when Millennium was formed) to June 1997, he served as the President and Chief Operating Officer of Millennium. Mr. Lee has been a director of Millennium since its inception. Mr. Lee was a director and the Senior Vice President and Chief Operating Officer of Hanson Industries from June 1995 until the formation of Millennium, an Associate Director of Hanson from 1992 until the formation of Millennium, Vice President and Chief Financial Officer of Hanson Industries from 1992 to June 1995, Vice President and Treasurer of Hanson Industries from 1990 to 1992, and Treasurer of Hanson Industries from 1987 to 1990. He joined Hanson Industries in 1982.

71

C. William Carmean, 50	Mr. Carmean has been a member of the Governance Committee since August 2003. Mr. Carmean has served as Senior Vice President, General Counsel and Secretary of Millennium since January 2002. He was Vice President-Legal of Millennium from December 1997 to December 2001. He was Associate General Counsel of Millennium from the inception of Millennium to December 1997, Associate General Counsel of Hanson Industries from 1993 to the formation of Millennium, and Corporate Counsel of Quantum Chemical Corporation from 1990 until its acquisition by Hanson in 1993.
T. Kevin DeNicola, 49	Mr. DeNicola has been a member of the Governance Committee since May 1998. Mr. DeNicola was appointed Senior Vice President and Chief Financial Officer of Lyondell effective as of June 30, 2002. Prior thereto, he served as Vice President, Corporate Development of Lyondell since April 1998, overseeing strategic planning. From 1996 until April 1998, Mr. DeNicola was Director of Investor Relations of Lyondell. Mr. DeNicola served as Ethylene Products Manager of Lyondell from 1993 until 1996. Mr. DeNicola also serves as a member of the Partnership Governance Committee of LCR.
Kerry A. Galvin, 42	Ms. Galvin has been a member of the Governance Committee since May 2002. Ms. Galvin was appointed Senior Vice President, General Counsel and Secretary of Lyondell in May 2002. Prior thereto, she served as Vice President, General Counsel and Secretary since July 2000. Ms. Galvin has responsibility for legal and governmental affairs for the Lyondell enterprise. Ms. Galvin originally joined Lyondell in 1990 and held various positions in the legal department prior to July 2000, including Associate General Counsel with responsibility for international legal affairs.
John E. Lushefski, 47	Mr. Lushefski has been a member of the Governance Committee since December 1997. Mr. Lushefski has been Senior Vice President and Chief Financial Officer of Millennium since 1996.

Executive Officers

The Governance Committee has delegated responsibility for day-to-day operations to our executive officers. The executive officers consist of a Chief Executive Officer and others as determined from time to time by the Governance Committee. Except for the Chief Executive Officer, the approval of at least two representatives of each of Lyondell and Millennium is required to appoint or discharge executive officers, based upon the recommendation of the Chief Executive Officer.

The Chief Executive Officer holds office for a five-year term, assuming he does not resign or die and is not removed, and need not be an employee of Equistar. The Chief Executive Officer may be removed at any time by action of the Governance Committee. Lyondell has the right to designate our Chief Executive Officer, provided the person designated is reasonably acceptable to Millennium.

The following table sets forth the names and ages of our executive officers as of September 30, 2003.

Name	Age	Partnership Position
Dan F. Smith	57	Chief Executive Officer
Morris Gelb	57	Chief Operating Officer
Edward J. Dineen	49	Senior Vice President, Chemicals and Polymers
W. Norman Phillips, Jr.	48	Senior Vice President, Fuels and Raw Materials
Charles L. Hall	53	Vice President and Controller

72

Mr. Smith has been our Chief Executive Officer since December 1997. Mr. Smith has been a director of Lyondell since October 1988. He has been President of Lyondell since August 1994 and Chief Executive Officer of Lyondell since December 1996. Mr. Smith was Chief Operating Officer of Lyondell from May 1993 to December 1996. Prior thereto, Mr. Smith held various senior executive positions with Lyondell and ARCO, including Executive Vice President and Chief Financial Officer of Lyondell, Vice President, Corporate Planning of ARCO and Senior Vice President in the areas of management, manufacturing, control and administration for Lyondell and the Lyondell Division of ARCO. Mr. Smith is a director of Cooper Industries, Inc. and is a member of our Governance Committee. Mr. Smith also is a member of the Board and the Executive Committee for the American Chemistry Council and is past Chairman of the Operating Board and a member of the Executive Committee for the American Plastics Council.

Mr. Gelb was appointed as our Chief Operating Officer in March 2002. Mr. Gelb has served as Executive Vice President and Chief Operating Officer of Lyondell since December 1998. Previously, he served as Senior Vice President, Manufacturing, Process Development and Engineering of Lyondell from July 1998 to December 1998. He was named Vice President for Research and Engineering of ARCO Chemical in 1986 and Senior Vice President of ARCO Chemical in July 1997. Mr. Gelb also serves as a member of the Partnership Governance Committee of LCR.

Mr. Dineen was appointed as our Senior Vice President, Chemicals and Polymers in March 2002 and Senior Vice President, Chemicals and Polymers of Lyondell in May 2002. Prior thereto, he served as Senior Vice President, Intermediates and Performance Chemicals of Lyondell since May 2000. Prior to this position, he served as Senior Vice President, Urethanes and Performance Chemicals of Lyondell since July 1998. He served as Vice President, Performance Products and Development for ARCO Chemical beginning in June 1997, and served as Vice President, Planning and Control for ARCO Chemical European Operations from 1993 until his appointment as Vice President, Worldwide CoProducts and Raw Materials in 1995.

Mr. Phillips was appointed as our Senior Vice President, Fuels and Raw Materials in March 2002 and Senior Vice President, Fuels and Raw Materials of Lyondell in May 2002. Prior thereto, he served as our Senior Vice President, Polymers since August 1998. He was previously our Vice President, Petrochemicals from December 1997 to August 1998. Mr. Phillips also has served as a Senior Vice President of Lyondell since October 2000. He previously served as Vice President, Polymers of Lyondell from January 1997 to December 1997, and as Vice President of Lyondell with responsibilities in the areas of marketing and operations from 1993 to January 1997. Mr. Phillips also serves as a member of the Partnership Governance Committee of LCR.

Mr. Hall was appointed Vice President and Controller of Equistar and Lyondell in October 2001. Prior thereto, Mr. Hall was with BP plc (formerly BP Amoco plc) for sixteen years in a variety of financial positions, including General Manager—Accounting and Reporting for BP’s North American operations, Controller of Amoco Chemical Company and Assistant Controller of Amoco Corporation. Prior to joining Amoco, Mr. Hall spent 10 years with Arthur Young & Company.

Compensation

Our Annual Report on Form 10-K for 2002 presents information on executive compensation and our incentive plans that were in effect on December 31, 2002. These plans remain in effect.

73

OWNERSHIP

We are wholly owned by subsidiaries of Lyondell and Millennium. Lyondell’s subsidiaries own 70.5% of our equity and Millennium’s subsidiaries own 29.5%. Lyondell’s interest increased from 41% to 70.5% on August 22, 2002 when it acquired the equity of entities that were previously subsidiaries of Occidental. Lyondell and Millennium each file reports and other information with the SEC, and you may read and copy any document filed by Lyondell or Millennium at the SEC’s public reference room or on the SEC’s Internet site located at www.sec.gov. Information Lyondell and Millennium file with the SEC is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

Name and Address of Beneficial Owner	Nature of Beneficial Ownership	Percentage Partnership Interest
Lyondell Petrochemical L.P. Inc. Two Greenville Crossing 4001 Kennett Pike, Suite 238 Greenville, DE 19807	Limited Partner	21.617	%
Lyondell (Pelican) Petrochemical L.P.1, Inc. Two Greenville Crossing 4001 Kennett Pike, Suite 238 Greenville, DE 19807	Limited Partner	6.623	%
Lyondell (Pelican) Petrochemical L.P.2, Inc. Two Greenville Crossing 4001 Kennett Pike, Suite 238 Greenville, DE 19807	Limited Partner	11.439	%
Lyondell LP3 Partners, LP Two Greenville Crossing 4001 Kennett Pike, Suite 238 Greenville, DE 19807	Limited Partner	30.000	%
Millennium Petrochemicals LP LLC 230 Half Mile Road Red Bank, NJ 07701	Limited Partner	28.910	%
Lyondell Petrochemical G.P. Inc. 1221 McKinney Street, Suite 700 Houston, TX 77010	General Partner	0.821	%
Millennium Petrochemicals GP LLC 230 Half Mile Road Red Bank, NJ 07701	General Partner	0.590	%

Lyondell directly or indirectly owns 100% of the outstanding capital stock of each of Lyondell Petrochemical L.P. Inc., Lyondell (Pelican) Petrochemical L.P.1, Inc., Lyondell (Pelican) Petrochemical L.P.2, Inc., Lyondell LP3 Partners, LP and Lyondell Petrochemical G.P. Inc. (collectively, the “Lyondell Owner Subsidiaries”). Lyondell has pledged its interests in each of the Lyondell Owner Subsidiaries under its bank credit facility. Millennium indirectly owns 100% of the outstanding equity interests of each of Millennium Petrochemicals LP LLC and Millennium Petrochemicals GP LLC (collectively, the “Millennium Owner Subsidiaries”). Millennium has pledged its interest in each of the Millennium Owner Subsidiaries under its bank credit facility. None of the general partners holds any significant assets other than its partnership interest.

74

Lyondell

Lyondell is a global chemical company. Lyondell had revenues of approximately $3.3 billion for the year ended December 31, 2002, and approximately $7.4 billion of assets at December 31, 2002. Lyondell is vertically integrated into its key raw materials through its equity ownership in us. Lyondell operates in the following businesses:

• Intermediate Chemicals and Derivatives. Lyondell is a leading producer of propylene oxide, commonly referred to as PO, and a leading worldwide producer and marketer of PO derivatives. Lyondell also is a leading supplier of toluene diisocyanate and a major producer and marketer of styrene monomer and tertiary butyl alcohol, co-products of Lyondell’s proprietary PO technology.

• Petrochemicals and Polymers. Lyondell operates in these businesses through its ownership interest in us.

• Refining. Lyondell owns 58.75% of LCR, which owns one of the largest crude oil refineries in the United States processing heavy Venezuelan crude oil. The refinery is located in Houston, Texas and is a full conversion refinery with heavy crude oil processing capability of approximately 268,000 barrels per day of 17 degree API gravity crude oil.

Millennium

Millennium is a major international chemical company, with leading market positions in a broad range of commodity, industrial, performance and specialty chemicals. Millennium had revenues of approximately $1.6 billion for the year ended December 31, 2002, and approximately $2.4 billion of assets at December 31, 2002. In addition to its interest in us, Millennium operates in three business segments: Titanium Dioxide and Related Products; Acetyls; and Specialty Chemicals.

Millennium has leading market positions in the United States and the world:

• Through its Titanium Dioxide and Related Products business segment, Millennium is the second-largest producer of titanium dioxide in the world. Millennium is also the largest merchant seller of titanium tetrachloride and a major producer of zirconia, silica gel and cadmium-based pigments;

• Through its Acetyls business segment, Millennium is the second-largest producer of vinyl acetate monomer and acetic acid in North America;

• Through its Specialty Chemicals business segment, Millennium is a leading producer of terpene-based fragrance and flavor chemicals;

• Through its 29.5% interest in Equistar, Millennium is a partner in the second-largest producer of ethylene and the third-largest producer of polyethylene in North America, and a leading producer of performance polymers, oxygenated chemicals, aromatics and specialty petrochemicals.

75

DESCRIPTION OF THE PARTNERSHIP AGREEMENT

Our partnership agreement governs, among other things, our management, ownership, cash distributions and capital contributions. A description of our management, consisting of a Governance Committee and executive officers, is included above under “Our Management.” A description of our ownership structure is set forth above under “Ownership.” The following is a summary of the material provisions of the partnership agreement. This summary is qualified in its entirety by reference to the full and complete text of the partnership agreement, which is available upon written request as provided under “Where You Can Find More Information.”

Actions Requiring Unanimous Voting by the Governance Committee

Unless approved by two or more representatives of each of Lyondell and Millennium, the Governance Committee may not take any actions that would permit or cause us, any of our subsidiaries, or any person acting in the name of or on behalf of any of them, directly or indirectly, whether in a single transaction or a series of related transactions, to:

• engage, participate or invest in any business outside the scope of our business as described in the partnership agreement;

• approve any strategic plan, as well as any amendments or updates to the strategic plan, including the annual update described under “—Strategic Plans and Preparation of an Annual Budget” below;

• authorize any disposition of assets having a fair market value exceeding $30 million in any one transaction or a series of related transactions not contemplated in an approved strategic plan;

• authorize any acquisition of assets or any capital expenditure exceeding $30 million that is not contemplated in an approved strategic plan;

• require capital contributions to us within any fiscal year if the total of contributions required from the partners within that year would exceed $100 million, or if the total of contributions required from the partners within that year and the immediately preceding four years would exceed $300 million, other than contributions:

— contemplated by the asset contribution agreements for each of Lyondell and Millennium,

— contemplated by an approved strategic plan or

— required to achieve or maintain compliance with health, safety and environmental laws;

• authorize the incurrence of debt for borrowed money, unless:

— the debt is to refinance all or a portion of our credit facility as contemplated below,

— after giving effect to the incurrence of the debt and any related transactions, we would be expected to have an “investment grade” debt rating by Moody’s and Standard & Poor’s or

— the debt is incurred to refinance the public or bank debt assumed or incurred by us as contemplated by documents relating to our formation and the contribution of the Occidental contributed business or to refinance any such refinancing debt;

and in the case of each of the three exceptions above, the agreement relating to the debt does not provide that the transfer by a partner of its partnership interests, or a change of control with respect to any partner or any of its affiliates, would either:

— constitute a default under the debt instruments,

— otherwise accelerate the maturity of the debt or

— give the lender or holder any “put rights” or similar rights with respect to the debt instrument;

however, unanimous consent is not required for us to refinance any of our synthetic or capitalized leases in effect on March 31, 2002 with debt for borrowed money if the amount of the debt incurred does not in the aggregate exceed the amount required to terminate the synthetic or capitalized lease;

76

• make borrowings under one or more of our bank credit facilities, uncommitted lines of credit or any credit facility or debt instruments that refinances all or any portion of our credit facility or facilities, at any time, if, as a result of any such borrowing, the aggregate principal amount of all such borrowings outstanding at that time would exceed $1.75 billion;

• enter into interest rate protection or other hedging agreements, other than hydrocarbon hedging agreements in the ordinary course of business;

• enter into any capitalized lease or off-balance sheet financing arrangements involving payments, individually or in the aggregate, by us in excess of $30 million in any fiscal year;

• cause us or any of our subsidiaries to issue, sell, redeem or acquire any partnership interests in us or other equity securities, or any rights to acquire, or any securities convertible into or exchangeable for, partnership interests or other equity securities;

• make cash distributions from us in excess of Available Net Operating Cash, as defined below under “—Distribution of Available Net Operating Cash to Our Partners,” or to make non-cash distributions, except as provided in the partnership agreement in respect of a dissolution or liquidation;

• appoint or discharge executive officers, other than the Chief Executive Officer, based on the recommendation of the Chief Executive Officer;

• approve material compensation and benefit plans and policies, material employee policies and material collective bargaining agreements for our employees;

• initiate or settle any litigation or governmental proceedings if the effect of the litigation or proceedings would be material to our financial condition;

• change our independent accountants;

• change our method of accounting as adopted in the partnership agreement or make tax elections under the Internal Revenue Code of 1986, as amended, determined to be appropriate by the Governance Committee;

• create or change the authority of any auxiliary committee;

• merge, consolidate or convert us or any of our subsidiaries with or into any other entity, other than a wholly owned subsidiary of Equistar;

• engage in certain bankruptcy and reorganization actions specified in the partnership agreement;

• exercise any of the powers or rights described below under “—Transactions with Affiliates” with respect to a business conflict involving either:

— LCR, its successors or assigns,

— Lyondell Methanol Company, L.P. (“LMC”), its successors or assigns or

— any other affiliate of any of the general partners, if the affiliate’s actions with respect to the conflict circumstance are not controlled by Lyondell or Millennium, other than a business conflict involving the exercise of any rights and remedies with respect to a default under any agreement that is the subject of the conflict; or

• repay any of our long-term debt or any of its long-term synthetic leases that are treated as debt for purposes of federal income tax if, by doing so, the aggregate amount of all such indebtedness would be reduced below $1.825 billion prior to May 15, 2005, and thereafter, below $1.5 billion.

Although unanimous approval by all six members of the Governance Committee is never required, the requirements described above are referred to as “unanimous voting requirements” because two representatives of each of the general partners must agree on any action taken in respect of the enumerated matters.

77

Transactions with Affiliates

Except as described above under “—Actions Requiring Unanimous Voting by the Governance Committee,” if a business conflict caused by any transaction or dealing between us, or any of our subsidiaries, and one or more of our general partners, or any of their affiliates, occurs, the other general partner will have sole and exclusive power, at our expense, to both (1) control all decisions, elections, notifications, actions, exercises or non-exercises and waivers of all rights, privileges and remedies provided to, or possessed by, us with respect to the conflict and (2) retain and direct legal counsel and to control, assert, enforce, defend, litigate, mediate, arbitrate, settle, compromise or waive any and all claims, disputes and actions if any potential, threatened or asserted claim, dispute or action about a conflict occurs. Any action by the Governance Committee with respect to such a conflict, except as described above under “—Actions Requiring Unanimous Voting by the Governance Committee,” will require the approval of at least two representatives of the uninvolved general partner, and the representatives of the interested general partner will have no votes.

Strategic Plans and Preparation of an Annual Budget

We are managed under a five-year strategic business plan which is updated annually under the direction of our Chief Executive Officer and presented for approval by the Governance Committee no later than 90 days before the start of the first fiscal year covered by the updated plan. The strategic plan must be approved each year by at least two representatives of each of the general partners. The strategic plan establishes our strategic direction, including:

• plans relating to capital maintenance and enhancement;

• geographic expansion, acquisitions and dispositions;

• new product lines;

• technology;

• long-term supply and customer arrangements;

• internal and external financing;

• environmental and legal compliance; and

• plans, programs and policies relating to compensation and industrial relations.

In addition, our executive officers prepare an annual budget for each fiscal year. Each annual budget includes an operating budget and capital expenditure budget. Each annual budget must be consistent with the information for its fiscal year included in the most recently approved strategic plan. Unless otherwise provided in the most recently approved strategic plan, each annual budget utilizes a format and provides a level of detail consistent with our previous annual budget.

If for any fiscal year the Governance Committee fails to approve an updated strategic plan, for that year and each subsequent year before the approval of an updated strategic plan, our executive officers will prepare and promptly furnish to the Governance Committee an annual budget consistent with the projections and other information for that year included in the strategic plan most recently approved. Our Chief Executive Officer, acting in good faith, shall be entitled to modify any annual budget:

• to satisfy current contractual and compliance obligations; and/or

• to account for other changes in circumstances resulting from the passage of time or the occurrence of events beyond our control.

Our Chief Executive Officer is not authorized to cause us to proceed with capital expenditures to accomplish capital enhancement projects except to the extent that the expenditures would enable us to continue or complete any capital project reflected in the last strategic plan that was approved by the Governance Committee.

78

After a strategic plan and an annual budget have been approved by the Governance Committee, or an annual budget has been developed as described above in cases where an updated strategic plan has not yet been approved, the Chief Executive Officer is authorized, without further action by the Governance Committee, to cause us to make expenditures consistent with the updated strategic plan and annual budget, provided that all internal control policies and procedures, including those regarding the required authority for expenditures, shall have been followed.

Governance Committee Deadlock Over the Strategic Plan

If the Governance Committee has not agreed upon and approved an updated strategic plan by 12 months after the beginning of the first fiscal year that would have been covered by the plan, then our general partners are required to submit to a non-binding dispute resolution process. The general partners are required to continue the dispute resolution process until either:

• agreement is reached by the general partners, acting through their representatives, on an updated strategic plan; or

• at least 24 months have elapsed since the beginning of the first fiscal year that was to be covered by the first updated strategic plan for which agreement was not reached and one general partner determines and notifies the other general partner in writing that no agreement resolving the dispute is likely to be reached.

Following receipt of notice described above, either general partner may elect to dissolve us.

Distribution of Available Net Operating Cash to Our Partners

The partnership agreement provides that we must distribute to the partners, as soon as practicable following the end of each month, all Available Net Operating Cash, as defined below.

“Available Net Operating Cash” is defined in the partnership agreement, at the relevant time of determination, as:

• all cash and cash equivalents on hand as of the most recent month’s end, plus the excess, if any, of our targeted level of indebtedness over our actual indebtedness as of that month’s end; less

• the Projected Cash Requirements, if any, as of that month’s end, as determined by the executive officers.

The targeted level of indebtedness is shown in the most recently updated strategic plan. The actual indebtedness is determined according to generally accepted accounting principles and represents all short term and long term debt.

“Projected Cash Requirements” means, for the 12-month period following any month’s end, the excess, if any, of the sum of:

• our (1) forecast capital expenditures; (2) forecast cash payments for taxes, debt service, including principal and interest payment requirements and other non-cash credits to income; and (3) forecast cash reserves for future operations or other requirements;

     over the sum of:

• our (1) forecast net income; (2) forecast depreciation, amortization, other non-cash charges to income, interest expense and tax expenses, in each case to the extent deducted in determining net income; (3) forecast decreases in working capital or minus forecast increases in working capital; and (4) forecast cash proceeds of disposition of assets, net of expenses.

79

Our Projected Cash Requirements are calculated, subject to changes in certain circumstances, consistently with the most recently updated strategic plan.

Distributions to the partners of cash or property arising from our liquidation would be made according to the capital account balances of the partners. Unless otherwise agreed by the general partners not involved with a business conflict as described under “—Transactions with Affiliates” above, any amount otherwise distributable to a partner as described above will be applied by us to satisfy obligations to us resulting from a partner’s or its affiliate’s failure to (1) pay any interest or principal when due on any indebtedness for borrowed money to us, (2) make any indemnification payment required by its asset contribution agreement that has been finally determined to be due or (3) make any capital contribution required by the partnership agreement, other than as required by the applicable asset contribution agreement.

Indemnification of Each Partner

We have agreed, to the fullest extent permitted by applicable law, to indemnify, defend and hold harmless each partner, its affiliates and its respective officers, directors and employees. This indemnification is from, against and in respect of any liability which the indemnified person may sustain, incur or assume as a result of, or relative to, any third-party claim arising out of or in connection with our business, property or affairs. This indemnification does not apply to the extent that it is finally determined that the third-party claim arose out of or was related to actions or omissions of the indemnified partner, its affiliates or any of their respective officers, directors or employees acting in those capacities constituting a breach of the partnership agreement or any related agreement. This indemnification obligation is not intended to, nor will it, affect or take precedence over the indemnity provisions contained in any related agreement. See “Related Party Transactions—Asset Contributions by Lyondell and Affiliates of Millennium and Occidental.”

Transfers and Pledges of a Partner’s Interest in Us

Without the consent of the general partners, no partner may transfer less than all of its interest in us, nor can any partner transfer its interest other than for cash. If one of the limited partners and its affiliated general partner desire to transfer, via a cash sale, all of their units, they must give written notice to us and the other partners and the non-selling partners shall have the option, exercisable by delivering written acceptance notice of the exercise to the selling partners within 45 days after receiving notice of the proposed sale, to elect to purchase all of the partnership interests of the selling partners on the terms described in the initial notice. If all of the other non-selling partners deliver notice of acceptance, then all of the partnership interests shall be transferred in proportion to the partners’ current percentage interest unless otherwise agreed. If less than all of the non-selling partners deliver notice of acceptance, the partner who delivers notice of acceptance will have the option of purchasing all of the partnership interests up for sale. The notice of acceptance will set a date for closing the purchase which is not less than 30 nor more than 90 days after delivery of the notice of acceptance, subject to extension. The purchase price for the selling partners’ partnership interests will be paid in cash.

If the non-selling partners do not elect to purchase the selling partners’ partnership interests within 45 days after the receipt of initial notice of the proposed sale, the selling partners will have a further 180 days during which they may consummate the sale of their units to a third-party purchaser. The sale to a third-party purchaser must be at a purchase price and on other terms that are no more favorable to the purchaser than the terms offered to the non-selling partners. If the sale is not completed within the 180-day period, the initial notice will be deemed to have expired, and a new notice and offer shall be required before the selling partners may make any transfer of their partnership interests.

Before the selling partners may consummate a transfer of their partnership interests to a third party under the partnership agreement, the selling partners must demonstrate that the person willing to serve as the proposed purchaser’s guarantor must have outstanding indebtedness that is rated investment grade by Moody’s and

80

Standard & Poor’s. If the proposed guarantor has no rated indebtedness outstanding, it shall provide an opinion from a nationally recognized investment banking firm that it could be reasonably expected to obtain suitable ratings. In addition, a partner may transfer its partnership interests only if, together with satisfying all other requirements:

• the transfer is accomplished in a nonpublic offering in compliance with, and exempt from, the registration and qualification requirements of all federal and state securities laws and regulations;

• the transfer does not cause a default under any material contract to which Equistar is a party or by which Equistar or any of its properties is bound;

• the transferee executes an appropriate agreement to be bound by the partnership agreement;

• the transferor and/or the transferee bears all reasonable costs incurred by Equistar in connection with the transfer;

• the guarantor of the transferee delivers an agreement to the ultimate parent entity of the non-selling partners and to Equistar substantially in the form of the parent agreement; and

• the proposed transferor is not in material default in the timely performance of any of its material obligations to us.

A partner will not in any transaction or series of actions, directly or indirectly, pledge all or any part of its partnership interest. However, a partner may at any time assign its right to receive distributions from us so long as the assignment does not purport to assign any:

• right of the partner to participate in or manage our affairs;

• right of the partner to receive any information or accounting of our affairs;

• right of the partner to inspect our books or records; or

• other right of a partner under the partnership agreement or the Delaware Revised Uniform Limited Partnership Act.

In addition, except for any restrictions imposed by the parent agreement described under “Description of The Parent Agreement,” nothing in our partnership agreement will prevent the transfer or pledge by the owner of any capital stock, equity ownership interests or other security of the partner or any affiliate of a partner.

The partnership agreement specifically provides for transfers of a partner’s partnership interest to an affiliate without consent of the other partners. A general partner may transfer all of its units in the partnership to another general partner that is its affiliate if this transfer would not cause our dissolution. A limited partner may transfer its units as follows:

• up to 99% of its units may be transferred to a general partner that is its affiliate, whereupon the limited partner units so transferred will become general partner units;

• up to 99% of its units may be transferred to another limited partner that is its affiliate; and

• all of its units may be transferred to another limited partner that is its affiliate if this transfer would not cause our dissolution.

In addition, any partner may transfer all of its partnership interest in us to one of its wholly owned affiliates that is not at that time a partner if the transferee executes an instrument reasonably satisfactory to all of the general partners accepting the partnership agreement.

81

Business Opportunities Which Must be Offered to Us

Except as described below, each partner’s affiliates are free to engage in or possess an interest in any other business of any type and to avail themselves of any business opportunity available to it without having to offer us or any partner the opportunity to participate in that business. If a partner’s affiliate desires to initiate or pursue an opportunity to undertake, engage in, acquire or invest in a “related business,” as defined in the partnership agreement, that partner or its affiliate will offer us the business opportunity. A related business is any business related to:

• the manufacturing, marketing and distribution of the types of olefins, polyolefins, ethyl alcohol, ethyl ether and ethylene oxide, ethylene glycol and derivatives of ethylene oxide and ethylene glycol that are specifically set forth in the partnership agreement;

• the purchasing, processing and disposing of raw materials in connection with the manufacturing, marketing and distributing of the chemicals identified in the previous bullet point; and

• any research and development in connection with the previous two bullet points.

When a proposing partner offers a business opportunity to us, we will elect to do one of the following within a reasonably prompt period:

• acquire or undertake the business opportunity for our benefit as a whole, at our cost, expense and benefit; or

• permit the proposing partner to acquire or undertake the business opportunity for its own benefit and account without any duty to us or the other partners.

If the business opportunity is in direct competition with our then-existing business and we do not elect to acquire or undertake the business opportunity for our own benefit, then the proposing partner and we shall, if either so elects, seek to negotiate and implement an arrangement whereby we would either:

• acquire or undertake the competing opportunity at the sole cost, expense and benefit of the proposing partner under a mutually acceptable arrangement, in which case the competing opportunity will be treated as a separate business within us; or

• enter into a management agreement with the proposing partner to manage the competing opportunity on behalf of the proposing partner on terms and conditions mutually acceptable to the proposing partner and us.

If we and the proposing partner do not reach agreement as to an arrangement, the proposing partner may acquire or undertake the competing opportunity for its own benefit and account without any duty to us or the other partners.

In addition, if the business opportunity constitutes less than 25% of an acquisition of or investment in assets, activities, operations or businesses that is not otherwise a related business, then a proposing partner may acquire or invest in a business opportunity without first offering it to us. The 25% figure is based on annual revenues for the most recently completed fiscal year. After completion of the above acquisition or investment, the proposing partner must offer the business opportunity to us under the terms described above. If we elect to pursue the business opportunity, it will be acquired by us at its fair market value as of the date of the acquisition.

If we are presented with an opportunity to acquire or undertake a business opportunity that we determine not to acquire or undertake, and the representatives of one general partner, but not the other general partner, desire that we acquire or undertake the business opportunity, then we will permit the general partner and its affiliates to acquire or undertake such business opportunity, and the business opportunity shall be treated in the same manner as if the general partner and its affiliates were a proposing partner with respect to the business opportunity.

82

Limitation on Fiduciary Duty of Partners

Under our partnership agreement, the liability of our partners and their affiliates to us or another partner for any act or omission by a partner in its capacity as such that is imposed by law is waived and eliminated to the extent permitted by law, except in the case of observing the unanimous voting requirements described under “—Actions Requiring Unanimous Voting by the Governance Committee.”

Amendment of Partnership Agreement

All waivers, modifications, amendments or alterations of the partnership agreement require the written approval of all of our partners.

83

DESCRIPTION OF THE PARENT AGREEMENT

Lyondell, Millennium and Equistar are parties to an amended and restated parent agreement dated November 6, 2002. The following is a summary of the material provisions of the parent agreement. This summary is qualified in its entirety by reference to the full and complete text of the parent agreement, which is available upon written request as provided under “Where You Can Find More Information.”

Guarantee of Obligations Under the Partnership Agreement and Related Party Agreements

Pursuant to the parent agreement, each of Lyondell and Millennium (the “Parents”) has guaranteed, undertaken and promised to cause the due and punctual payment and the full and prompt performance of all of the amounts to be paid and all of the terms and provisions under various agreements, including, without limitation, the partnership agreement and the asset contribution agreements, to be performed or observed by or on the part of certain of their respective subsidiaries, including subsidiaries that are our partners, and any other direct or indirect subsidiary of any of the Parents that are parties to these agreements. These subsidiaries collectively are referred to as the “Affiliated Obligors.” The entities that are the limited partners and general partners collectively are referred to as the “Partner Subs.” Additionally, for purposes of agreements related to the partnership that predate August 22, 2002, the term “Affiliated Obligors” includes affiliates of any of Oxy CH Corporation, Occidental Chemical Corporation or Occidental Chemical Holding Corporation if any such affiliate was a party to those related agreements. Insofar as the provisions described in this subsection apply to agreements other than the partnership agreement and the parent agreement, the term “Affiliated Obligors” will not include us or any of our partners in its capacity as a partner. The parent agreement provides expressly that the parent guarantees inure solely to the benefit of the beneficiaries specified in the parent agreement, which consist of us, Lyondell and Lyondell’s Affiliated Obligors and Millennium and Millennium’s Affiliated Obligors. The parent agreement also states that nothing in the agreement confers upon any other person any rights, benefits or remedies by reason of the parent agreement. Accordingly, the holders of the notes may not enforce any provision, or seek relief by reason, of the parent agreement.

Conflict Circumstance

The partnership agreement includes definitions of “Conflict Circumstance,” “Conflicted General Partner” and “Nonconflicted General Partner” and provides that the Nonconflicted General Partners have some exclusive rights to control us with respect to any Conflict Circumstance, generally involving a transaction between us and an affiliate of one of our partners. The guarantee provisions described above do not apply to the parents of the general partners that direct us in connection with these Conflict Circumstances, so that the parents of a Nonconflicted General Partner are not effectively guaranteeing our performance of contracts with other parents. However, a parent of a Nonconflicted General Partner may have liability for our failure to perform in circumstances where that failure was caused by an act or failure to act of its Partner Sub. Without limiting the rights of the Partner Subs under the partnership agreement, and without prejudice to any rights, remedies or defenses we may have in any other agreement or Conflict Circumstance, each Parent has agreed to cause each of its Partner Subs to both:

• cause us to pay, perform and observe all of the terms and provisions of other agreements to be paid, performed or observed by or on the part of us under the agreements, according to their terms to the extent that the Partner Sub is a Nonconflicted General Partner and is thereby entitled to cause the payment, performance and observance of the terms and provisions; and

• except to the extent inconsistent with its obligations above, abide by its obligations as a Nonconflicted General Partner with respect to any Conflict Circumstance arising in connection with any other agreement according to the terms of the partnership agreement that apply.

84

Nothing in the provisions described in this subsection shall require a Parent to make or cause a Partner Sub to either:

• cure or mitigate our inability to make any payment or to perform or observe any terms and provisions under any other agreements;

• cause us to require from the Partner Subs any cash contributions in respect of any payment, performance or observance involving a Conflict Circumstance; or

• make any contribution to us that the Partner Sub is not otherwise required to make under terms of the partnership agreement concerning required capital contributions.

See “Description of the Partnership Agreement—Transactions with Affiliates.”

Restrictions on Transfer of Partner Sub Stock

Without the consent of the other Parent, no Parent may transfer less than all of its interests in its Partner Subs (the “Partner Sub Stock”) except in compliance with the following provisions.

Each Parent may transfer all, but not less than all, of its Partner Sub Stock, without the consent of the other Parent, if the transfer is in connection with either:

• a merger, consolidation, conversion or share exchange of the transferring Parent; or

• a sale or other disposition of (A) the Partner Sub Stock, plus (B) other assets representing at least 50% of the book value of the transferring Parent’s assets excluding the Partner Sub Stock, as reflected on its most recent audited consolidated or combined financial statements.

In addition, any transfer of Partner Sub Stock by any Parent described above is only permitted if the acquiring, succeeding or surviving entity, if any, both:

• succeeds to and is substituted for the transferring Parent with the same effect as if it had been named in the parent agreement; and

• executes an instrument agreeing to be bound by the obligations of the transferring Parent under the parent agreement, with the same effect as if it had been named in the instrument.

The transferring Parent may be released from its guarantee obligations under the parent agreement after the successor parent agrees to be bound by the Parent’s obligations.

Unless a transfer is permitted under the provisions described above, any Parent desiring to transfer all of its Partner Sub Stock to any person, including another Parent or any affiliate of a Parent, may only transfer its Partner Sub Stock for cash consideration and will give a written right of first option to us and the other Parent. The offeree Parent will have the option to elect to purchase all of the Partner Sub Stock of the selling Parent, on the terms described in the right of first offer. If the offeree Parent does not elect to purchase all of the selling Parent’s Partner Sub Stock within 45 days after the receipt of the initial notice, the selling Parent will have a further 180 days during which it may, subject to the provisions of the following paragraph, consummate the sale of its Partner Sub Stock to a third-party purchaser at a purchase price and on other terms that are no more favorable to the purchaser than the initial terms offered to the offeree Parent. If the sale is not completed within the further 180-day period, the right of first offer will be deemed to have expired and a new right of first offer shall be required before the selling Parent may make any transfer of its Partner Sub Stock.

85

Before the selling Parent may consummate a transfer of its Partner Sub Stock to a third party under the provisions described in the preceding paragraph, the selling parent shall demonstrate to the other Parent that the proposed purchaser, or the person willing to serve as its guarantor as contemplated by the terms of the parent agreement, has outstanding indebtedness that is rated investment grade by either Moody’s or Standard & Poor’s. If such proposed purchaser or the other person has no rated indebtedness outstanding, that person shall provide an opinion from Moody’s, Standard & Poor’s or from a nationally recognized investment banking firm that it could be reasonably expected to obtain a suitable rating. Moreover, a Parent may transfer its Partner Sub Stock, under the previous paragraph, only if all of the following occur:

• the transfer is accomplished in a nonpublic offering in compliance with, and exempt from, the registration and qualification requirements of all federal and state securities laws and regulations;

• the transfer does not cause a default under any material contract which has been approved unanimously by the Governance Committee and to which we are a party or by which we or any of our properties are bound;

• the transferee executes an appropriate agreement to be bound by the parent agreement;

• the transferor and/or transferee bears all reasonable costs incurred by us in connection with the transfer;

• the transferee, or the guarantor of the obligations of the transferee, delivers an agreement to the other Parent and us substantially in the form of the parent agreement; and

• the proposed transferor is not in default in the timely performance of any of its material obligations to us.

In no event may any Parent transfer the Partner Sub Stock of any of the subsidiaries that hold the direct interests in us to any person unless the transferring Parent simultaneously transfers the Partner Sub Stock of all of its subsidiaries that hold the direct interests in us to that person or a wholly owned affiliate of that person or a common parent.

Competing Business by Our Owners or Their Affiliates

If Lyondell or Millennium or any of their affiliates (including Occidental) desires to initiate or pursue any opportunity to undertake, engage in, acquire or invest in a business opportunity of the type described under “Description of The Partnership Agreement—Business Opportunities Which Must be Offered to Us,” it shall agree to offer that business opportunity to us under the terms and conditions in the partnership agreement as if it were the “proposing partner,” as described in such section. We will have the rights and obligations arising from the offer of the business opportunity granted by the partnership agreement. See “Description of the Partnership Agreement—Business Opportunities Which Must be Offered to Us.”

86

RELATED PARTY TRANSACTIONS

During 2002, we had a change in ownership. Until August 2002, Equistar, a limited partnership, was wholly owned by subsidiaries of each of Lyondell, Millennium and Occidental. On August 22, 2002, Lyondell purchased Occidental’s 29.5% ownership interest in us by purchasing all of the outstanding stock of the Occidental subsidiaries that were our owners. To finance that purchase, Lyondell sold the following to a subsidiary of Occidental: (1) 34 million shares of newly issued Lyondell Series B common stock, (2) five-year warrants to acquire five million shares of Lyondell’s original common stock and (3) a right to receive a contingent payment. As a result of these transactions, Occidental no longer owns an interest in us and Lyondell’s ownership interest in us increased from 41% to 70.5%. Millennium owns the remaining 29.5% interest in us. Based on the most recent Statement on Schedule 13G or 13D, Form 4 or amendments thereto filed with the SEC, as of October 7, 2003, Occidental and its subsidiaries collectively beneficially owned 2,700,000 shares of Lyondell’s original common stock, 36,310,972 shares of Lyondell’s Series B common stock and warrants to purchase five million shares of Lyondell’s original common stock, representing in the aggregate 24.2% of all of Lyondell’s outstanding common stock. In addition, as a result of the transactions described above, two Occidental executives, Dr. Ray R. Irani, Chairman and Chief Executive Officer, and Stephen I. Chazen, Chief Financial Officer and Executive Vice President, became members of Lyondell’s Board of Directors.

The following summary describes transactions among us and our current owners and their affiliates (including Occidental). We believe that the related party transactions described below were obtained on terms substantially no more or less favorable than those that would have been agreed upon by third parties on an arm’s length basis, although we have not received fairness opinions in all cases.

Asset Contributions by Lyondell and Affiliates of Millennium and Occidental

Both Lyondell and Millennium Petrochemicals entered into separate asset contribution agreements on December 1, 1997, providing for the contribution of the Lyondell and Millennium contributed businesses. Wholly owned subsidiaries of Occidental (the “Occidental Subsidiaries”) entered into an asset contribution agreement with us on May 15, 1998, with respect to the transfer of the Occidental contributed business, a portion of which transfer was accomplished through a merger of an Occidental Subsidiary with and into us. Among other things, the asset contribution agreements required representations and warranties by the contributor regarding the transferred assets and indemnification of us by the contributor. These agreements also provide for the assumption by us of, among other things:

• third party claims that are related to contingent liabilities arising prior to the contribution transactions that are asserted before December 1, 2004 as to Lyondell and Millennium Petrochemicals or before May 15, 2005 as to the Occidental Subsidiaries to the extent the aggregate amount does not exceed, in the case of each of Lyondell, Millennium and the Occidental Subsidiaries, $7 million;

• third party claims related to contingent liabilities arising prior to the contribution transactions that are asserted for the first time after December 1, 2004 as to Lyondell and Millennium Petrochemicals, or after May 15, 2005 as to the Occidental Subsidiaries;

• obligations for $745 million of Lyondell indebtedness, of which $330 million remains outstanding as of December 31, 2002;

• a $750 million intercompany obligation of Millennium Petrochemicals to an indirect subsidiary of Millennium, which has been repaid;

• the lease intended for security relating to the Corpus Christi facility contributed by Occidental, which has been repaid;

• liabilities for products sold after December 1, 1997 as to Lyondell and Millennium Petrochemicals, or after May 15, 1998 as to the Occidental Subsidiaries, regardless of when manufactured;

87

• certain post-retirement benefits related to the applicable contributed business or to certain Lyondell employees who became our employees;

• in the case of the Millennium Petrochemicals asset contribution agreement, future maintenance and maintenance turnaround costs related to the Millennium contributed business;

• in the case of each of the Millennium Petrochemicals and the Occidental Subsidiaries asset contribution agreements, obligations under railcar leases under which we are the lessee.

As of September 30, 2001, we, Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries amended these asset contribution agreements to clarify the treatment of, and procedures pertaining to the management of, certain claims arising under the asset contribution agreements. We believe that these amendments do not materially change the asset contribution agreements.

Lyondell, Millennium Petrochemicals and Occidental Chemical entered into Master Intellectual Property Agreements and other related agreements with respect to intellectual property with us. These agreements provide for all of the following:

• the transfer of intellectual property of Lyondell, Millennium Petrochemicals and Occidental Chemical related to the businesses each contributed to us;

• the grant of irrevocable, non-exclusive, royalty-free licenses (without the right to sublicense) with respect to intellectual property retained by Lyondell, Millennium Petrochemicals or Occidental Chemical that is related to our business; and

• the grant of irrevocable, non-exclusive, royalty-free licenses (without the right to sublicense) from us to Lyondell, Millennium Petrochemicals and Occidental Chemical with respect to intellectual property each contributed to us.

Lyondell, Millennium Petrochemicals and the Occidental Subsidiaries each entered into various other conveyance documents with us to effect their asset contributions as provided for in their respective contribution agreements.

Transactions with LMC

Prior to May 2002, LMC was a joint venture of which Lyondell owned 75%. As of May 1, 2002, Lyondell owns 100% of LMC. We provide operating and other services for LMC under the terms of existing agreements that were assumed by us from Lyondell, including the lease to LMC by us of the real property on which LMC’s methanol plant is located. Under the terms of those agreements, LMC pays us a management fee of $6.6 million per year and reimburses certain of our expenses at cost. The natural gas for LMC’s plant is purchased by us as agent for LMC under our master agreements with various third party suppliers, which master agreements are administered by Lyondell personnel. These sales of natural gas to LMC were $75.6 million in 2002.

Transactions with LCR

In connection with our formation, substantially all of Lyondell’s rights and obligations under the terms of its product sales and raw material purchase agreements with LCR were assigned to us. Accordingly, refinery products, including propane, butane, naphthas, heating oils and gas oils, are sold by LCR to us as raw materials, and some olefins by-products are sold by us to LCR for processing into gasoline. LCR billed us $217.7 million in 2002 in connection with these product sales and we billed LCR $323.7 million in 2002 in connection with these raw material purchases.

88

Equistar and LCR are also parties to:

• tolling arrangements under which some of LCR’s co-products are transferred to us and processed by us, with the resulting product being returned to LCR’

• terminaling and storage obligations;

• an arrangement under which LCR performs some marine chartering services; and

• an arrangement under which we perform some marketing services for LCR.

We billed LCR $20.2 million under these agreements in 2002 and LCR billed us $600,000 under these agreements in 2002. All of the agreements between LCR and us are on terms generally representative of prevailing market prices.

Services and Shared-Site Agreements with Lyondell and Affiliates of Millennium and Occidental

We have implemented an agreement with Lyondell to share office space and utilize shared services over a broad range, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering and research and development, facility services, legal, accounting, treasury, internal audit, and tax (the “Shared Services Agreement”). Employee-related and indirect costs are allocated between the two companies in the manner prescribed in the Shared Services Agreement while direct third party costs, incurred exclusively for either Lyondell or us, are charged directly to that entity. In addition, in November 2002, we entered into an agreement with Lyondell for Lyondell to provide sales services for us outside of North America for EO derivatives. During the year ended December 31, 2002, Lyondell charged us $132.2 million for both the shared services and the international sales services. During the year ended December 31, 2002, we charged Lyondell $9.7 million for the shared services, research and development services and barge and dock usage and related services.

We are party to a variety of operating, manufacturing and technical service agreements with Millennium Petrochemicals related to our business and the vinyl acetate monomer, acetic acid, synthesis gas and methanol businesses of Millennium Petrochemicals. Agreements currently in effect include the provision by us to Millennium Petrochemicals of utilities, fuel streams, and office space. These agreements also include the provision by Millennium Petrochemicals to us of operational services, including utilities as well as barge dock access and related services. As a consequence of services provided by us to Millennium Petrochemicals, we billed Millennium Petrochemicals $9.2 million in 2002. As a consequence of services provided by Millennium Petrochemicals to us, Millennium Petrochemicals billed us $15.7 million in 2002. In the case of services and utilities, prices usually are based on cost recovery or an allocation of costs according to anticipated relative usage. In the case of product sales, prices generally are market-related. We purchase vinyl acetate monomer and glacial acetic acid from Millennium Petrochemicals pursuant to an agreement with Millennium Petrochemicals. Under this agreement, we are required to purchase 100% of our vinyl acetate monomer raw materials requirements for the LaPorte, Texas; Clinton, Iowa; and Morris, Illinois plants for the production of ethylene vinyl acetate products at those locations. The initial term of the contract expired December 31, 2000. The contract automatically renews annually. Either party may terminate on one year’s notice. Neither party has provided notice of termination of the agreement. During the year ended December 31, 2002, we purchased $9.9 million of vinyl acetate monomer and glacial acetic acid from Millennium Petrochemicals. Millennium Petrochemicals purchases ethylene and hydrogen from us.

We sublease certain railcars from Occidental Chemical, for which Occidental Chemical charged us $6.6 million in 2002. In addition, we leased our Lake Charles facility and the land related thereto from Occidental Chemical for $100,000 per year under a lease that expired in May 2003. At that time, we entered into a new one-year lease with Occidental Chemical that has renewal provisions for two additional one-year periods at our option. The Lake Charles facility has been temporarily idled since the first quarter 2001.

89

Product Transactions with Occidental Chemical

We entered into an ethylene sales agreement with Occidental Chemical dated effective May 15, 1998. Under the terms of this agreement, Occidental Chemical and its affiliates have agreed to purchase an amount of ethylene from us equal to 100% of the ethylene raw material requirements of Occidental Chemical’s U.S. plants. The ethylene raw material is exclusively for internal use in production at these plants less any quantities up to 250 million pounds per year tolled according to the provisions of the agreement. Upon three years’ notice from either party to the other, the ethylene sales agreement may be “phased down” over a period of not less than five years. No phase down may commence before January 1, 2009. The annual minimum requirements set forth in the agreement must be phased down over at least a five-year period so that the annual required minimum cannot decline to zero prior to December 31, 2013, unless specified force majeure events occur. The ethylene sales agreement provides for sales of ethylene at market-related prices. During 2002, we received aggregate payments from Occidental Chemical and its affiliates of $358.3 million under the ethylene sales agreement.

In addition to ethylene, we made sales of methanol to Occidental Chemical totaling $23,500 in 2002. Also, from time to time, we have entered into over-the-counter derivatives, primarily price swap contracts, related to crude oil with Occidental Energy Marketing, Inc., a subsidiary of Occidental Chemical, to help manage our exposure to commodity price risk with respect to crude oil-related raw material purchases. There were no outstanding price swap contracts during 2002. We purchased various other products from Occidental Chemical at market-related prices totaling $800,000 in 2002.

Ethylene Sales Agreement with Millennium Petrochemicals

We sell ethylene to Millennium Petrochemicals at market-related prices under an agreement entered into in connection with our formation. Under this agreement, Millennium Petrochemicals is required to purchase 100% of its ethylene requirements for its La Porte, Texas facility from us. The pricing terms under this agreement between Millennium Petrochemicals and us are similar to the pricing terms under the ethylene sales agreement between Occidental Chemical and us. The initial term of this agreement expired December 1, 2000. The agreement automatically renews annually. Either party may terminate the contract on one year’s notice. Neither party has provided notice of termination of the agreement. Millennium Petrochemicals paid $43.1 million to us for ethylene during 2002.

Product Transactions with Lyondell

We sell ethylene, propylene and benzene to Lyondell at market-related prices pursuant to agreements dated effective as of October 1998, August 1999 and January 1999, respectively. Under the agreements, Lyondell is required to purchase 100% of its benzene, ethylene and propylene requirements for its Channelview and Bayport, Texas facilities, with the exception of quantities of one product that Lyondell is obligated to purchase under a supply agreement with an unrelated third party entered into prior to 1999 and expiring in 2015. The pricing terms under the agreements between Lyondell and us are similar to the pricing terms under the ethylene sales agreement between Occidental Chemical and us. The initial term of each of those agreements between Lyondell and us expires on December 31, 2013 in the case of the ethylene sales agreement, and December 31, 2014 in the case of the propylene and benzene sales agreements. After the initial term, each of the agreements automatically renews for successive one-year periods and either party may terminate any of the agreements on notice of one year. In addition, a wholly owned subsidiary of Lyondell licenses MTBE technology to us. Lyondell also purchases a significant portion of the MTBE produced by us at one of our two Channelview units at market-related prices. Product sales from us to Lyondell in 2002 were $459.4 million. We also purchase by-products from Lyondell at market-related prices. Product sales from Lyondell to us in 2002 were $700,000.

Product Transactions with Oxy Vinyls, LP

Occidental Chemical owns 76% of Oxy Vinyls, LP, a joint venture partnership, the remaining interest in which is held by an unaffiliated party. We sell ethylene to Oxy Vinyls for Oxy Vinyls’ LaPorte, Texas facility at market-related prices pursuant to an agreement that expires on December 31, 2003. We made ethylene sales to Oxy Vinyls totaling $42.0 million in 2002.

90

Agreement Regarding Services of Our Chief Executive Officer

Dan F. Smith serves as the Chief Executive Officer of both Lyondell and Equistar and is a director of Lyondell. Mr. Smith receives no compensation from us. Under an agreement between Lyondell and us, we paid $1.3 million to Lyondell as compensation for the services rendered by Mr. Smith as part of the shared services provided by Lyondell during 2002.

Indemnity Agreement with Occidental Chemical

Effective August 22, 2002 and in connection with Lyondell’s purchase of Occidental’s interest in us, an indemnity agreement between Occidental Chemical and us was terminated. When the indemnity agreement was in effect, Occidental Chemical may have been required to contribute to us an amount equal to up to the lesser of approximately $420 million or the principal amount of the notes due 2009 then outstanding, together with interest. Occidental Chemical would have been required to pay this amount to us only if the holders of the notes due 2009 were not able to obtain payment after pursuing and exhausting all their remedies to compel payment by us and Equistar Funding Corporation, including the liquidation of assets. The indemnity expressly did not create any right in the lenders or holders of the notes due 2009 or any person other than Occidental Chemical, us and our owners.

Indemnity Agreement with Millennium America

Effective August 22, 2002 and in connection with Lyondell’s purchase of Occidental’s interest in us, an indemnity agreement between Millennium America and us was terminated. When the indemnity agreement was in effect, Millennium America may have been required to contribute to us an amount equal to up to the lesser of $750 million or the sum of the principal amount outstanding under our amended and restated credit facility (not to exceed $275 million) and of the 10.125% senior notes due 2008 then outstanding (not to exceed $475 million), in any case together with interest. Millennium America would have been required to pay this amount to us only if the lenders under our amended and restated credit facility and the holders of the notes due 2008 were not able to obtain payment after pursuing and exhausting all their remedies to compel payment by us and Equistar Funding Corporation, including the liquidation of assets. The indemnity expressly did not create any right in the lenders or holders of the notes due 2008 or any person other than Millennium America, us and our owners.

Millennium America (or its affiliate) may, in its sole discretion, elect to execute an indemnity agreement in favor of us whereby Millennium America (or its affiliate) may be required to contribute to us an amount equal to up to $300 million of any indebtedness for borrowed money that Millennium America elects at the time the indemnity agreement is executed. The existence of the indemnity would not prevent us from repaying the indemnified amount at any time, and would not create any right in any lender or holder of outstanding notes or any person other than us and our owners.

Debt Instruments of Lyondell We Assumed

Upon our formation, we assumed $745 million of Lyondell indebtedness, of which $300 million remained outstanding as of September 30, 2003. Lyondell was not released as an obligor at the time of the assumption and, until November 2000, Lyondell remained as a co-obligor on the indebtedness, although as between Lyondell and us, we were primarily liable. In November 2000, Lyondell was added as a guarantor on $400 million of the indebtedness and subsequently the consent of the holders of the indebtedness was obtained to the release of Lyondell as a primary obligor (but not as a guarantor) on such $400 million of indebtedness, of which $300 million remained outstanding at September 30, 2003. Lyondell remains a co-obligor on $1 million of indebtedness that matures in March 2005.

91

DESCRIPTION OF OTHER INDEBTEDNESS

The following is a summary of our other material indebtedness. It may not contain all of the information about this indebtedness that is important to you. You should therefore read the debt instruments, copies of which are available as described under “Where You Can Find More Information.” This summary is qualified in its entirety by reference to those debt instruments.

Existing Credit Facility

We have a credit facility with a group of lenders led by J.P. Morgan Securities Inc. and Banc of America Securities LLC as joint lead arrangers and joint bookrunners, JPMorgan Chase Bank, as collateral and administrative agent, Bank of America, N.A. as servicing agent and administrative agent, and Credit Suisse First Boston and Citicorp USA, Inc. as co-syndication agents. As of September 30, 2003, the credit facility consisted of (i) a senior secured revolving credit facility in the aggregate principal amount of up to $354 million, of which $29 million of borrowings and $17 million of letters of credit were outstanding, and (ii) a senior secured term loan in the aggregate outstanding principal amount of $173 million. The existing revolving credit facility is available until August 2006, and the term loan matures in August 2007. We used a portion of the net proceeds from the offering of the outstanding notes to prepay the entire outstanding balance of the term loan and used the balance of the net proceeds to repay $83 million of revolving credit borrowings outstanding under our revolving credit facility.

As a result of continuing adverse conditions in the industry, in March 2003, we obtained amendments to our credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive, with the exception that the maximum permitted debt ratios become more restrictive beginning September 30, 2004, the definition of total indebtedness became more restrictive at March 31, 2003 and the defined limitation on expenditures for property, plant and equipment was extended to apply through 2004. In addition, the financial ratio requirements become increasingly restrictive over time beginning in the fourth quarter 2003.

We are in the process of replacing the existing revolving credit facility and expect the process to be completed during the fourth quarter 2003. See “—Proposed New Revolving Credit Facility” below.

Prepayment

We may prepay borrowings under the credit facility in minimum amounts of $1 million or more and we may, at our option, terminate the existing revolving credit facility or reduce permanently the amount of the credit facility in a minimum amount of $25 million. We are required to make mandatory prepayments of the term loan from net cash proceeds of certain transactions. In addition, unless our senior unsecured long-term debt is rated investment grade, the commitments under the existing revolving credit facility will be permanently and ratably reduced by 50% of the incremental amount of any committed financing pursuant to a receivables securitization facility.

Security

Our obligations under the existing credit facility are secured by a lien upon substantially all of our personal property, including inventory, accounts receivable and other property, as well as a portion of our real property. However, under the terms of our indentures governing our 1999 notes and the assumed Lyondell debt, the amount of debt under the existing credit facility that is secured by our “restricted property,” which consists of our principal plants, is limited to 10% of consolidated net tangible assets.

Interest Rates

Borrowings under the existing revolving credit facility accrue interest at the following rates per annum:

• Eurodollar Loans: LIBO Rate, as defined in the credit facility, plus a margin which varies between 1.25% and 2.50%.

92

• Base Rate Loans: Alternate Base Rate, defined as the higher of (i) the rate of interest publicly announced by Bank of America, N.A. as its prime rate, and (ii) 0.50% per annum above the Federal Funds Effective Rate in effect on such date, plus a margin which varies between 0.25% and 1.50%.

The margins will vary depending on our utilization of the facility and a debt ratio specified in the facility.

Borrowings under the term loan accrue interest at the following rates per annum:

• Eurodollar Loans: LIBO Rate plus a margin which varies between 3.25% and 3.50%; or

• Base Rate Loans: Alternate Base Rate plus a margin which varies between 2.25% and 2.50%.

The margins will vary depending on a debt ratio specified in the credit facility.

We incur a facility fee payable quarterly in arrears based on the entire amount of our existing revolving credit facility at a rate of 0.25% to 0.75% per year, depending on our utilization and a debt ratio specified in the facility. If we use more than 50% of our existing revolving credit facility, the facility fee will be reduced by 0.25% and the applicable margins on borrowings under the facility will increase by 0.25%.

We will also be required to pay additional interest at a rate of 0.75% of the outstanding amount borrowed (or in the case of the existing revolving credit facility, the average amount outstanding (including competitive loan exposure) in the 30 days prior to such dividend payment) per dividend payment (payable in kind) if we are required to issue Additional Dividend Notes, as defined under “Description of New Notes— Selected Covenants—Additional Interest Upon Payment of Certain Permitted Dividends.”

Covenants

In addition, the existing credit facility contains negative covenants limiting our ability, and in certain cases the ability of any material subsidiary, to, among other things:

• engage in another type of business;

• make certain dividend payments, investments, acquisitions and specified capital expenditures;

• engage in transactions with affiliates;

• repurchase equity or repurchase or prepay other debt, including the notes;

• enter into restrictive agreements;

• incur additional indebtedness;

• use proceeds of borrowings under the credit facility for hostile takeovers;

• enter into or permit to exist any agreement that restricts the ability of a material subsidiary to pay dividends or other distributions;

• have derivative obligations, except for bona fide hedging purposes; and

• incur certain types of capital expenditures.

The existing credit facility also contains the following financial ratio requirements:

• minimum ratio of EBITDA to net interest expense;

• maximum ratio of total debt to EBITDA; and

• maximum ratio of senior secured debt to EBITDA.

93

The existing credit facility also includes customary events of default, including a default in the event of a change of control, as defined in the credit facility.

Borrowings are generally available subject to the accuracy of all representations and warranties, including the absence of a material adverse change, the absence of any default or event of default and, in certain circumstances, satisfaction of a collateral coverage test.

Proposed New Revolving Credit Facility

We are in the process of implementing a new $250 million, four-year inventory-based revolving credit facility that will replace our existing $354 million revolving credit facility. We have received a commitment letter from financial institutions to underwrite this facility. The facility is expected to close in December 2003, subject to completion of definitive documentation and other customary closing conditions.

The amount available under the new revolving credit facility would be subject to a borrowing base limitation, initially expected to be equal to cash held in a specified account plus the lower of 70% of eligible inventory values and 85% of the orderly liquidation value of eligible inventory, less certain reserves, all to be defined in the credit agreement. In addition, the new revolving credit facility is expected to require that the unused available amounts under that facility and the new accounts receivable sales facility will exceed specified amounts. The principal such requirement is that aggregate unused availability under the two new facilities be at least $75 million through March 30, 2005 and $50 million after that date (or, after that date, $100 million if our interest coverage ratio is less than 2:1). The new revolving credit facility is not expected otherwise to contain any covenants requiring us to maintain financial ratios or to contain any ratings triggers. The new facility is expected to contain covenants that, subject to certain exceptions, restrict lien incurrence, debt incurrence, sales of assets, investments, capital expenditures, certain payments and mergers, but that generally are no more restrictive than those contained in our existing credit facility. The new revolving credit facility also is expected to permit the issuance of letters of credit thereunder.

Our obligations under the new revolving credit facility are expected to be secured by a lien on all inventory and certain other personal property, including a pledge of the equity ownership interest held by us in the subsidiary established for the new accounts receivable sales facility described below. If the aggregate unused availability under the two new facilities falls below $100 million for any consecutive five days (or that amount plus certain excess value of collateral and eligible receivables falls below $125 million on any one day or $150 million for any consecutive five days), we could be required to use all proceeds of the collateral pledged to the lenders to pay down borrowings on a daily basis. We would be permitted, however, to reborrow under the agreement on a daily basis, subject to satisfying the conditions to borrowing contained in the credit agreement.

As of September 30, 2003, the aggregate amount of funds available under the new revolving credit facility and the new accounts receivable sales facility would have been approximately $540 million (after taking account of the $75 million minimum unused availability requirement described above).

Receivables Facility

During October 2002, we entered into an agreement with an independent issuer of receivables-backed commercial paper under which we sold receivables and received cash proceeds of $100 million. The agreement has annual renewal provisions for up to three years upon mutual consent of the parties. Under the terms of the agreement, we agreed to maintain a senior unsecured debt rating of at least B1 by Moody’s and BB- by Standard & Poor’s. In March 2003, we obtained an amendment to reduce the minimum required debt rating of Moody’s to at least B2. With the debt rating downgrade by Standard & Poor’s earlier in 2003, the Standard & Poor’s debt rating of BB- is at the minimum required by the agreement. With the debt rating downgrade by Moody’s on November 13, 2003, the Moody’s debt rating of B2 is at the minimum required by the agreement. If we do not maintain the minimum ratings, the counterparty would be permitted to terminate the accounts receivable sales agreement.

94

As of September 30, 2003, the balance of accounts receivable sold under this arrangement was $77 million.

We are in process of replacing the existing receivable sales agreement with a new $450 million, four-year accounts receivable sales facility. We have received a commitment letter from financial institutions to underwrite the new accounts receivable sales facility. The facility is expected to close in December 2003, subject to completion of definitive documentation and other customary closing conditions. Under the new accounts receivable sales facility, we will sell our accounts receivable to a bankruptcy-remote subsidiary formed for purposes of the new accounts receivable sales facility. That subsidiary will be entitled to sell undivided ownership interests in those accounts receivable to the counterparties and receive cash proceeds in an amount up to $450 million. The new accounts receivable sales facility is expected to be subject to substantially the same minimum unused availability requirements and covenant requirements as the new revolving credit facility, but is not expected otherwise to contain any covenants requiring that we maintain financial ratios or to contain any ratings triggers.

Existing Senior Notes

We completed private placements of notes in February 1999, August 2001 and April 2003, and completed the private placement of the outstanding notes in November 2003. The proceeds of these offerings were used to refinance existing debt. As of September 30, 2003, the outstanding portion of these notes consists of:

• $700 million aggregate principal amount of 10.125% senior notes due 2008;

• $599 million aggregate principal amount of 8.75% notes due 2009; and

• $450 million aggregate principal amount of 10 ⁵/8% senior notes due 2011.

The notes described above include (1) a customary restriction on our ability to enter into sale/lease-backs of, or grant liens secured by, our principal plants without equally and ratably securing such notes, (2) a limit on our ability to grant liens on the stock or indebtedness of certain of our subsidiaries and (3) customary events of default. In addition, the indenture for the notes due 2008 includes covenants and events of default that are substantially similar to those described under “Description of New Notes.” The 10 ⁵/8% senior notes issued on April 22, 2003 were issued under the same indenture as the new notes and have identical terms as the new notes.

Assumed Lyondell Debt

At our formation, we assumed specific medium- and long-term notes and debentures of Lyondell. At September 30, 2003, the outstanding portion of those obligations consists of:

• $150 million aggregate principal amount of 6.50% notes due 2006; and

• $150 million aggregate principal amount of 7.55% debentures due 2026.

Lyondell guarantees the 6.50% notes and the 7.55% debentures but has been released as a primary obligor as to such debt.

The assumed Lyondell debt includes customary restrictions on our ability to enter into sale/lease-backs of, or grant liens secured by, our principal plants without equally and ratably securing such notes, as well as a limit on our ability to grant liens on the stock or indebtedness of certain of our subsidiaries, as well as customary events of default, including any repudiation by Lyondell of its guarantee. In addition, some of the assumed debt also contains limits on the incurrence of debt by any subsidiary in the future that owns either of our Channelview olefin plants, which are currently not held through subsidiaries.

95

Railcar Lease

We lease certain railcars, under an operating lease, from an unaffiliated entity established for the purpose of serving as lessor with respect to this lease. These transactions have not been accounted for as debt on our balance sheet, pursuant to GAAP. Beginning December 31, 2003, we are required to account for them as debt. The consolidation of the entity that serves as lessor under this operating lease as of September 30, 2003 would have increased our debt by $101 million.

This lease includes an option for us to purchase the leased railcars during the lease term. If we do not exercise the purchase option, the railcars will be sold upon termination of the lease. In the event the sale proceeds are less than certain guaranteed residual values under the lease agreement, we are obligated to pay the difference to the lessor, but no more than the guaranteed residual value. The guaranteed residual value at December 31, 2002 was $83 million.

The railcar lease requires that we maintain a minimum rating from both Standard & Poor’s and Moody’s and, as a result of the recent downgrade by Moody’s of our senior unsecured debt rating to B2, we are below the minimum rating required by the agreement. Accordingly, the counterparty to our railcar lease is permitted to terminate the lease on February 11, 2004. See “Risk Factors—Risks Relating to Our Indebtedness and the Notes—Our debt rating has been reduced recently, which will permit the counterparty to a railcar lease to terminate that lease. Any debt rating reduction could increase borrowing costs and reduce access to capital and would allow the counterparty to our existing accounts receivable sales agreement to terminate that agreement.”

We are also a party to other operating leases. See “Management’s Discussion and Analysis of Results of Operation and Financial Condition.”

96

DESCRIPTION OF NEW NOTES

The new notes offered hereby will be issued under the Indenture dated as of April 22, 2003, as amended by the First Supplemental Indenture dated as of November 21, 2003 (as so amended, the “Indenture”), that we entered into with The Bank of New York, as trustee (the “Trustee”). The Indenture also governs the outstanding unregistered notes issued on November 21, 2003 and the outstanding notes issued on April 22, 2003.

In this Description of Notes, “Equistar” refers only to Equistar Chemicals, LP, and any successor obligor on the notes, and not to any of its subsidiaries, “Equistar Funding” refers only to Equistar Funding Corporation and any successor obligor on the notes, not to any of its subsidiaries, and “issuers” refers to Equistar and Equistar Funding. You can find the definitions of certain terms used in this description under “—Selected Definitions.”

The following description is only a summary of the material provisions of the notes and the Indenture. These descriptions do not purport to be complete and are subject to, and are qualified in their entirety by reference to, the notes and the Indenture and those provisions made part of the Indenture by reference to the Trust Indenture Act of 1939 (the “Trust Indenture Act”). You may request a copy of the Indenture at our address set forth under the heading “Where You Can Find More Information.”

General

The form and the terms of the new notes are the same as the form and terms of the outstanding unregistered notes issued on November 21, 2003, except that:

• the new notes are registered under the Securities Act;

• the new notes will not bear legends restricting transfer; and

• the holders of the new notes will not be entitled to some rights under the registration rights agreement, including payment of liquidated damages for failure to meet specified deadlines that will terminate when the exchange offer is consummated.

The new notes will be issued solely in exchange for an equal principal amount of outstanding unregistered 10 ⁵/8% senior notes due 2011 issued on November 21, 2003. As of the dated of this prospectus, $250 million aggregate principal amount of 10 ⁵/8% senior notes due 2011 issued on November 21, 2003 are outstanding but not yet registered. See “The Exchange Offer.”

The new notes will be issued as additional 10 ⁵/8% senior notes due 2011 pursuant to the Indenture. There are $450 million aggregate principal amount of 10 ⁵/8% senior notes due 2011 issued on April 22, 2003 already outstanding under the Indenture. As a result, the term “Issue Date” refers to April 22, 2003, the date of issue of the original notes under the Indenture. New notes received in the exchange offer are expected to trade under the same CUSIP number as the 10 ⁵/8% senior notes issued on April 22, 2003 that have been exchanged for registered notes.

As used in this “Description of New Notes,” except as otherwise specified, the term “notes” means the new notes offered hereby, any outstanding unregistered notes issued on November 21, 2003 that are not validly tendered and exchanged the exchange offer described in this prospectus, and all outstanding notes issued on April 22, 2003, including those which have been tendered and exchanged in a separate exchange offer relating to those notes and those which remain unregistered. All such notes will constitute a single series of notes and will vote together as a single series for all purposes under the Indenture. The issuers are jointly and severally liable for all obligations under the notes.

Equistar Funding is a wholly owned subsidiary of Equistar that has been incorporated in Delaware as a special purpose finance subsidiary to facilitate the offering of debt securities of Equistar. Equistar Funding is the co-issuer of our 10 ¹/8% notes due 2008 issued under an indenture dated as of August 24, 2001 and the $450,000,000 of 10 ⁵/8% senior notes due 2011 previously issued under the Indenture. We believe that some

97

prospective purchasers of the new notes may be restricted in their ability to purchase debt securities of partnerships such as Equistar unless the securities are jointly issued by a corporation. Equistar Funding will not have any substantial operations or assets and will not have any revenues. Accordingly, you should not expect Equistar Funding to participate in servicing the principal and interest obligations on the new notes.

The new notes will mature on May 1, 2011 and will bear interest at the rate of 10 ⁵/8% per annum. Interest on the new notes will accrue from November 1, 2003, and will be payable semiannually in arrears on May 1 and November 1 of each year, commencing May 1, 2004. We will make each interest payment to the holders of record of the new notes at the close of business on the April 15 or October 15 preceding such interest payment date. Interest will be computed on the basis of a 360-day year of twelve 30-day months.

Principal, interest and liquidated damages, if any, will be payable at the office or agency of Equistar maintained for that purpose, which initially will be the office of the Trustee in the City of New York, provided that, all payments with respect to global notes, the holders of which have given wire transfer instructions on or prior to the relevant record date, will be required to be made by wire transfer of immediately available funds and, at the option of the issuers, payment of interest on notes not in global form may be made by check mailed to the address of the Person entitled thereto as it appears in the register of the notes maintained by the Registrar. Initially, the Trustee will also act as Paying Agent and Registrar for the new notes. We will be required to pay additional interest on the new notes in certain circumstances if we pay dividends to our equity holders. See “—Selected Covenants—Restricted Payments.”

Additional Notes

Subject to the covenants described below, the issuers may issue additional notes (“Additional Notes”) under the Indenture having the same terms in all respects as the new notes (except the Additional Notes need not provide for the payment of interest scheduled and paid prior to the date of issuance of the Additional Notes and liquidated damages paid thereon). Prior to any issuance of Additional Notes, Equistar must deliver an opinion of counsel to the Trustee confirming that the holders of the outstanding notes under the Indenture will be subject to federal income tax on the same amounts, in the same manner and at the same times as would have been the case if the Additional Notes were not issued. The notes, any Additional Dividend Notes (as defined below) and any Additional Notes would be treated as a single class for all purposes under the Indenture. The new notes offered hereby constitute Additional Notes under the Indenture.

Ranking

The new notes will be unsecured obligations of the issuers. The notes rank pari passu in right of payment with all unsecured and unsubordinated Indebtedness of the issuers and will rank senior in right of payment to all future indebtedness of the issuers that by its terms is junior or subordinated in right of payment to the notes. As of September 30, 2003, after giving pro forma effect to the issuance of the outstanding unregistered notes issued on November 21, 2003 and the use of the proceeds therefrom, the issuers would have had approximately $2.3 billion of outstanding indebtedness, none of which is subordinated.

On September 30, 2003, after giving pro forma effect to the issuance of the outstanding unregistered notes issued on November 21, 2003 and the use of the proceeds therefrom, we would have had no secured debt senior to the notes. Subject to the covenants described below, the issuers will be permitted to issue additional secured debt. Any future borrowings under our existing credit facility or our proposed new revolving credit facility will be secured.

Equistar’s subsidiaries will not guarantee the new notes upon initial issuance. Claims of creditors of our subsidiaries, including trade creditors and creditors holding guarantees issued by our subsidiaries, and claims of preferred and minority stockholders (if any) of our subsidiaries generally will have priority with respect to the assets and earnings of our subsidiaries over the claims of creditors of Equistar, including holders of the notes.

98

The new notes therefore will be effectively subordinated to creditors (including trade creditors) and preferred and minority stockholders (if any) of our subsidiaries. As of September 30, 2003, after giving pro forma effect to the offering of the outstanding unregistered notes issued on November 21, 2003, our subsidiaries (other than Equistar Funding) would have had approximately $152 million of outstanding liabilities. Although the Indenture limits the incurrence of Indebtedness and Disqualified Stock or Preferred Stock of Restricted Subsidiaries, the limitation is subject to a number of significant exceptions. Moreover, the Indenture does not impose any limitation on the incurrence by Restricted Subsidiaries of liabilities that are not considered Indebtedness or Disqualified Stock or Preferred Stock under the Indenture. See “—Selected Covenants—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock.”

Optional Redemption

Prior to May 1, 2007, the notes will be redeemable, in whole, at any time, or in part, from time to time, at the option of the issuers upon not less than 30 nor more than 60 days’ notice at a redemption price equal to the sum of:

(1) 100% of the principal amount thereof, plus accrued and unpaid interest and liquidated damages, if any, thereon to the redemption date; plus

(2) the Make-Whole Amount, if any.

The term “Make-Whole Amount” shall mean, in connection with any optional redemption of any note, the excess, if any, of:

(1) the aggregate present value as of the date of such redemption of each dollar of principal being redeemed and the amount of interest (exclusive of interest accrued to the redemption date) that would have been payable in respect of such dollar if such prepayment had not been made, determined by discounting, on a semiannual basis, such principal and interest at the Treasury Rate (determined on the business day preceding the date of such redemption) plus 0.5%, from the respective dates on which such principal and interest would have been payable if such payment had not been made; over

(2) the principal amount of the note being redeemed.

“Treasury Rate” means, in connection with the calculation of any Make-Whole Amount with respect to any Note, the yield to maturity at the time of computation of United States Treasury securities with a constant maturity, as compiled by and published in the most recent Statistical Release that has become publicly available at least two business days prior to the redemption date, equal to the then remaining maturity of the Note being prepaid. If no maturity exactly corresponds to such maturity, yields for the published maturities occurring prior to and after such maturity most closely corresponding to such maturity shall be calculated pursuant to the immediately preceding sentence and the Treasury Rate shall be interpolated or extrapolated from such yields on a straight-line basis, rounding in each of such relevant periods to the nearest month.

“Statistical Release” means the statistical release designated “H.15(519)” or any successor publication which is published weekly by the Federal Reserve System and which establishes yields on actively traded U.S. government securities adjusted to constant maturities or, if such statistical release is not published at the time of any determination, then such other reasonably comparable index which shall be designated by the Trustee.

On or after May 1, 2007, the notes will be subject to redemption at the option of the issuers, in whole or from time to time in part, upon not less than 30 nor more than 60 days’ notice, at the redemption prices (expressed as percentages of principal amount) set forth below plus accrued and unpaid interest and liquidated

99

damages, if any, thereon to the applicable redemption date, if redeemed during the twelve-month period beginning on May 1 of the following years:

Year	Percentage
2007	105.313	%
2008	102.656	%
2009 and thereafter	100.000	%

Selection and Notice

If less than all the notes issued under the Indenture are to be redeemed at any time, selection of notes for redemption will be made by the Trustee on a pro rata basis, by lot or by such method as the Trustee shall deem fair and appropriate; provided that no notes of $1,000 or less shall be redeemed in part. Notices of redemption shall be mailed by first class mail at least 30 but not more than 60 days before the redemption date to each holder of notes to be redeemed at its registered address. Notices of redemption may not be conditional. If any note is to be redeemed in part only, the notice of redemption that relates to such note shall state the portion of the principal amount thereof to be redeemed. A new note in principal amount equal to the unredeemed portion thereof will be issued in the name of the holder thereof upon cancellation of the original note. Notes called for redemption become due on the date fixed for redemption. On and after the redemption date, interest and liquidated damages will cease to accrue on notes or portions of them called for redemption.

Repurchase at Option of Holders

Change of Control

Upon the occurrence of a Change of Control, each holder of notes will have the right to require the issuers to repurchase all or any part (equal to $1,000 or an integral multiple thereof) of such holder’s notes pursuant to the offer described below (the “Change of Control Offer”) at an offer price in cash equal to 101% of the aggregate principal amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon to the date of purchase (the “Change of Control Payment”) on a date that is not more than 90 days after the occurrence of such Change of Control (the “Change of Control Payment Date”). Within 30 days following any Change of Control, the issuers will mail, or at the issuers’ request the Trustee will mail, a notice to each holder offering to repurchase the notes held by such holder pursuant to the procedures specified in such notice. The issuers will comply with the requirements of Rule 14e-1 under the Exchange Act of 1934, as amended, and any other securities laws and regulations thereunder to the extent such laws and regulations are applicable in connection with the repurchase of the notes as a result of a Change of Control.

On the Change of Control Payment Date, the issuers will, to the extent lawful:

• accept for payment all notes or portions thereof properly tendered and not withdrawn pursuant to the Change of Control Offer;

• deposit with the applicable Paying Agent an amount equal to the aggregate Change of Control Payments in respect of all notes or portions thereof so tendered; and

• deliver or cause to be delivered to the Trustee the notes so accepted together with an officers’ certificate stating the aggregate principal amount of notes or portions thereof being purchased by the issuers.

The Paying Agent will promptly mail to each holder of notes so tendered the Change of Control Payment for such notes, and the Trustee will promptly authenticate and mail (or cause to be transferred by book-entry) to each holder a note equal in principal amount to any unpurchased portion of the notes surrendered, if any; provided that each such note will be in a principal amount of $1,000 or an integral multiple thereof.

A failure by the issuers to comply with the provisions of the two preceding paragraphs will constitute an Event of Default under the Indenture. Except as described above with respect to a Change of Control, the

100

Indenture does not contain provisions that permit the holders of the notes to require that the issuers purchase or redeem the notes in the event of a takeover, recapitalization or similar transaction. See “—Events of Default.”

There can be no assurance that the issuers will have the financial resources to purchase the notes, particularly if a Change of Control triggers a similar repurchase requirement for, or results in the acceleration of, other indebtedness. Our Credit Facility provides that certain events constituting a Change of Control will constitute a default under, and could result in the acceleration of the maturity of, the Credit Facility and our proposed new revolving credit facility is expected to include a similar provision. Future indebtedness might contain similar provisions. If a Change of Control occurs, the issuers could try to refinance the Credit Facility and any such future Indebtedness. Accordingly, the issuers might not be able to fulfill their obligation to repurchase any notes if a Change of Control occurs. See “Risk Factors—Risks Relating to our Indebtedness and the Notes—We may be unable to repurchase the notes upon a change of control.”

The issuers are not required to make a Change of Control Offer upon a Change of Control if a third party makes the Change of Control Offer at the same or a higher purchase price, at the same times and otherwise in substantial compliance with the requirements applicable to a Change of Control Offer otherwise required to be made by the issuers and purchases all notes validly tendered and not withdrawn under such Change of Control Offer.

“Change of Control” means the occurrence of any of the following:

(i) the sale, transfer, conveyance or other disposition, in one or a series of related transactions, of all or substantially all the assets of Equistar and its Subsidiaries taken as a whole to any person or group (as such terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than to one or more Permitted Holders;

(ii) the acquisition by any person or group (as defined above), other than one or more Permitted Holders, of a direct or indirect interest in more than 50% of the Capital Stock of Equistar and the right to exercise a substantial portion of the powers of (a) Lyondell to act on behalf of the Partnership Governance Committee and (b) the representatives of Lyondell on the Partnership Governance Committee (in each case as in effect on the Issue Date), by way of merger or consolidation or otherwise;

(iii) any person or group (as defined above), other than one or more Permitted Holders (or their representatives on the Partnership Governance Committee), acquires the right, directly or indirectly, to exercise, without the need for the consent of any Permitted Holder (or their representatives on the Partnership Governance Committee), a substantial portion of the rights and powers of the Partnership Governance Committee with respect to matters that require unanimous consent under the partnership agreement as in effect on the Issue Date; or

(iv) the adoption of a plan for the liquidation or dissolution of one or both of the issuers, except in connection with a sale, conveyance, transfer or other disposition of all or substantially all of such issuer’s assets or an acquisition of Capital Stock of Equistar that would not otherwise constitute a Change of Control pursuant to clauses (i) through (iii).

The phrase “all or substantially all” the assets of Equistar will likely be interpreted under applicable state law and will be dependent upon particular facts and circumstances. As a result, there may be a degree of uncertainty in ascertaining whether a sale or transfer of “all or substantially all” the assets of Equistar has occurred, in which case a holder’s ability to obtain the benefit of a Change of Control Offer may be impaired.

Asset Sales

Equistar will not, and will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless:

(i) Equistar and/or the Restricted Subsidiary, as the case may be, receives consideration at the time of such Asset Sale at least equal to the fair market value (as conclusively evidenced by a resolution of

101

the Partnership Governance Committee of Equistar set forth in an Officers’ Certificate delivered to the Trustee) of the assets or Equity Interests issued or sold or otherwise disposed of; and

(ii) at least 75% of the consideration therefor received by Equistar and/or such Restricted Subsidiary is in the form of:

• cash or Cash Equivalents; or

• a controlling interest or a joint venture interest (to the extent otherwise permitted by the Indenture) in a business engaged in a Permitted Business or long-term property or assets that are used or useful in a Permitted Business;

provided that the amount of (x) any liabilities (as shown on Equistar’s or such Restricted Subsidiary’s most recent balance sheet) of Equistar or any Restricted Subsidiary (other than contingent liabilities and liabilities that are by their terms subordinated to the notes or any guarantee thereof) that are assumed by the transferee of any such assets pursuant to a customary novation agreement that releases Equistar or such Restricted Subsidiary from further liability and (y) any securities, notes or other obligations received by Equistar or any such Restricted Subsidiary from such transferee to the extent they are promptly converted or monetized by Equistar or such Restricted Subsidiary into cash (to the extent of the cash received), shall be deemed to be cash for purposes of this provision.

Within 360 days after the receipt of any Net Proceeds from an Asset Sale, Equistar may apply such Net Proceeds, at its option:

(a) to permanently repay Indebtedness outstanding on the Issue Date (other than any Indebtedness subordinated by its terms to the notes) with a Stated Maturity prior to the maturity of the notes (and to correspondingly reduce commitments with respect thereto in the case of revolving borrowings) of Equistar or any Restricted Subsidiary that is a Subsidiary Guarantor or Indebtedness (and to correspondingly reduce commitments with respect thereto in the case of revolving borrowings) of any Restricted Subsidiary that is not a Subsidiary Guarantor; or

(b) to the acquisition of Additional Assets (to the extent otherwise permitted by the Indenture) or the making of a capital expenditure, in each case, in a Permitted Business (or enter into a binding commitment for any such acquisition or expenditure); provided that such binding commitment shall be treated as a permitted application of Net Proceeds from the date of such commitment until and only until the earlier of (x) the date on which such expenditure or acquisition is consummated and (y) the 180th day following the expiration of the aforementioned 360 day period. If the acquisition or expenditure contemplated by such binding commitment is not consummated on or before such 180th day and Equistar shall not have applied such Net Proceeds pursuant to clause (a) above on or before such 180th day, such commitment shall be deemed not to have been a permitted application of Net Proceeds at any time.

Pending the final application of any such Net Proceeds, Equistar may temporarily reduce the revolving Indebtedness under the Credit Facility or otherwise invest such Net Proceeds in any manner that is not prohibited by the Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as provided in the first sentence of this paragraph will be deemed to constitute “Excess Proceeds.” When the aggregate amount of Excess Proceeds under the Indenture exceeds $25 million, Equistar will be required to make an offer to all holders of notes issued under the Indenture (an “Asset Sale Offer”) to purchase the maximum principal amount of notes and, if Equistar is required to do so under the terms of any other Indebtedness ranking pari passu with such notes, such other Indebtedness on a pro rata basis with the notes, that may be purchased out of the Excess Proceeds, at a purchase price in cash in an amount equal to 100% of the principal amount thereof plus accrued and unpaid interest and liquidated damages, if any, thereon, to the date of purchase in accordance with the procedures set out in the Indenture. To the extent that the aggregate amount of notes (and any other pari passu Indebtedness subject to such Asset Sale Offer) tendered pursuant to such Asset Sale Offers is less than the Excess Proceeds, Equistar may, subject to the other terms of the Indenture, use any remaining Excess Proceeds for general corporate purposes. If the aggregate principal amount of notes surrendered by holders thereof in

102

connection with any Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select the notes to be purchased on a pro rata basis. Upon completion of the offer to purchase made under the Indenture, the amount of Excess Proceeds under the Indenture shall be reset at zero.

Selected Covenants

Restricted Payments

Equistar will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly:

(1) declare or pay any dividend or make any distribution on account of Equistar’s or any of its Restricted Subsidiaries’ Equity Interests, other than:

(x) dividends or distributions payable in Qualified Equity Interests of Equistar,

(y) dividends or distributions payable to Equistar or any Restricted Subsidiary of Equistar, and

(z) Permitted Dividends;

(2) purchase, redeem or otherwise acquire or retire for value any Equity Interests of Equistar or any Affiliate of Equistar that controls Equistar, other than any such Equity Interests owned by Equistar or any of its Restricted Subsidiaries;

(3) make any principal payment on, or purchase, redeem, defease or otherwise acquire or retire for value any Indebtedness (“Subordinated Debt”) of Equistar or any Restricted Subsidiary that is subordinated by its terms to the notes or the Subsidiary Guarantees, as applicable, other than Indebtedness owed to Equistar or any Restricted Subsidiary or to Lyondell, except, in each case, payment of interest or principal at Stated Maturity; or

(4) make any Restricted Investment;

(all such payments and other actions set forth in clauses (1) through (4) above being collectively referred to as “Restricted Payments”); unless, at the time of and after giving effect to such Restricted Payment (the amount of any such Restricted Payment, if other than cash, shall be the fair market value (as conclusively evidenced by a resolution of the Partnership Governance Committee) of the asset(s) proposed to be transferred by Equistar or such Restricted Subsidiary, as the case may be, pursuant to such Restricted Payment):

(a) no Default or Event of Default shall have occurred and be continuing after giving effect thereto; and

(b) Equistar would, at the time of such Restricted Payment and after giving pro forma effect thereto as if such Restricted Payment had been made at the beginning of the most recently ended four full fiscal quarters for which financial statements have been filed with the SEC pursuant to the covenant described below under the caption “—Reports” immediately preceding the date of such Restricted Payment, have been permitted to incur at least $1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio test set forth in the first paragraph of the covenant described below under the caption “—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock;” and

(c) such Restricted Payment, together with the aggregate of all other Restricted Payments and Permitted Dividends made by Equistar and its Restricted Subsidiaries on or after August 24, 2001 (excluding Restricted Payments permitted by clauses (b) (to the extent paid to Equistar or any of its Restricted Subsidiaries or to the extent such distributions are deducted as a minority interest in calculating Consolidated Net Income), (c), (d), (e), (g) and (h) of the next succeeding paragraph) and 50% of any Restricted Payments permitted by clause (f) of the next succeeding paragraph, is less than the sum, without duplication, of:

(i) 50% of the Consolidated Net Income of Equistar for the period (taken as one accounting period) from the beginning of the first fiscal quarter commencing on October 1, 2001, to the end of our most recently ended fiscal quarter for which financial statements have been filed with the SEC pursuant

103

to the covenant described below under the caption “—Reports” at the time of such Restricted Payment (or, if such Consolidated Net Income for such period is a deficit, less 100% of such deficit); plus

(ii) 100% of the aggregate net cash proceeds received by Equistar or any of its Restricted Subsidiaries from the issue or sale (other than to a Subsidiary or Joint Venture of Equistar or if the proceeds are used to make a Permitted Investment of the type described in clause (v) of the definition thereof) after August 24, 2001 of Qualified Equity Interests of Equistar or of debt securities of Equistar or any of its Restricted Subsidiaries that have been converted into or exchanged for such Qualified Equity Interests of Equistar; plus

(iii) to the extent that any Restricted Investment, other than a Restricted Investment permitted to be made pursuant to clause (f) or (i) below, that was made after August 24, 2001 is sold for cash or otherwise liquidated, repaid or otherwise reduced, including by way of dividend or distribution (to the extent not included in calculating Consolidated Net Income), for cash, the lesser of (A) the cash return with respect to such Restricted Investment (less the cost of disposition, if any) and (B) the initial amount of such Restricted Investment; plus

(iv) an amount equal to the sum of (A) the net reduction in Investments in Unrestricted Subsidiaries resulting from dividends, repayments of loans or other transfers of assets (to the extent not included in calculating Consolidated Net Income), in each case to Equistar or any Restricted Subsidiary from Unrestricted Subsidiaries and (B) the portion (proportionate to Equistar’s equity interest in such Subsidiary) of the fair market value of the net assets of an Unrestricted Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted Subsidiary; provided, however, that the foregoing sum shall not exceed, in the case of any Unrestricted Subsidiary, the amount of Restricted Investments, other than a Restricted Investment permitted to be made pursuant to clause (f) or (i) below, previously made after August 24, 2001 by Equistar or any Restricted Subsidiary in such Unrestricted Subsidiary.

The foregoing provisions will not prohibit the following Restricted Payments:

(a) the payment of any dividend within 60 days after the date of declaration thereof, if at said date of declaration such payment would have complied with the provisions of the Indenture;

(b) dividends or distributions by any Restricted Subsidiary of Equistar payable (x) to all holders of a class of Capital Stock of such Restricted Subsidiary on a pro rata basis or on a basis that is more favorable to Equistar; provided that at least 50% of such class of Capital Stock is held by Equistar and/or one or more of its Restricted Subsidiaries or (y) to all holders of a class of Preferred Stock of a Restricted Subsidiary that is not a Subsidiary Guarantor issued after August 24, 2001 in compliance with the covenant described below under the caption “—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock;”

(c) the payment of cash dividends on any series of Disqualified Stock issued after August 24, 2001 in an aggregate amount not to exceed the cash received by Equistar since August 24, 2001 upon issuance of such Disqualified Stock;

(d) the redemption, repurchase, retirement or other acquisition of any Equity Interests of Equistar, any Affiliate of Equistar, or any Joint Venture (or the acquisition of any outstanding Equity Interests of any Person the majority of whose assets are Equity Interests in Equistar or a Joint Venture), in exchange for, or out of the net cash proceeds of the substantially concurrent sale (other than to a Subsidiary or Joint Venture of Equistar) of, Qualified Equity Interests of Equistar; provided that the amount of any such net cash proceeds that are utilized for any such redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;

(e) the defeasance, redemption or repurchase of Subordinated Debt with the net cash proceeds from an incurrence of Permitted Refinancing or in exchange for or out of the net cash proceeds from the substantially concurrent sale (other than to a Subsidiary or Joint Venture of Equistar) of Qualified Equity Interests of Equistar; provided that the amount of any such net cash proceeds that are utilized for any such

104

redemption, repurchase, retirement or other acquisition shall be excluded from clause (c)(ii) of the preceding paragraph;

(f) Restricted Investments in any Joint Venture made during any fiscal year of Equistar or within 45 days after the end of such fiscal year in amounts that, together with all other Restricted Investments made in such Joint Venture in respect of such fiscal year in reliance on this clause (f) during such fiscal year or within 45 days after the end of such fiscal year, do not exceed the amount of dividends or distributions previously paid in respect of such fiscal year to Equistar or any Restricted Subsidiary by such Joint Venture; provided that no Default or Event of Default shall have occurred and be continuing after giving effect to such Restricted Payment;

(g) distributions or payments of Receivables Fees;

(h) distributions by any Restricted Subsidiary or Joint Venture of chemicals to a holder of Capital Stock of such Restricted Subsidiary or Joint Venture if such distributions are made pursuant to a provision in a joint venture agreement or other arrangement entered into a connection with the establishment of such Joint Venture or Restricted Subsidiary that requires such holder to pay a price for such chemicals equal to that which would be paid in a comparable transaction negotiated on an arms-length basis (or pursuant to a provision that imposes a substantially equivalent requirement);

(i) any other Restricted Payment which, together with all other Restricted Payments made pursuant to this clause (i) on or after August 24, 2001, does not exceed $25 million (after giving effect to any reductions in the aggregate amount of such Investments made pursuant to this clause (i) as a result of the disposition thereof, including through liquidation, repayment or other reduction, including by way of dividend or distribution, for cash, as set forth in clause (c)(iii) above, the aggregate amount of such reductions not to exceed the aggregate amount of such Investments outstanding and previously made pursuant to this clause (i)), provided that no Default or Event of Default shall have occurred and be continuing after giving effect to such Restricted Payment; and

(j) the repurchase of any Subordinated Debt at a purchase price not greater than 101% of the principal amount thereof in the event of (x) a change of control pursuant to a provision no more favorable to the holders thereof than the provision described under “—Repurchase at the Option of the Holders—Change of Control” or (y) an Asset Sale (pursuant to a provision no more favorable to the holders thereof than the provision described under “—Repurchase at the Option of the Holders—Asset Sales”); provided that, (1) in each case, prior to such repurchase Equistar has made a Change of Control Offer or Asset Sale Offer, as applicable, and repurchased all notes that were validly tendered for payment in connection with such Change of Control Offer or Asset Sale Offer and (2) no Default or Event of Default shall have occurred and be continuing after giving effect to such Restricted Payment.

The Partnership Governance Committee of Equistar may designate any Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would not cause a Default. For purposes of making such determination, all outstanding Investments by Equistar and its Restricted Subsidiaries in the Subsidiary so designated will be deemed to be Restricted Payments at the time of such designation and will reduce the amount available for Restricted Payments under the first paragraph of this covenant (except to the extent such Investments were repaid in cash). All such outstanding Investments will be deemed to constitute Investments in an amount equal to the fair market value of such Investments at the time of such designation, as conclusively determined by the Partnership Governance Committee. Such designation will only be permitted if any such Restricted Payment would be permitted at such time and if such Restricted Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. In the case of any designation by Equistar of a Person as an Unrestricted Subsidiary on the first day that such Person is a Subsidiary of Equistar in accordance with the provisions of the Indenture, such designation shall be deemed to have occurred for all purposes of the Indenture simultaneously with, and automatically upon, such Person becoming a Subsidiary.

For purposes of this covenant, any payment made on or after August 24, 2001 but prior to the Issue Date, shall be deemed to be a “Restricted Payment” to the extent such payment would have been a Restricted Payment

105

had the Indenture been in effect at the time of such payment (and, to the extent that any such Restricted Payment was permitted by clauses (a) through (j) above, such Restricted Payment may be deemed by Equistar to have been made pursuant to such clause).

Additional Interest Upon Payment of Certain Permitted Dividends

Equistar shall provide public notice of its intent to pay a Permitted Dividend which would require the issuance of Additional Dividend Notes by means of a press release on a date that is not more than twenty-one days or less than fourteen days prior to the date of any scheduled payment of any such Permitted Dividend (a “Notice Date”). Such notice shall provide the date of the Permitted Dividend and the amount of additional interest that will be paid on such date pursuant to the next paragraph.

If Equistar makes a Permitted Dividend and Equistar’s Fixed Charge Coverage Ratio calculated (on a pro forma basis as described in the following sentence) on the Dividend Payment Date would have been less than 1.75 to 1, then the issuers shall, on the date when Equistar makes such Permitted Dividend (the “Dividend Payment Date”), pay to each holder of record on the Notice Date immediately prior to the date of such payment, as additional interest, an amount equal to the Additional Interest Amount. For this purpose, the calculation shall give pro forma effect to any Indebtedness, Disqualified Stock or Preferred Stock incurred or contemplated to be incurred or any asset sold or contemplated to be sold, in each case to finance such Permitted Dividend as if such incurrence or sale had been made at the beginning of the most recently ended four full fiscal quarters for which financial statements have been filed with the SEC pursuant to the covenant described below under the caption “—Reports” immediately preceding the date of such Permitted Dividend. Notwithstanding the foregoing, Equistar shall not be required to make any such additional interest payment if it has made an additional interest payment with respect to another Permitted Dividend on a Dividend Payment Date that occurred within 90 days prior to the Dividend Payment Date.

Any such interest shall be paid by the issuers in the form of additional notes (“Additional Dividend Notes”) that are identical in all respects to the notes with respect to which such Additional Dividend Notes are issued. Interest on such Additional Dividend Notes shall accrue from the most recent interest payment date prior to the Dividend Payment Date or, if no interest has been paid on the notes, from the Issue Date. The Additional Dividend Notes shall be issued in an aggregate principal amount that, together with accrued interest thereon through the Dividend Payment Date, as determined pursuant to the foregoing sentence, will be equal to the Additional Interest Amount required to be paid on the applicable Dividend Payment Date; provided that Equistar shall, to the extent necessary, round up the principal amount of any Additional Dividend Note so that the principal amount of each such note is $1,000 or a higher $1,000 increment thereof.

“Additional Interest Amount” means an amount, to be paid on the applicable Dividend Payment Date, to each holder of record of notes on the applicable Notice Date, equal to the amount of interest that would be paid on the aggregate principal amount of the notes held by such holder for a period of 90 days at a rate of 3.0% per annum, calculated on the basis of a 360-day year (without any compounding of such interest).

For example, if we were to pay a Permitted Dividend and the Fixed Charge Coverage Ratio was below 1.75 to 1, we would pay $5.25 million as additional interest to the holders of the notes (assuming $700 million of outstanding notes) and $5.25 million as additional interest to the holders of the 10 ¹/8% senior notes due 2008 (assuming $700 million of outstanding notes). Additional interest on loans under the existing credit facility would depend on the amounts outstanding under the credit facility at that time.

106

Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock

On or after the Issue Date:

• Equistar will not, and will not permit any of its Restricted Subsidiaries to incur any Indebtedness (including Acquired Debt);

• Equistar will not, and will not permit any of its Restricted Subsidiaries to, issue any Disqualified Stock (including Acquired Disqualified Stock); and

• Equistar will not permit any of its Restricted Subsidiaries that are not Subsidiary Guarantors to issue any shares of Preferred Stock (including Acquired Preferred Stock);

provided, however, that Equistar and the Subsidiary Guarantors may incur Indebtedness (including Acquired Debt) and Equistar and the Subsidiary Guarantors may issue shares of Disqualified Stock (including Acquired Disqualified Stock) if the Fixed Charge Coverage Ratio for Equistar’s most recently ended four full fiscal quarters for which financial statements have been filed with the SEC pursuant to the covenant described below under “—Reports” immediately preceding the date on which such additional Indebtedness is incurred or such Disqualified Stock is issued would have been at least 2.0 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom), as if the additional Indebtedness had been incurred or the Disqualified Stock or Preferred Stock had been issued, as the case may be, at the beginning of such four-quarter period, with any letters of credit and bankers’ acceptances being deemed to have an aggregate principal amount of Indebtedness equal to the maximum amount available thereunder.

The foregoing provisions will not apply to:

(i) the incurrence by Equistar of Indebtedness pursuant to the Credit Facility in an aggregate principal amount at any time outstanding not to exceed an amount equal to $800 million less the aggregate principal amount of all mandatory repayments (other than mandatory prepayments triggered solely by the issuance of Indebtedness or Preferred Stock of a Finance Subsidiary to refinance the Credit Facility) applied after August 24, 2001 to (a) repay loans (other than revolving credit loans) outstanding thereunder or (b) permanently reduce the revolving credit commitments thereunder (and the incurrence by its Subsidiaries of Guarantees thereof); provided that, if the aggregate principal amount of Indebtedness pursuant to the Credit Facility permitted to be incurred hereby is reduced as a result of any mandatory repayment made in connection with Equistar’s entry into a Receivables Facility, then such aggregate principal amount permitted to be incurred shall be increased by the amount of such previous reduction if and when such Receivables Facility is terminated;

(ii) the incurrence by Equistar and the Subsidiary Guarantors of Indebtedness represented by the existing 10 ⁵/8% senior notes due 2011 already outstanding under the indenture (including any Additional Dividend Notes but not any Additional Notes) and Subsidiary Guarantees thereof;

(iii) the incurrence by Equistar and its Restricted Subsidiaries of Existing Indebtedness (other than Indebtedness of the type described in clauses (i), (ii), (v) through (xii) or (xiv) of this covenant);

(iv) the incurrence by Equistar or any of its Restricted Subsidiaries of any Permitted Refinancing in exchange for, or the Net Proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness that was permitted to be incurred under the Fixed Charge Coverage Ratio test set forth above or clauses (ii) or (iii) above or (xiii) below or this clause (iv);

(v) the incurrence by Equistar or any of its Restricted Subsidiaries of intercompany Indebtedness between or among Equistar and any of its Restricted Subsidiaries; provided, however, that (1) if Equistar or any Subsidiary Guarantor is the obligor on such Indebtedness, such Indebtedness is expressly subordinated by its terms to the prior payment in full in cash of all Obligations with respect to the notes or the Subsidiary Guarantee, as the case may be, and (2)(A) any subsequent issuance or transfer of Equity Interests that results in any such Indebtedness being held by a Person other than Equistar or a Restricted Subsidiary and (B) any sale or other transfer of any such Indebtedness to a Person that is not either Equistar or a Restricted

107

Subsidiary shall be deemed, in each case, to constitute an incurrence of such Indebtedness by Equistar or such Restricted Subsidiary, as the case may be;

(vi) the incurrence by Equistar or any Restricted Subsidiary of Hedging Obligations that are incurred for the purpose of (A) fixing or hedging interest rate or currency risk with respect to any fixed or floating rate Indebtedness that is permitted by the Indenture to be outstanding or any receivable or liability the payment of which is determined by reference to a foreign currency; provided that the notional principal amount of any such Hedging Obligation does not exceed the principal amount of the Indebtedness or any receivable or liability to which such Hedging Obligation relates or (B) managing fluctuations in the price or cost of raw materials, manufactured products or related commodities; provided that such obligations are entered into in the ordinary course of business to hedge or mitigate risks to which Equistar or any Restricted Subsidiary is exposed in the conduct of its business or the management of its liabilities (as determined by Equistar’s or such Restricted Subsidiary’s principal financial officer in the exercise of his or her good faith business judgment);

(vii) the issuance by any of Equistar’s Restricted Subsidiaries of shares of Preferred Stock to Equistar or a Wholly Owned Restricted Subsidiary; provided that (A) any subsequent issuance or transfer of Equity Interests that results in such Preferred Stock being held by a Person other than Equistar or a Wholly Owned Restricted Subsidiary or (B) the transfer or other disposition by Equistar or a Wholly Owned Restricted Subsidiary of any such shares to a Person other than Equistar or a Wholly Owned Restricted Subsidiary shall be deemed, in each case, to constitute an issuance of such Preferred Stock by such Subsidiary on such date that is not permitted by this clause (vii);

(viii) the incurrence by Equistar or any of its Restricted Subsidiaries of Indebtedness represented by tender, bid, performance, government contract, surety or appeal bonds, standby letters of credit and warranty and contractual service obligations of like nature, trade letters of credit or documentary letters of credit, in each case to the extent incurred in the ordinary course of business of Equistar or such Restricted Subsidiary;

(ix) the incurrence by any Restricted Subsidiary of Equistar of Indebtedness or the issuance by any Restricted Subsidiary of Preferred Stock, the aggregate principal amount (or accreted value, as applicable) or liquidation preference of which, together with all other Indebtedness and Preferred Stock of Equistar’s Restricted Subsidiaries at the time outstanding and incurred or issued in reliance upon this clause (ix), does not exceed $25 million;

(x) the issuance by any Finance Subsidiary of Preferred Stock with an aggregate liquidation preference not exceeding the amount of Indebtedness of Equistar held by such Finance Subsidiary; provided that the Fixed Charge Coverage Ratio for Equistar’s most recently ended four full fiscal quarters for which financial statements have been filed with the SEC pursuant to the covenant described below under “—Reports” immediately preceding the date on which such Preferred Stock is issued would have been at least 2.0 to 1, determined on a pro forma basis (including a pro forma application of the net proceeds therefrom) as if such Preferred Stock had been issued at the beginning of such four-quarter period;

(xi) the incurrence of Indebtedness by Foreign Subsidiaries in the aggregate principal amount (or accreted value, as applicable) of which, together with all other Indebtedness at the time outstanding and incurred in reliance upon this clause (xi), does not exceed $10 million;

(xii) the Guarantee by Equistar or any Restricted Subsidiary of Indebtedness of Equistar or a Restricted Subsidiary that was permitted to be incurred by another provision of this covenant;

(xiii) Acquired Debt or Acquired Disqualified Stock; provided that such Indebtedness or Disqualified Stock was not incurred in connection with or in contemplation of such Person becoming a Restricted Subsidiary; and provided further that immediately after giving effect to such incurrence, the Fixed Charge Coverage Ratio for Equistar’s most recently ended four full fiscal quarters for which financial statements have been filed with the SEC pursuant to the covenant described below under “—Reports” immediately preceding the date of such incurrence would have been at least 2.0 to 1, determined on a pro forma basis (including giving pro forma effect to the applicable transaction related thereto);

108

(xiv) the incurrence by Equistar Funding of Indebtedness as a co-issuer of Indebtedness of Equistar that was permitted to be incurred by another provision of this covenant;

(xv) the incurrence of Indebtedness represented by industrial revenue bonds to finance capital expenditures incurred to reduce NOx emissions in the Houston/Galveston region pursuant to a Texas Natural Resource Conservation Commission plan; and

(xvi) the incurrence by Equistar or any Subsidiary Guarantor of Indebtedness or the incurrence of Disqualified Stock, the aggregate principal amount (or accreted value, as applicable) or liquidation preference of which, together with all other Indebtedness and Disqualified Stock at the time outstanding and incurred in reliance on this clause (xvi), does not exceed $100 million.

For purposes of determining compliance with this covenant, in the event that an item of Indebtedness or Preferred Stock meets the criteria of more than one of the categories of permitted Indebtedness described in clauses (i) through (xvi) above or is entitled to be incurred pursuant to the first paragraph of this covenant, Equistar shall, in its sole discretion, classify such item of Indebtedness or Preferred Stock in any matter that complies with this covenant and such Indebtedness or Preferred Stock will be treated as having been incurred pursuant to the clauses or the first paragraph hereof, as the case may be, designated by Equistar. The amount of Indebtedness issued at a price which is less than the principal amount thereof shall be equal to the amount of the liability in respect thereof determined in accordance with GAAP.

The amount of Indebtedness outstanding under the Credit Facility for purposes of clause (i) of this covenant shall exclude any amounts paid as interest-in-kind in connection with a Permitted Dividend.

The notes offered hereby are being incurred pursuant to clause (i) above.

Limitation on Liens

Equistar will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create, incur, assume or suffer to exist any Lien, except Permitted Liens, on any asset now owned or hereafter acquired, or any income or profits therefrom, unless all payments due under the Indenture and the notes are secured on an equal and ratable basis with the obligations so secured (or, if such obligations are subordinated by their terms to the notes or the Subsidiary Guarantees, prior to the obligations so secured) until such time as such obligations are no longer secured by a Lien.

Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries

Equistar will not, and will not permit any of its Restricted Subsidiaries to, directly or indirectly, create or otherwise cause or suffer to exist or become effective any restriction on the ability of any Restricted Subsidiary to:

(i) (a) pay dividends or make any other distributions to Equistar or any of its Restricted Subsidiaries:

    (1) on its Capital Stock, or

    (2) with respect to any other interest or participation in, or measured by, its profits, or

(b) pay any Indebtedness owed to Equistar or any of its Restricted Subsidiaries;

(ii) make loans or advances to Equistar or any of its Restricted Subsidiaries; or

(iii) transfer any of its properties or assets to Equistar or any of its Restricted Subsidiaries;

109

except for such restrictions existing under or by reason of:

(a) existing agreements as in effect on the Issue Date;

(b) Indebtedness permitted by the Indenture to be incurred containing restrictions on the ability of Restricted Subsidiaries to consummate transactions of the types described in clauses (i), (ii) or (iii) above not materially more restrictive than those contained in the Indenture;

(c) the Indenture;

(d) applicable law;

(e) existing restrictions with respect to a Person acquired by Equistar or any of its Restricted Subsidiaries (except to the extent such restrictions were put in place in connection with or in contemplation of such acquisition), which restrictions are not applicable to any Person, or the properties or assets of any Person, other than the Person, or the property or assets of the Person, so acquired;

(f) customary non-assignment provisions in leases and other agreements entered into in the ordinary course of business;

(g) construction loans and purchase money obligations (including Capital Lease Obligations) for property acquired in the ordinary course of business that impose restrictions of the nature described in clause (iii) above on the property so constructed or acquired;

(h) in the case of clause (iii) above, restrictions contained in security agreements or mortgages securing Indebtedness of a Restricted Subsidiary to the extent such restrictions restrict the transfer of the property subject to such security agreements or mortgages;

(i) a Permitted Refinancing, provided that the restrictions contained in the agreements governing such Permitted Refinancing are not materially more restrictive, taken as a whole, than those contained in the agreements governing the Indebtedness being refinanced (as conclusively evidenced by a resolution of the Partnership Governance Committee);

(j) customary restrictions on a Finance Subsidiary imposed in such Finance Subsidiary’s organizational documents or by the terms of its Preferred Stock;

(k) any restriction with respect to shares of Capital Stock of a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of such shares of Capital Stock or any restriction with respect to the assets of a Restricted Subsidiary imposed pursuant to an agreement entered into for the sale or disposition of such assets or all or substantially all the Capital Stock of such Restricted Subsidiary pending the closing of such sale or disposition;

(l) in the case of any Restricted Subsidiary that is a Joint Venture, customary restrictions on such Restricted Subsidiary contained in its joint venture agreement, which restrictions are consistent with the past practice of Equistar and its Restricted Subsidiaries (as conclusively evidenced by a resolution of the Partnership Governance Committee); and

(m) the Credit Facility and related documentation as the same is in effect on the Issue Date and as amended, modified, extended, renewed, refunded, refinanced, restated or replaced from time to time; provided that the Credit Facility and related documentation as so amended, modified, extended, reviewed, refunded, refinanced, restated or replaced is not materially more restrictive, taken as a whole, as to the matters enumerated above than the Credit Facility and related documentation as in effect on the Issue Date (as conclusively evidenced by a resolution of the Partnership Governance Committee).

For purposes of determining compliance with this covenant, in the event that a restriction meets the criteria of more than one of the categories of permitted restrictions described in clauses (a) through (m) above, Equistar shall, in its sole discretion, classify such restriction in any matter that complies with this covenant and such restriction will be treated as existing pursuant to the clauses designated by Equistar.

110

Limitation on Sale and Lease-Back Transactions

Equistar will not, and will not permit any of its Restricted Subsidiaries to, enter into any Sale and Lease-Back Transaction; provided that Equistar or any Restricted Subsidiary may enter into a Sale and Lease-Back Transaction if:

(a) Equistar or such Restricted Subsidiary, as the case may be, could have:

(i) incurred Indebtedness in an amount equal to the Attributable Debt relating to such Sale and Lease-Back Transaction pursuant to the covenant described under the caption “—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock” (whether or not such covenant has ceased to be otherwise in effect as described below under “—Limitation of Applicability of Certain Covenants if Notes Rated Investment Grade”), and

(ii) incurred a Lien to secure such Indebtedness pursuant to the covenant described under the caption “—Limitation on Liens” without securing the notes; and

(b) the gross cash proceeds of such Sale and Lease-Back Transaction are at least equal to the fair market value (as conclusively determined by the Partnership Governance Committee) of the property that is the subject of such Sale and Lease-Back Transaction.

Line of Business

Equistar will not, and will not permit any of its Restricted Subsidiaries to, engage in any business other than Permitted Businesses, except to such extent as would not be material to Equistar and its Subsidiaries taken as a whole.

Limitation on Affiliate Transactions

Equistar will not, and will not permit any of its Restricted Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its properties or assets to, or purchase any property or assets from, or enter into or make any contract, agreement, understanding, loan, advance or Guarantee with, or for the benefit of, any Affiliate, any Partner or any Affiliate of any Partner (each of the foregoing, an “Affiliate Transaction”), unless (1) the terms of such Affiliate Transaction are no less favorable to Equistar or such Restricted Subsidiary, as the case may be, than those that could be obtained in a comparable arm’s-length transaction with a Person that is not an Affiliate of Equistar and (2) Equistar delivers to the Trustee (a) with respect to any Affiliate Transaction involving aggregate consideration in excess of $10 million, a resolution of the Partnership Governance Committee set forth in an Officers’ Certificate certifying that such Affiliate Transaction complies with clause (1) above and that such Affiliate Transaction has been approved by a majority of the disinterested members of the Partnership Governance Committee and (b) with respect to any Affiliate Transaction involving aggregate consideration in excess of $25 million, an opinion as to the fairness to Equistar or such Restricted Subsidiary of such Affiliate Transaction from a financial point of view issued by an investment banking firm of national standing; provided that:

(i) transactions or payments pursuant to any employment arrangements or employee, officer or director benefit plans or arrangements entered into by Equistar or any of its Restricted Subsidiaries in the ordinary course of business;

(ii) transactions between or among Equistar and/or its Restricted Subsidiaries;

(iii) customary loans, advances, fees and compensation paid to, and indemnity provided on behalf of, officers, directors, employees or consultants of Equistar or any of its Restricted Subsidiaries;

(iv) transactions in the ordinary course of business between Equistar or any of its Restricted Subsidiaries and any Partner or Affiliate of any Partner, provided that, with respect to any such Affiliate Transaction involving aggregate consideration in excess of $25 million, such Affiliate Transaction complies

111

with clause (1) of the initial paragraph hereof and has been approved by the Partnership Governance Committee, including a majority of the disinterested members (if any);

(v) sales (including a sale in exchange for a promissory note of or equity interest in such Accounts Receivable Subsidiary) of accounts receivable, related assets and the provision of billing, collection and other services in connection therewith, in each case, to an Accounts Receivable Subsidiary in connection with any Receivables Facility;

(vi) transactions pursuant to any contract or agreement in effect on the Issue Date, as the same may be amended, modified or replaced from time to time, so long as any such contract or agreement as so amended, modified or replaced is, taken as a whole, no less favorable to Equistar and its Restricted Subsidiaries in any material respect than the contract or agreement as in effect on the Issue Date (as conclusively evidenced by a resolution of the Partnership Governance Committee);

(vii) any transaction or series of transactions between Equistar or any Restricted Subsidiary and any of their Joint Ventures, provided that (a) such transaction or series of transactions is in the ordinary course of business between Equistar or such Restricted Subsidiary and such Joint Venture, and (b) with respect to any such Affiliate Transaction involving aggregate consideration in excess of $25 million, such Affiliate Transaction complies with clause (1) of the initial paragraph above and such Affiliate Transaction has been approved by the Partnership Governance Committee, including a majority of the disinterested members (if any); and

(viii) any Restricted Payment of the type described in clause (1) or (2) of the first paragraph of the covenant described under “—Restricted Payments” and any Permitted Dividend;

in each case, shall not be deemed to be Affiliate Transactions and therefore (except as otherwise specified in such clauses) not subject to the requirements of clauses (1) and (2) of the initial paragraph above.

Limitation on Business Activities of Equistar Funding

Equistar Funding may not hold any assets, become liable for any obligations or engage in any business activities; provided that it may be a co-obligor with respect to the notes or any other Indebtedness issued by Equistar, and may engage in any activities directly related thereto or necessary in connection therewith. Equistar Funding shall be a Wholly Owned Restricted Subsidiary of Equistar at all times.

Limitation on Issuance of Guarantees by Restricted Subsidiaries

Equistar will not permit any Restricted Subsidiary that is not a Subsidiary Guarantor, directly or indirectly, to Guarantee or secure the payment of any other Indebtedness of Equistar or any of its Restricted Subsidiaries (except Indebtedness of such Restricted Subsidiary or a Restricted Subsidiary of such Restricted Subsidiary) unless such Restricted Subsidiary simultaneously executes and delivers a supplemental indenture to the Indenture providing for the Guarantee (a “Subsidiary Guarantee”) of the payment of the notes by such Restricted Subsidiary; provided that this paragraph shall not be applicable to:

(i) any Guarantee of any Restricted Subsidiary that existed at the time such Person became a Restricted Subsidiary and was not incurred in connection with, or in contemplation of, such Person becoming a Restricted Subsidiary;

(ii) Guarantees of Indebtedness of a Restricted Subsidiary that is a Foreign Subsidiary by a Restricted Subsidiary that is a Foreign Subsidiary; or

(iii) Equistar Funding.

If the guaranteed Indebtedness is subordinated in right of payment to the notes or any Subsidiary Guarantee, as applicable, pursuant to a written agreement to that effect, the Guarantee of such guaranteed Indebtedness must

112

be subordinated in right of payment to the Subsidiary Guarantee to at least the extent that the guaranteed Indebtedness is subordinated to the notes.

Each Subsidiary Guarantee will be limited to the maximum amount that would not render the Subsidiary Guarantor’s obligations subject to avoidance under applicable fraudulent conveyance provisions of the United States Bankruptcy Code or any comparable provision of state law. By virtue of this limitation, a Subsidiary Guarantor’s obligation under its Subsidiary Guarantee could be significantly less than amounts payable with respect to the notes, or a Guarantor may have effectively no obligation under its Subsidiary Guarantee.

No Subsidiary Guarantor will be permitted to:

• consolidate with or merge with or into any Person; or

• sell, convey, transfer or dispose of, all or substantially all its assets as an entirety or substantially as an entirety, in one transaction or a series of related transactions, to any Person; or

• permit any Person to merge with or into the Subsidiary Guarantor unless:

(A) the other Person is Equistar or any Wholly Owned Restricted Subsidiary that is a Subsidiary Guarantor or becomes a Subsidiary Guarantor concurrently with the transaction; or

(B) (1) either (x) the Subsidiary Guarantor is the continuing Person or (y) the resulting, surviving or transferee Person expressly assumes by supplemental indenture all of the obligations of the Subsidiary Guarantor under its Subsidiary Guarantee; and (2) immediately after giving effect to the transaction, no Default has occurred and be continuing; or

(C) the transaction constitutes a sale or other disposition (including by way of consolidation or merger) of the Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of the Subsidiary Guarantor (in each case other than to Equistar or a Restricted Subsidiary) otherwise permitted by the Indenture.

The Subsidiary Guarantee of a Subsidiary Guarantor will terminate upon:

(1) a sale or other disposition (including by way of consolidation or merger) of the Subsidiary Guarantor or the sale or disposition of all or substantially all the assets of the Subsidiary Guarantor (other than to Equistar or a Restricted Subsidiary) otherwise permitted by the Indenture;

(2) the cessation of the circumstances requiring the Subsidiary Guarantee;

(3) the designation in accordance with the Indenture of the Subsidiary Guarantor as an Unrestricted Subsidiary; or

(4) defeasance or discharge of the notes, as provided in “—Defeasance and Discharge.”

Accounts Receivable Facilities

Equistar may, and any of its Restricted Subsidiaries may, sell (including a sale in exchange for a promissory note of or Equity Interest in such Accounts Receivable Subsidiary) at any time and from time to time, accounts receivable and related assets to any Accounts Receivable Subsidiary; provided that the aggregate consideration received in each such sale is at least equal to the aggregate fair market value of the receivables sold.

Reports

Whether or not required by the rules and regulations of the SEC, so long as any notes are outstanding, Equistar will furnish to each Trustee and the holders of the notes:

(1) all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K if Equistar were required to file such Forms, including a

113

“Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report thereon by Equistar’s certified independent accountants; and

(2) all current reports that would be required to be filed with the SEC on Form 8-K if Equistar were required to file such reports.

In addition, whether or not required by the rules and regulations of SEC, Equistar will file a copy of all such information and reports with the SEC for public availability and make such information available to securities analysts and prospective investors upon request.

Further, the issuers have agreed that, for so long as any notes remain outstanding, they will furnish to the holders and to securities analysts and prospective investors, upon their request, the information, if any, required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act.

Limitation of Applicability of Covenants When Notes are Rated Investment Grade

Notwithstanding the foregoing, the issuers’ obligations to comply with the provisions of the Indenture described above under the captions “—Repurchase at Option of Holders—Asset Sales” and “—Selected Covenants—Transactions with Affiliates,” “—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock,” “—Restricted Payments,” “—Additional Interest Upon Payment of Certain Permitted Dividends,” “—Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries,” “—Line of Business,” “—Guarantees by Restricted Subsidiaries” and “—Accounts Receivable Facilities” will terminate and cease to have any further effect from and after the first date when the notes are rated Investment Grade.

Consolidation, Merger and Sale of Assets

Equistar

Equistar may not consolidate with or merge into, or sell, assign, transfer, convey or otherwise dispose of all or substantially all of its assets in one or more related transactions to, any Person, or permit any Person to merge with or into it unless each of the following conditions is satisfied:

(1) immediately after giving effect to such transaction and any related incurrence of Indebtedness or issuance of Disqualified Stock, no Default or Event of Default shall have occurred and be continuing;

(2) either (i) Equistar shall be the continuing Person, or (ii) the entity formed by such consolidation or into which Equistar is merged, or the Person to which such properties and assets will have been conveyed or transferred, assumes Equistar’s obligation as to the due and punctual payment of the principal of (and premium, if any, on) and interest, if any, on the notes and the performance and observance of every covenant to be performed by Equistar under the Indenture, the notes and the Registration Rights Agreement; any such entity will be organized under the laws of the United States, one of the States thereof or the District of Columbia;

(3) Equistar or the entity or the Person formed by or surviving any such consolidation or merger (if other than Equistar), or to which such sale, assignment, transfer, conveyance or other disposition shall have been made:

(A) except in the case of a merger or consolidation with, or a sale, assignment, transfer, conveyance or other disposition to, a Permitted Holder, will have a Consolidated Net Worth immediately after the transaction equal to or greater than the Consolidated Net Worth of Equistar immediately preceding the transaction; and

(B) except with respect to a consolidation or merger of Equistar with or into a Person that has no outstanding Indebtedness, will, at the time of such transaction and after giving pro forma effect

114

thereto as if such transaction had occurred at the beginning of the applicable four-quarter period, (i) have a Fixed Charge Coverage Ratio of at least 2.0 to 1 or (ii) have a greater Fixed Charge Coverage Ratio than Equistar’s Fixed Charge Coverage Ratio immediately before the transaction; and

(4) each of the issuers has delivered to the Trustee an Officers’ Certificate and Opinion of Counsel stating that the transaction complies with these conditions.

The foregoing shall not prohibit the merger or consolidation of a Wholly Owned Restricted Subsidiary with Equistar; provided that, in connection with any such merger or consolidation, no consideration, other than Qualified Equity Interests in the surviving Person or Equistar, shall be issued or distributed to the holders of Equity Interests of Equistar.

The sale, assignment, transfer, conveyance or other disposition by Equistar of all or substantially all its property or assets taken as a whole to one or more of Equistar’s Subsidiaries shall not relieve Equistar from its obligations under the Indenture and the notes. In addition, Equistar will not lease all or substantially all its assets in one or more related transactions to another Person.

Equistar Funding

Equistar Funding shall not consolidate with, merge into, sell, assign, convey, transfer, lease or otherwise dispose of all or substantially all of its property and assets to, any Person, or permit any Person to merge with or into Equistar Funding unless:

(1) concurrently therewith, a corporate Wholly Owned Restricted Subsidiary of Equistar organized and validly existing under the laws of the United States of America or any jurisdiction thereof (which may be the continuing Person as a result of such transaction) shall expressly assume, by a supplemental Indenture, executed and delivered to the Trustee and in form and substance satisfactory to the Trustee, all of the obligations of an issuer under the notes, the Indenture and the Registration Rights Agreement; or

(2) after giving effect thereto, at least one obligor on the notes shall be a corporation organized and validly existing under the laws of the United States of America or any jurisdiction thereof; and

(3) immediately after such transaction, no Default or Event of Default shall have occurred and be continuing.

Events of Default

Each of the following constitutes an Event of Default with respect to the notes:

(1) default for 30 days in the payment when due of interest (including the issuance of Additional Dividend Notes) or liquidated damages on the notes;

(2) default in payment when due of the principal of or premium, if any, on the notes, at maturity or otherwise;

(3) failure by the issuers to comply with the provisions described under the captions “—Repurchase at Option of Holders—Change of Control,” “—Repurchase at Option of Holders—Asset Sales” or “—Consolidation, Merger and Sale of Assets;”

(4) failure by the issuers for 60 days after notice by the Trustee or holders of at least 25% in principal amount of the outstanding notes to comply with any of the other agreements in the Indenture or the notes;

(5) any default occurs under any mortgage, indenture or instrument under which there may be issued or by which there may be secured or evidenced any Indebtedness for money borrowed by

115

Equistar or any of its Significant Subsidiaries (or any Indebtedness for money borrowed Guaranteed by Equistar or any of its Significant Subsidiaries if Equistar or a Significant Subsidiary does not perform its payment obligations under such Guarantee within any grace period provided for in the documentation governing such Guarantee), whether such Indebtedness or Guarantee exists on the Issue Date or is thereafter created, which default (a) constitutes a Payment Default or (b) results in the acceleration of such Indebtedness prior to its Stated Maturity, and in each case, the principal amount of any such Indebtedness, together with the principal amount of any other such Indebtedness under which there has been a Payment Default or that has been so accelerated, aggregates $50 million or more;

(6) failure by Equistar or any of its Significant Subsidiaries to pay a final judgment or final judgments aggregating in excess of $50 million, which judgment or judgments are not paid, discharged or stayed, for a period of 60 days;

(7) certain events of bankruptcy or insolvency with respect to Equistar or any of its Significant Subsidiaries; and

(8) except as permitted by the Indenture, any Subsidiary Guarantee shall be held in any judicial proceeding to be unenforceable or invalid or shall cease for any reason to be in full force and effect or any Subsidiary Guarantor, or any Person acting on behalf of any Subsidiary Guarantor, shall deny or disaffirm its obligations under the Subsidiary Guarantees.

If an Event of Default (other than an Event of Default specified in clause (7) above that occurs with respect to Equistar, Equistar Funding or any Subsidiary Guarantor) occurs and is continuing under the Indenture, the Trustee or the holders of at least 25% in aggregate principal amount of the notes then outstanding, by written notice to Equistar (and to the Trustee if such notice is given by the holders), may, and the Trustee at the request of such holders shall, declare the principal of and premium, if any, and accrued but unpaid interest and liquidated damages, if any, on the notes to be due and payable. Upon a declaration of acceleration, such principal, premium, if any, and accrued but unpaid interest and liquidated damages, if any, shall be immediately due and payable. If an Event of Default specified in clause (7) above occurs with respect to Equistar, Equistar Funding or any Subsidiary Guarantor, the principal of and premium, if any, and accrued interest and liquidated damages, if any, on the notes then outstanding shall ipso facto become and be immediately due and payable without any declaration or other act on the part of the Trustee or any holder.

The holders of at least a majority in principal amount of the notes then outstanding by written notice to Equistar and to the Trustee, may waive all past defaults and rescind and annul a declaration of acceleration and its consequences if:

(i) all existing Events of Default, other than the nonpayment of the principal of and premium, if any, and interest and liquidated damages, if any, on such notes that have become due solely by such declaration of acceleration, have been cured or waived; and

(ii) the rescission would not conflict with any judgment or decree of a court of competent jurisdiction.

For information as to the waiver of defaults, see “—Modification and Waiver.”

The holders of at least a majority in aggregate principal amount of the outstanding notes may direct the time, method and place of conducting any proceeding for any remedy available to the Trustee or exercising any trust or power conferred on the Trustee. However, the Trustee may refuse to follow any direction that conflicts with law or the Indenture, that may involve the Trustee in personal liability, or that the Trustee determines in good faith may be unduly prejudicial to the rights of holders of the notes not joining in the giving of such direction and may take any other action it deems proper that is not inconsistent with any such direction received from holders of the notes. A holder may not pursue any remedy with respect to the Indenture or the notes unless:

(1) the holder gives the Trustee written notice of a continuing Event of Default;

(2) the holders of at least 25% in aggregate principal amount of notes then outstanding make a written request to the Trustee to pursue the remedy;

116

(3) such holder or holders offer the Trustee indemnity satisfactory to the Trustee against any costs, liability or expense;

(4) the Trustee does not comply with the request within 60 days after receipt of the request and the offer of indemnity; and

(5) during such 60-day period, the holders of at least a majority in aggregate principal amount of the notes then outstanding do not give the Trustee a direction that is inconsistent with the request.

However, such limitations do not apply to the right of any holder of a note to receive payment of the principal of or premium, if any, interest or liquidated damages, if any, on such note or to bring suit for the enforcement of any such payment, on or after the due date expressed in the notes, which right shall not be impaired or affected without the consent of the holder.

The Indenture requires certain officers of the issuers to certify, on or before a date not more than 120 days after the end of each fiscal year, that they have conducted or supervised a review of the activities of Equistar and its Restricted Subsidiaries and Equistar’s and its Restricted Subsidiaries’ performance under such Indenture and that, to the best of such officers’ knowledge, based upon such review, Equistar has fulfilled all obligations thereunder or, if there has been a default in the fulfillment of any such obligation, specifying each such default and the nature and status thereof. Equistar is also obligated to notify the Trustee promptly of any default or defaults in the performance of any covenants or agreements under any Indenture.

Modification and Waiver

The Indenture permits the issuers and the Trustee, with the consent of the holders of not less than a majority in aggregate principal amount of the notes, to execute supplemental indentures adding any provisions to or changing or eliminating any provisions of the Indenture or modifying the rights of such holders. However, no modification or amendment may, without the consent of each holder affected thereby:

(1) change the Stated Maturity of the principal of, or any installment of interest on, any note;

(2) reduce the principal amount of or premium, if any, or interest or liquidated damages, if any, on any note;

(3) reduce any amount payable on redemption of the notes or upon the occurrence of an Event of Default or reduce the Change of Control Payment or the amount to be paid in connection with an Asset Sale Offer;

(4) change the place or currency of payment of principal of or premium, if any, or interest or liquidated damages, if any, on any note;

(5) impair the right to institute suit for the enforcement of any payment on or after the Stated Maturity (or, in the case of a redemption, on or after the Redemption Date) of any note;

(6) reduce the above-stated percentage of outstanding notes the consent of whose holders is necessary to modify or amend the Indenture;

(7) waive a default in the payment of principal of or premium, if any, or interest or liquidated damages, if any, on the notes (except as set forth under the caption “—Events of Default”);

(8) reduce the percentage or aggregate principal amount of outstanding notes the consent of whose holders is necessary for waiver of compliance with certain provisions of the Indenture or for waiver of certain defaults;

(9) modify or change any provision of the Indenture affecting the ranking of the notes or the Subsidiary Guarantees in a manner adverse to the holders of the notes; or

117

(10) release any Subsidiary Guarantor from any of its obligations under its Subsidiary Guarantee or the Indenture other than in accordance with the provisions of the Indenture, or amend or modify any provision relating to such release.

Neither Equistar nor any of its Subsidiaries or Affiliates will, directly or indirectly, pay or cause to be paid any consideration, whether by way of interest, fee or otherwise, to any holder of any notes for or as an inducement to any consent, waiver or amendment of any of the terms or provisions of the Indenture or the notes unless such consideration is offered to be paid or agreed to be paid to all holders of such notes that consent, waive or agree to amend such term or provision in the time frame set forth in the solicitation documents relating to such consent, waiver or agreement.

Modification and amendment of the Indenture may be made by the issuers and the Trustee without the consent of any holder, for any of the following purposes:

(1) to cure any ambiguity, omission, defect or inconsistency in the Indenture;

(2) to provide for the assumption by a successor of an issuer of the obligations of such issuer under the Indenture;

(3) to provide for uncertificated notes, subject to certain conditions;

(4) to secure the notes under the Indenture, to add Subsidiary Guarantees with respect to the notes, or to confirm and evidence the release, termination or discharge of any such security or Subsidiary Guarantee when such release, termination or discharge is permitted by the Indenture;

(5) to add to the covenants of the issuers for the benefit of the holders of the notes or to surrender any right or power conferred upon the issuers;

(6) to provide for or confirm the issuance of Additional Notes or Additional Dividend Notes in accordance with the terms of the Indenture;

(7) to make any other change that does not adversely affect the rights of any holder under the notes or the Indenture; or

(8) to comply with any requirement of the SEC in connection with qualification of the Indenture under the Trust Indenture Act or otherwise.

Defeasance and Discharge

The issuers may discharge their obligations under the notes and the Indenture by irrevocably depositing in trust with the Trustee money or U.S. Government Obligations sufficient to pay principal of and interest on the notes to maturity or redemption within one year, subject to meeting certain other conditions.

The Indenture provides that the issuers may elect either (i) to defease and be discharged from any and all obligations with respect to all or a portion of the notes of any series (except for, among other matters, the obligations to register the transfer of or exchange notes, replace temporary or mutilated, destroyed, lost or stolen notes of such series, maintain an office or agency in respect of such notes and hold moneys for payment in trust) (“legal defeasance”); or (ii) to be released from their obligations with respect to most of the covenants and under clauses (1) and (3) of “—Consolidation, Merger and Sale of Assets—Equistar” (and the events listed in clauses (5), (6) and (8) under “—Events of Default” will no longer constitute Events of Default), and any omission to comply with such obligations will not constitute a Default or an Event of Default with respect to such notes (“covenant defeasance”), in either case upon the irrevocable deposit by the issuers with the Trustee (or other qualifying trustee), in trust, of (i) an amount in cash; (ii) U.S. Government Obligations that, through the payment of principal and interest in accordance with their terms, will provide money in an amount; or (iii) a combination

118

thereof in an amount, sufficient to pay the principal of (and premium, if any, on) and interest, if any, to Stated Maturity (or redemption) on such notes, on the scheduled due dates therefor.

Such a trust may only be established if, among other things, the issuers have delivered to the Trustee an Opinion of Counsel to the effect that the holders of such notes will not recognize income, gain or loss for United States federal income tax purposes as a result of such legal defeasance or covenant defeasance and will be subject to United States federal income tax on the same amounts, in the same manner and at the same times as would have been the case if such defeasance or covenant defeasance had not occurred, and such opinion, in the case of defeasance under clause (i) above, must refer to and be based upon a ruling of the Internal Revenue Service or a change in applicable United States federal income tax law occurring after the date of the Indenture. The defeasance would in each case be effective when 123 days have passed since the date of the deposit in trust.

In the case of either discharge or defeasance, the Subsidiary Guarantees, if any, will terminate.

Concerning the Trustee

The Indenture contains certain limitations on the rights of the Trustee, should it become a creditor of Equistar, to obtain payment of claims in certain cases, or to realize on certain property received in respect of any such claim as security or otherwise. The Trustee is permitted to engage in other transactions; however, if it acquires any conflicting interest it must eliminate such conflict within 90 days, apply to the SEC for permission to continue or resign.

The holders of a majority in principal amount of the notes then outstanding have the right to direct the time, method and place of conducting any proceeding for exercising any remedy available to the applicable Trustee, subject to certain exceptions. The Indenture provides that in case an Event of Default shall occur and be continuing, the Trustee is required, in the exercise of its power, to use the degree of care of a prudent man in the conduct of his own affairs. Subject to such provisions, the Trustee is not under any obligation to exercise any rights or powers under the Indenture at the request of any holder of notes, unless such holder shall have offered to the applicable Trustee security and indemnity satisfactory to it against any loss, liability or expense.

No Personal Liability of Directors, Officers, Employees, Stockholders and Partners

No director, officer, employee, incorporator, partner, member of the Partnership Governance Committee or holder of Capital Stock of either issuer or any Subsidiary Guarantor, as such, has any liability for any obligations of the issuers and the Subsidiary Guarantors under the notes, the Subsidiary Guarantees, or the Indenture or for any claim based on, in respect of, or by reason of, such obligations. Each holder of notes by accepting a note waives and releases all such liability. The waiver and release are part of the consideration for issuance of the notes. This waiver may not be effective to waive liabilities under the federal securities laws and it is the view of the SEC that such a waiver is against public policy.

Payment, Transfer and Exchange

The issuers are required to maintain an office or agency at which the principal of (and premium, if any, on), interest and liquidated damages, if any, on the notes will be payable. The issuers initially designated the office of the agent of the Trustee in New York City as an office where such principal, premium, interest and liquidated damages, if any, will be payable. The issuers may from time to time designate additional offices or agencies, approve a change in the location of any office or agency and rescind the designation of any office or agency.

All moneys paid by the issuers to the Trustee or a Paying Agent for the payment of principal of (or premium, if any, on) or interest, if any, on any new notes that remain unclaimed for two years after such principal, premium or interest becomes due and payable will be repaid to the issuers, and the holder of such new

119

notes will (subject to applicable abandoned property or similar laws) thereafter, as an unsecured general creditor, look only to the issuers.

Subject to the terms of the Indenture, new notes may be presented for registration of transfer and for exchange (i) at each office or agency required to be maintained by the issuers, as described above, and (ii) at each other office or agency that the issuers may designate from time to time for such purposes. Registration of transfers and exchanges will be effected if the transfer agent is satisfied with the evidence of ownership and identity of the Person making the request and if the transfer form thereon is duty executed and the transfer agent is otherwise satisfied that the transfer is being made in accordance with the Indenture and applicable law.

No service charge will be made for any registration of transfer or exchange of new notes, but the issuers may require payment of any tax or other governmental charge payable in connection therewith.

Book-Entry, Delivery and Form

The new notes will initially be represented by one or more permanent global notes in definitive, fully registered book-entry form (the “Global Notes” and registered in the name of a nominee of DTC. The Global Notes will be deposited on behalf of the acquirors of the new notes with a custodian of DTC for credit to the respective accounts of acquirors or such other accounts as they direct DTC. See “The Exchange Offer-Procedures for Tendering-Book-Entry Transfer.”

The Global Notes

We expect that under procedures established by DTC, upon deposit of the Global Notes with DTC or its custodian, DTC will credit on its internal system a portion of the Global Notes that shall be composed of the corresponding respective amounts of the Global Notes to the respective accounts of persons who have accounts with the depository.

Ownership of beneficial interests in a Global Note will be limited to persons who have accounts with DTC (“participants”) or persons who hold interests through participants. Ownership of beneficial interests in a Global Note will be shown on, and the transfer of that ownership will be effected only through, records maintained by DTC or its nominee (with respect to interests of participants) and the records of participants (with respect to interests of persons other than participants).

So long as DTC, or its nominee, is the registered owner or holder of a Global Note, DTC or such nominee, as the case may be, will be considered the sole owner or holder of the new notes represented by such Global Note for all purposes under the Indenture and under the new notes represented thereby. No beneficial owner of an interest in a Global Note will be able to transfer that interest except in accordance with DTC’s applicable procedures in addition to those provided for under the Indenture. Except as provided below, owners of beneficial interest in Global Notes will not:

• be entitled to have new notes represented by Global Notes registered in their names;

• receive or be entitled to receive physical delivery of certificated new notes; or

• be considered the owners or holders of the Global Notes under the Indenture for any purpose, including with respect to the giving of any direction, instruction or approval to the Trustee.

Payments of the principal of, and interest on, a Global Note will be made to DTC or its nominee, as the case may be, as the registered owner thereof. Neither the issuers, the Trustee nor any Paying Agent will have any responsibility or liability for any aspect of the records relating to or payments made on account of beneficial ownership interests in a Global Note or for maintaining, supervising or reviewing any records relating to such beneficial ownership interests.

120

We expect that DTC or its nominee, upon receipt of any payment of principal or interest in respect of a Global Note, will credit participants’ accounts with payments in amounts proportionate to their respective beneficial interests in the principal amount of such Global Note as shown on the records of DTC or its nominee. We also expect that payments by participants to owners of beneficial interests in such Global Note held through such participants will be governed by standing instructions and customary practices, as is now the case with securities held for the accounts of customers registered in the names of nominees for such customers. Such payments will be the responsibility of such participants.

Transfers between participants in DTC will be effected in the ordinary way in accordance with DTC rules and will be settled in same-day funds.

We expect that DTC will take any action permitted to be taken by a holder of new notes (including the presentation of new notes for exchange as described below) only at the direction of one or more participants to whose account the DTC interests in a Global Note is credited and only in respect of such portion of the aggregate principal amount of new notes as to which such participant or participants has or have given such direction. However, if there is an Event of Default under the new notes, DTC has the right to exchange the applicable Global Note for Certificated Notes, which it will distribute to its participants and which may be legended as set forth under the heading “Transfer Restrictions.”

If DTC is at any time unwilling or unable to continue as a depositary for the Global Notes and a successor depositary is not appointed by the issuers within 90 days, we will issue Certificated Notes, in exchange for the Global Notes. Holders of an interest in a Global Note may receive Certificated Notes, upon at least 20 days prior written notice by the Depository in accordance with customary procedures, in accordance with the DTC’s rules and procedures in addition to those provided for under the Indenture.

Description of DTC

The description of the operations of DTC set forth below is provided solely as a matter of convenience. These operations and procedures are solely within the control of DTC and are subject to change from time to time. We do not take any responsibility for these operations or procedures, and investors are urged to contact DTC or its participants directly to discuss these matters.

DTC has advised us that it is:

• a limited purpose trust company organized under the laws of the State of New York;

• a “banking organization” within the meaning of New York Banking Law;

• a member of the Federal Reserve System;

• a “clearing corporation” within the meaning of the Uniform Commercial Code; and

• a “Clearing Agency” registered pursuant to the provisions of Section 17A of the Exchange Act.

DTC was created to hold securities for its participants and facilitate the clearance and settlement of securities transactions between participants through electronic book-entry changes in accounts of its participants, thereby eliminating the need for physical movement of certificates. DTC is owned by a number of its participants and by the New York Stock Exchange, Inc., the American Stock Exchange, Inc. and the National Association of Securities Dealers, Inc. DTC’s direct Participants include:

• securities brokers and dealers;

• banks and trust companies; and

• clearing corporations and certain other organizations.

121

Indirect access to the DTC system is available to others such as banks, brokers, dealers and trust companies that clear through or maintain a custodial relationship with a participant, either directly or indirectly (“indirect participants”). Investors who are not participants may beneficially own securities held by or on behalf of DTC only through participants or indirect participants.

Although DTC is expected to follow the foregoing procedures in order to facilitate transfers of interests in a Global Note among participants of DTC, it is under no obligation to perform or continue to perform such procedures, and such procedures may be discontinued at any time. Neither the issuers nor the Trustee will have any responsibility for the performance by DTC or its respective participants or indirect participants of their respective obligations under the rules and procedures governing their operations.

Same Day Settlement and Payment

The Indenture requires that payments in respect of the notes represented by the global notes be made by wire transfer of immediately available funds to the accounts specified by holders of the Global Notes. With respect to new notes in certificated form, the issuers will make all payments at the agency or office maintained by us for that purpose or, at our option, by mailing a check to each holder’s registered address.

The rules applicable to DTC and its participants are on file with the SEC.

The notes represented by the Global Notes are expected to be eligible to trade in The PORTAL Market and to trade in DTC’s Same-Day Funds Settlement System, and any permitted secondary market trading activity in such new notes will, therefore, be required by DTC to be settled in immediately available funds. We expect that secondary trading in any certificated notes will also be settled in immediately available funds.

Governing Law

The Indenture, including any Subsidiary Guarantees and the new notes, shall be governed by, and construed in accordance with, the laws of the State of New York.

Selected Definitions

“Accounts Receivable Subsidiary” means any Wholly Owned Subsidiary of Equistar (i) which is formed solely for the purpose of, and which engages in no activities other than activities in connection with, financing accounts receivable of Equistar and/or its Restricted Subsidiaries, (ii) which is designated by Equistar as an Accounts Receivables Subsidiary pursuant to an Officers’ Certificate delivered to the Trustee, (iii) no portion of Indebtedness or any other obligation (contingent or otherwise) of which is at any time recourse to or obligates Equistar or any Restricted Subsidiary in any way, or subjects any property or asset of Equistar or any Restricted Subsidiary, directly or indirectly, contingently or otherwise, to the satisfaction thereof, other than pursuant to (1) representations, warranties and covenants (or, any indemnity with respect to such representations, warranties and covenants) entered into in the ordinary course of business in connection with the sale (including a sale in exchange for a promissory note of or Equity Interest in such Accounts Receivable Subsidiary) of accounts receivable to such Accounts Receivable Subsidiary or (2) any Guarantee of any such accounts receivable financing by Equistar or any Restricted Subsidiary that is permitted to be incurred pursuant to the covenants described under the caption entitled “—Selected Covenants—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock” and “—Restricted Payments,” (iv) with which neither Equistar nor any Restricted Subsidiary of Equistar has any contract, agreement, arrangement or understanding other than contracts, agreements, arrangements and understandings entered into in the ordinary course of business in connection with the sale (including a sale in exchange for a promissory note of or Equity Interest in such Accounts Receivable Subsidiary) of accounts receivable in accordance with the covenant described under the caption “—Selected Covenants— Accounts Receivable Facilities” and fees payable in the ordinary course of business in connection with servicing accounts receivable and (v) with respect to which neither Equistar nor any

122

Restricted Subsidiary of Equistar has any obligation (a) to subscribe for additional shares of Capital Stock or other Equity Interests therein or make any additional capital contribution or similar payment or transfer thereto other than in connection with the sale (including a sale in exchange for a promissory note of or Equity Interest in such Accounts Receivable Subsidiary) of accounts receivable to such Accounts Receivable Subsidiary in accordance with the covenant described under “—Selected Covenants—Accounts Receivable Facilities” or (b) to maintain or preserve the solvency, any balance sheet term, financial condition, level of income or results of operations thereof.

“Acquired Debt” means, with respect to any specified Person, (i) Indebtedness of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Indebtedness incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien encumbering any asset acquired by such specified Person.

“Acquired Disqualified Stock” means, with respect to any specified Person, Disqualified Stock of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Disqualified Stock incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person.

“Acquired Preferred Stock” means, with respect to any specified Person, Preferred Stock of any other Person existing at the time such other Person is merged with or into or became a Subsidiary of such specified Person, including, without limitation, Preferred Stock incurred in connection with, or in contemplation of, such other Person merging with or into or becoming a Subsidiary of such specified Person.

“Additional Assets” means (a) Capital Stock of a Person that becomes a Restricted Subsidiary as a result of the acquisition of such Capital Stock by Equistar or another Restricted Subsidiary from any Person other than Equistar or an Affiliate of Equistar, (b) any controlling interest or joint venture interest in another business or (c) any other asset (other than securities, cash, Cash Equivalents, or other current assets) to be owned by Equistar or any Restricted Subsidiary.

“Affiliate” of any specified Person means any other Person directly or indirectly, through one or more intermediaries, controlling or controlled by or under direct or indirect common control with such specified Person. For the purpose of this definition, “control” when used with respect to any specified Person means the possession, direct or indirect, of the power to manage or direct or cause the direction of the management and policies of such Person directly or indirectly, whether through the ownership of voting stock, by contract or otherwise; and the terms “controlling” and “controlled” have meanings correlative to the foregoing.

“Asset Sale” means (i) the sale, lease, conveyance or other disposition (other than the creation of a Lien) of any assets (other than the disposition of inventory or equipment in the ordinary course of business consistent with industry practices or the disposition of Cash Equivalents) (provided that the sale, conveyance or other disposition of all or substantially all the assets of Equistar and its Restricted Subsidiaries taken as a whole will be governed by the provisions of the Indenture described above under the caption “—Repurchase at the Option of Holders—Change of Control” and/or the provisions described above under the caption “—Consolidation, Merger and Sale of Assets” and not by the provisions of the Asset Sale covenant), (ii) the sale by Equistar or any of its Restricted Subsidiaries of Equity Interests of any of Equistar’s Restricted Subsidiaries, Unrestricted Subsidiaries or Joint Ventures and (iii) the issuance by any of Equistar’s Restricted Subsidiaries of Equity Interests of such Restricted Subsidiary, in the case of clauses (i), (ii) or (iii), whether in a single transaction or a series of related transactions (a) that have a fair market value in excess of $25 million or (b) for Net Proceeds in excess of $25 million. Notwithstanding the foregoing: (a) a transfer of assets by Equistar to a Restricted Subsidiary or by a Restricted Subsidiary to Equistar or to another Restricted Subsidiary; (b) an issuance of Equity Interests by a Restricted Subsidiary to Equistar or to another Restricted Subsidiary; (c) an issuance of Preferred Stock by a Finance Subsidiary that is permitted by the covenant described under the caption “—Selected Covenants—Limitation on

123

Incurrence of Additional Indebtedness and Issuance of Preferred Stock;” (d) sales (including a sale in exchange for a promissory note of or Equity Interest in such Accounts Receivable Subsidiary) of accounts receivable, related assets to an Accounts Receivable Subsidiary in connection with any Receivables Facility; (e) Sale and Lease-Back Transactions; and (f) Restricted Payments (and Permitted Dividends payable in cash) permitted by the covenant described under “—Selected Covenants—Restricted Payments” and Permitted Investments will not be deemed to be an Asset Sale.

“Attributable Debt” in respect of a Sale and Lease-Back Transaction means, at the time of determination, the present value (discounted at the rate of interest implicit in such transaction, determined in accordance with GAAP) of the obligation of the lessee for net rental payments during the remaining term of the lease included in such Sale and Lease-Back Transaction (including any period for which such lease has been extended or may, at the option of the lessor, be extended).

“Capital Lease Obligation” means, at the time any determination thereof is to be made, the amount of the liability in respect of a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP.

“Capital Stock” means (i) in the case of a corporation, corporate stock, (ii) in the case of an association or business entity, any and all shares, interests, participations, rights or other equivalents (however designated) of corporate stock, (iii) in the case of a partnership, partnership interests (whether general or limited) and (iv) any other interest or participation that confers on a Person the right to receive a share of the profits and losses of, or distributions of assets of, the issuing Person.

“Cash Equivalents” means (a) United States dollars, (b) securities issued or directly and fully guaranteed or insured by the United States government or any agency or instrumentality thereof having maturities of not more than one year from the date of acquisition, (c) demand deposits, time deposits and certificates of deposit with maturities of one year or less from the date of acquisition, bankers’ acceptances with maturities not exceeding one year from the date of acquisition and overnight bank deposits, in each case with any bank or trust company organized or licensed under the laws of the United States or any State thereof having capital, surplus and undivided profits in excess of $250 million, (d) repurchase obligations with a term of not more than seven days for underlying securities of the type described in clauses (b) and (c) above entered into with any financial institution meeting the qualifications specified in clause (c) above, (e) commercial paper rated as least P-1 or A-1 by Moody’s or Standard & Poor’s, respectively, (f) investments in any U.S. dollar-denominated money market fund as defined by Rule 2a-7 of the General Rules and Regulations promulgated under the Investment Company Act of 1940 and (g) in the case of a Foreign Subsidiary, substantially similar investments denominated in foreign currencies (including similarly capitalized foreign banks).

“Consolidated Cash Flow” means, with respect to any Person for any period, the Consolidated Net Income of such Person for such period, plus in each case, without duplication:

(i) provision for taxes based on income or profits of such Person and its Restricted Subsidiaries for such period (including any provision for taxes on the Net Income of any Joint Venture that is a pass-through entity for federal income tax purposes, to the extent such taxes are paid or payable by such Person or any of its Restricted Subsidiaries), to the extent that such provision for taxes was included in computing such Consolidated Net Income;

(ii) the Fixed Charges of such Person and its Restricted Subsidiaries for such period, to the extent that such Fixed Charges were deducted in computing such Consolidated Net Income;

(iii) depreciation and amortization (including amortization of goodwill and other intangibles but excluding amortization of prepaid cash expenses that were paid in a prior period) of such Person and its Restricted Subsidiaries for such period to the extent that such depreciation and amortization were deducted in computing such Consolidated Net Income; and

124

(iv) any non-cash charges reducing Consolidated Net Income for such period (excluding any such non-cash charge to the extent that it represents an accrual of or reserve for cash expenses in any future period or amortization of a prepaid cash expense that was paid in a prior period); minus

(v) any non-cash items increasing Consolidated Net Income for such period; minus

(vi) the lesser of (x) the aggregate amount of all Investments made by Equistar or any of its Restricted Subsidiaries in any Joint Venture during the period under clause (f) of the second paragraph of the covenant described under “—Selected Covenants—Restricted Payments” and (y) the aggregate amount of Net Income (but not loss) of any such Joint Venture referred to in clause (x) of this clause (vi) included in calculating Equistar’s Consolidated Net Income during such period;

in each case, on a consolidated basis and determined in accordance with GAAP.

Notwithstanding the foregoing, the provision for taxes on the income or profits of, and the depreciation and amortization of, a Restricted Subsidiary of the referent Person shall be added to Consolidated Net Income to compute Consolidated Cash Flow only to the extent (and in the same proportion) that the Net Income of such Restricted Subsidiary was included in calculating the Consolidated Net Income of such Person.

“Consolidated Net Income” means, with respect to any Person for any period, the aggregate of the Net Income of such Person and its Restricted Subsidiaries for such period, on a consolidated basis, determined in accordance with GAAP; provided that:

(i) the Net Income of any Person that is not a Restricted Subsidiary shall be included only to the extent of the lesser of (x) the amount of dividends or distributions paid in cash (but not by means of a loan) to the referent Person or a Restricted Subsidiary thereof or (y) the referent Person’s (or, subject to clause (ii), a Restricted Subsidiary of the referent Person’s) proportionate share of the Net Income of such other Person;

(ii) the Net Income (but not loss) of any Restricted Subsidiary shall be excluded to the extent that the declaration or payment of dividends or similar distributions by that Restricted Subsidiary of that Net Income is not at the date of determination permitted without any prior governmental approval (that has not been obtained) or, directly or indirectly, by operation of the terms of its charter or any agreement, instrument, judgment, decree, order, statute, rule or governmental regulation applicable to that Subsidiary or its stockholders;

(iii) the Net Income of any Person acquired in a pooling of interests transaction for any period prior to the date of such acquisition shall be excluded; and

(iv) the cumulative effect of a change in accounting principles shall be excluded.

“Consolidated Net Tangible Assets” shall mean the total amount of assets (less applicable reserves and other properly deductible items) after deducting therefrom (a) all current liabilities (excluding any thereof which are by their terms extendible or renewable at the option of the obligor thereon to a time more than 12 months after the time as of which the amount thereof is being computed) and (b) all goodwill, trade names, trademarks, patents, purchased technology, unamortized debt discount and other like intangible assets, all as set forth on the most recent financial statements of Equistar and its consolidated Subsidiaries filed with the Commission pursuant to the covenant described under “—Selected Covenants—Reports” and computed in accordance with GAAP.

“Consolidated Net Worth” means, with respect to any Person as of any date, the sum, without duplication, of:

(i) the consolidated equity of holders of Capital Stock (other than Preferred Stock and Disqualified Stock) of such Person and its consolidated Restricted Subsidiaries as of such date; plus

(ii) the respective amounts reported on such Person’s balance sheet as of such date with respect to any series of Preferred Stock (other than Disqualified Stock); less

125

(iii) all write-ups (other than write-ups resulting from foreign currency translations and write-ups of tangible assets of a going concern business made in accordance with GAAP as a result of the acquisition of such business) subsequent to the Issue Date in the book value of any asset owned by such Person or a consolidated Restricted Subsidiary of such Person; and excluding

(iv) the cumulative effect of a change in accounting principles;

all as determined in accordance with GAAP.

“Credit Facility” means that certain Amended and Restated Credit Agreement dated as of August 24, 2001 by and among Equistar, the lenders party thereto and Bank of America, N.A. and JPMorgan Chase Bank, as administrative agents, including any related notes, instruments and agreements executed in connection therewith, as amended, restated, modified, extended, renewed, refunded, replaced or refinanced, in whole or in part, from time to time, whether or not with the same lenders or agents.

“Default” means any event that is, or with the giving of notice or the lapse of time, or both, would constitute an Event of Default.

“Disqualified Stock” means any Capital Stock that, by its terms (or by the terms of any security into which it is convertible or for which it is exchangeable), or upon the happening of any event, matures or is mandatorily redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at the option of the holder thereof, in whole or in part, on or prior to the date on which the notes mature; provided that any Capital Stock that would not constitute Disqualified Stock but for provisions thereof giving holders thereof the right to require such Person to repurchase or redeem such Capital Stock upon the occurrence of an “asset sale” or “change of control” occurring prior to the date on which the notes mature shall not constitute Disqualified Stock if the “asset sale” or “change of control” provisions applicable to such Capital Stock are no more favorable to the holders of such Capital Stock than the provisions contained in “—Repurchase at Option of Holders—Asset Sales” and “—Change of Control” covenants described above and such Capital Stock specifically provides that such Person will not repurchase or redeem any such stock pursuant to such provision prior to Equistar’s repurchase of such notes as are required pursuant to such covenants. The “liquidation preference” of any Disqualified Stock shall be the amount payable thereon upon liquidation prior to any payment to holders of common stock or, if none, the amount payable by the issuer thereof upon maturity or mandatory redemption.

“Equity Interests” means Capital Stock and all warrants, options or other rights to acquire Capital Stock (but excluding any debt security that is convertible into, or exchangeable for, Capital Stock).

“Existing Indebtedness” means Indebtedness of Equistar and its Restricted Subsidiaries in existence, and considered Indebtedness of Equistar or any of its Restricted Subsidiaries, on the Issue Date, until such amounts are repaid, including all reimbursement obligations with respect to letters of credit outstanding as of the Issue Date.

“Finance Subsidiary” means a Restricted Subsidiary of Equistar, all the Capital Stock of which (other than Preferred Stock) is owned by Equistar and/or one or more Wholly-Owned Restricted Subsidiaries thereof that does not engage in any activity other than:

(i) holding of Indebtedness of Equistar and/or one or more Wholly-Owned Restricted Subsidiaries thereof;

(ii) the issuance of Capital Stock; and

(iii) any activity necessary, incidental or related to the foregoing.

“Fixed Charge Coverage Ratio” means with respect to any Person for any period, the ratio of the Consolidated Cash Flow of such Person for such period to the Fixed Charges of such Person for such period. In

126

the event that Equistar or any of its Restricted Subsidiaries or any other applicable Person incurs, assumes or redeems any Indebtedness (other than revolving credit borrowings) or issues or redeems Disqualified Stock or Preferred Stock subsequent to the commencement of the period for which the Fixed Charge Coverage Ratio is being calculated but prior to the date on which the event for which the calculation of the Fixed Charge Coverage Ratio is made (the “Calculation Date”), then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect to such incurrence, assumption or redemption of Indebtedness or such issuance or redemption of Disqualified Stock or Preferred Stock as if the same had occurred at the beginning of the applicable four-quarter reference period.

In addition, for purposes of making the calculation referred to above:

(i) acquisitions that have been made by Equistar or any of its Restricted Subsidiaries or any other applicable Person, including through mergers or consolidations and including any related financing transactions, during the four-quarter reference period or subsequent to such reference period and on or prior to the Calculation Date shall be deemed to have occurred on the first day of the four-quarter reference period;

(ii) the Consolidated Cash Flow and Fixed Charges attributable to operations or businesses disposed of prior to the Calculation Date, shall be excluded, but, in the case of such Fixed Charges, only to the extent that the obligations giving rise to such Fixed Charges will not be obligations of the referent Person or any of its Restricted Subsidiaries following the Calculation Date; and

(iii) if since the beginning of the four-quarter reference period any Person was designated as an Unrestricted Subsidiary or redesignated as or otherwise became a Restricted Subsidiary, such event shall be deemed to have occurred on the first day of the four-quarter reference period.

“Fixed Charges” means, with respect to any Person for any period, the sum, without duplication, of:

(i) the consolidated interest expense of such Person and its Restricted Subsidiaries for such period, whether paid or accrued, determined in accordance with GAAP;

(ii) all commissions, discounts and other fees and charges incurred in respect of letters of credit or bankers’ acceptance financings, determined in accordance with GAAP, and net payments or receipts (if any) pursuant to Hedging Obligations of the types described in clauses (i) through (iii) of the definition thereof to the extent such Hedging Obligations relate to Indebtedness that is not itself a Hedging Obligation;

(iii) the consolidated interest expense of such Person and its Restricted Subsidiaries that was capitalized during such period;

(iv) any interest expense on Indebtedness of another Person (other than Non-Recourse Indebtedness of a Joint Venture that is not a Restricted Subsidiary or Unrestricted Subsidiary secured by a Limited-Recourse Stock Pledge) that is Guaranteed by such Person or one of its Restricted Subsidiaries or secured by a Lien on assets of such Person or one of its Restricted Subsidiaries (whether or not such Guarantee or Lien is called upon);

(v) amortization or write-off of debt discount in connection with any Indebtedness of Equistar and its Restricted Subsidiaries, on a consolidated basis in accordance with GAAP, other than amortization of deferred financing costs incurred on or prior to the Issue Date; and

(vi) the product of (a) all dividend payments (other than any payments to the referent Person or any of its Restricted Subsidiaries and any dividends payable in the form of Qualified Equity Interests) on any series of Preferred Stock or Disqualified Stock of such Person and its Restricted Subsidiaries, times (b) (x) a fraction, the numerator of which is one and the denominator of which is one minus the then current combined federal, state and local statutory tax rate of such Person, expressed as a decimal, in each case, on a consolidated basis and in accordance with GAAP or (y) if the dividends are deductible by such Person for income tax purposes, one;

127

provided that interest payments on Indebtedness of a Joint Venture shall, in each case, not be deemed Fixed Charges of Equistar or any Restricted Subsidiary as of any date of determination when such Indebtedness is not considered Indebtedness of Equistar or any Restricted Subsidiary of Equistar shall not be deemed Fixed Charges of Equistar or any Restricted Subsidiary.

“Foreign Subsidiary” means any Restricted Subsidiary that is not organized under the laws of the United States, any State thereof or the District of Columbia.

“GAAP” means generally accepted accounting principles set forth in the opinions and pronouncements of the Accounting Principles Board of the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board or in such other statements by such other entity as have been approved by a significant segment of the accounting profession, as in effect on August 24, 2001.

“General Partner” means a Restricted Subsidiary of Equistar or any of its Restricted Subsidiaries that has no assets and conducts no operations other than its ownership of a general partnership interest in a Joint Venture.

“Guarantee” means any obligation, contingent or otherwise, of any Person, directly or indirectly, guaranteeing any Indebtedness or Disqualified Stock of any other Person and, without limiting the generality of the foregoing, any obligation, direct or indirect, contingent or otherwise, of such Person (i) to purchase or pay (or advance or supply funds for the purchase or payment of) such Indebtedness or Disqualified Stock of such other Person (including those arising by virtue of partnership arrangements (other than with respect to the obligations of a Joint Venture, solely by virtue of a Restricted Subsidiary of Equistar being the General Partner of such Joint Venture if, as of the date of determination, no payment on such Indebtedness or obligation has been made by such General Partner of such Joint Venture and such arrangement would not be classified and accounted for, in accordance with GAAP, as a liability on a consolidated balance sheet of Equistar)) or (ii) entered into for the purpose of assuring in any other manner the obligee of such Indebtedness or Disqualified Stock of the payment thereof or to protect such obligee against loss in respect thereof in whole or in part (including by agreement to keep-well, to purchase assets, goods, securities or services, to take-or-pay, to maintain financial statement conditions or otherwise); provided that the term “Guarantee” shall not include endorsements for collection or deposit in the ordinary course of business. The term “Guarantee” used as a verb has a corresponding meaning.

“Hedging Obligations” means, with respect to any Person, the obligations of such Person under (i) interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, (ii) forward foreign exchange contracts or currency swap agreements, (iii) other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency values and (iv) commodity price protection agreements or commodity price hedging agreements designed to manage fluctuations in prices or costs in raw materials, manufactured products or related commodities.

“incur” means, with respect to any Indebtedness, to incur, create, issue, assume or Guarantee such Indebtedness. If any Person becomes a Restricted Subsidiary on any date after the Issue Date (including by redesignation of an Unrestricted Subsidiary), the Indebtedness and Capital Stock of such Person outstanding on such date will be deemed to have been incurred by such Person on such date for purposes of the covenant described under “—Selected Covenants—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock,” but will not be considered the sale or issuance of Equity Interests for purposes of the covenant described under “—Repurchase at Option of Holders—Asset Sales.” The accretion of original issue discount or payment of interest in kind will not be considered an incurrence of Indebtedness.

“Indebtedness” means, with respect to any Person,

• any indebtedness of such Person, whether or not contingent, in respect of borrowed money or evidenced by bonds, notes, debentures or similar instruments;

• letters of credit (or reimbursement agreements in respect thereof) or banker’s acceptances;

128

• Capital Lease Obligations and Attributable Debt in respect of Sale and Lease-Back Transactions;

• the balance deferred and unpaid of the purchase price of any property, except any such balance that constitutes an accrued expense or trade payable; and

• net Hedging Obligations,

if and to the extent any of the foregoing indebtedness (other than letters of credit and Hedging Obligations) would appear as a liability on a balance sheet of such Person prepared in accordance with GAAP, as well as

• all indebtedness of others secured by a Lien on any asset of such Person whether or not such indebtedness is assumed by such Person; provided that, for purposes of determining the amount of any Indebtedness of the type described in this clause, if recourse with respect to such Indebtedness is limited to such asset, the amount of such Indebtedness shall be limited to the lesser of the fair market value of such asset or the amount of such Indebtedness; and

• to the extent not otherwise included, the Guarantee by such Person of any indebtedness of the types described above of any other Person.

The amount of any Indebtedness outstanding as of any date shall be (i) the accreted value thereof, in the case of any Indebtedness that does not require current payments of interest and (ii) the principal amount thereof, together with any interest thereon that is more than 30 days past due, in the case of any other Indebtedness.

Notwithstanding the foregoing, a Limited Recourse Stock Pledge shall not be considered Indebtedness of Equistar or any of its Restricted Subsidiaries.

“Investment Grade” means a rating of BBB- or higher by Standard & Poor’s and Baa3 or higher by Moody’s or the equivalent of such ratings by Standard & Poor’s or Moody’s. In the event that Equistar shall select any other Rating Agency pursuant to the provisions of the definition thereof, the equivalent of such ratings by such Rating Agency shall be used.

“Investments” means, with respect to any Person, all investments by such Person in another Person (including an Affiliate of such Person) in the form of direct or indirect loans, advances or extensions of credit to such other Person (including any Guarantee by such Person of the Indebtedness or Disqualified Stock of such other Person) or capital contributions or purchases or other acquisitions for consideration of Indebtedness, Equity Interests or other securities of such other Person, together with all items that are or would be classified as investments of such investing Person on a balance sheet prepared in accordance with GAAP; provided that:

(i) trade credit and accounts receivable in the ordinary course of business;

(ii) commissions, loans, advances, fees and compensation paid in the ordinary course of business to officers, directors and employees; and

(iii) reimbursement obligations in respect of letters of credit and tender, bid, performance, government contract, surety and appeal bonds,

in each case solely with respect to obligations of Equistar or any of its Restricted Subsidiaries shall not be considered Investments.

If Equistar or any Restricted Subsidiary of Equistar sells or otherwise disposes of any Equity Interests of any direct or indirect Restricted Subsidiary of Equistar such that, after giving effect to any such sale or disposition, such Person is no longer a Restricted Subsidiary of Equistar, Equistar shall be deemed to have made an Investment on the date of any such sale or disposition equal to the fair market value of the Equity Interests of such Restricted Subsidiary not sold or disposed of in an amount determined as provided in the first paragraph of the covenant described above under the caption “—Selected Covenants—Restricted Payments.”

129

“Issue Date” means April 22, 2003.

“Joint Venture” means any joint venture between Equistar or any Restricted Subsidiary and any other Person, whether or not such joint venture is a Subsidiary of Equistar or any Restricted Subsidiary.

“Lien” means, with respect to any asset, any mortgage, lien, pledge, charge, security interest or encumbrance of any kind in respect of such asset, whether or not filed, recorded or otherwise perfected under applicable law (including any conditional sale or other title retention agreement, and any lease in the nature thereof) or the assignment or conveyance of any right to receive income therefrom.

“Limited Recourse Stock Pledge” means the pledge of Equity Interests in any Joint Venture (that is not a Restricted Subsidiary) or any Unrestricted Subsidiary to secure Non-Recourse Debt of such Joint Venture or Unrestricted Subsidiary, which pledge is made by a Restricted Subsidiary of Equistar, the activities of which are limited to making and managing Investments, and owning Equity Interests, in such Joint Venture or Unrestricted Subsidiary, but only for so long as its activities are so limited.

“Lyondell” means Lyondell Chemical Company, any successor of Lyondell that is a Permitted Holder or any Subsidiary of Lyondell.

“Moody’s” means Moody’s Investors Service and its successors.

“Net Income” means, with respect to any Person, the net income (loss) of such Person, determined in accordance with GAAP and before any reduction in respect of Preferred Stock dividends, excluding, however,

(i) any gain or loss, together with any related provision for taxes on such gain or loss, realized in connection with

(a) any Asset Sale or any disposition pursuant to a Sale and Lease-Back Transaction or

(b) the disposition of any securities by such Person or any of its Restricted Subsidiaries or the extinguishment of any Indebtedness of such Person or any of its Restricted Subsidiaries and

(ii) any extraordinary gain or loss, together with any related provision for taxes on such extraordinary gain or loss.

“Net Proceeds” means the aggregate cash proceeds (excluding any proceeds deemed to be “cash” pursuant to the covenant described above under “—Repurchase at Option of Holders—Asset Sales”) received by Equistar or any of its Restricted Subsidiaries in respect of any Asset Sale (including, without limitation, any cash received upon the sale or other disposition of any non-cash consideration received in any Asset Sale), net of (i) the direct costs relating to such Asset Sale (including, without limitation, legal, accounting and investment banking fees and sales commissions) and any relocation expenses incurred as a result thereof, (ii) taxes paid or payable as a result thereof (after taking into account any available tax credits or deductions and any tax sharing arrangements), (iii) amounts required to be paid to holders of minority interests in Restricted Subsidiaries or Joint Ventures as a result of such Asset Sale, (iv) amounts required to be applied to the repayment of Indebtedness (other than Indebtedness under the Credit Facility) secured by a Lien on any asset sold in such Asset Sale, or which must by the terms of such Lien or by applicable law be repaid out of the proceeds of such Asset Sale, (v) all payments made with respect to liabilities directly associated with the assets which are the subject of the Asset Sale, including, without limitation, trade payables and other accrued liabilities, and (vi) any reserves for adjustment in respect of the sale price of such asset or assets established in accordance with GAAP and any reserve for future liabilities established in accordance with GAAP; provided that the reversal of any such reserve that reduced Net Proceeds when issued shall be deemed a receipt of Net Proceeds in the amount of such proceeds on such day.

“Non-Recourse Indebtedness” means Indebtedness as to which (i) the lenders have been notified in writing that they will not have any recourse to the stock or assets of Equistar or any of its Restricted Subsidiaries, other

130

than the Equity Interests of a Joint Venture that is not a Restricted Subsidiary or Unrestricted Subsidiary pledged by Equistar or any of its Restricted Subsidiaries as a Limited Recourse Stock Pledge and (ii) no default thereunder would, as such, constitute a default under any Indebtedness of Equistar or any Restricted Subsidiary or give any rights to or in other assets of Equistar as its Restricted Subsidiaries.

“Obligations” means any principal, interest, penalties, fees, indemnifications, reimbursements, damages and other liabilities payable under the documentation governing any Indebtedness and in all cases whether direct or indirect, absolute or contingent, now outstanding or hereafter created, assumed or incurred and including, without limitation, interest accruing subsequent to the filing of a petition in bankruptcy or the commencement of any insolvency, reorganization or similar proceedings at the rate provided in the relevant documentation, whether or not an allowed claim, and any obligation to redeem or defease any of the foregoing.

“Partner” means any Person owning Equity Interests in Equistar and having the right to select at least one member of the Partnership Governance Committee.

“Partnership Governance Committee” means Equistar’s Partnership Governance Committee, together with any successor or substitute committee or board exercising similar power and authority.

“Payment Default” means any failure to pay any scheduled installment of interest or principal on any Indebtedness within the grace period provided for such payment in the documentation governing such Indebtedness.

“Permitted Business” means the petrochemical, chemical and petroleum refining businesses and any business reasonably related, incidental, complementary or ancillary thereto.

“Permitted Dividends” means (i) dividends and distributions by Equistar on any class of its Equity Interests; provided that a portion of such class is held by any Permitted Holder or (ii) any payment of principal on, or purchase, redemption, defeasance or other acquisition for value of Subordinated Debt owed to Lyondell except for a payment of principal or interest at Stated Maturity.

“Permitted Holders” means Lyondell Chemical Company, Millennium Chemicals Inc., Occidental Petroleum Corporation, the successor of any Permitted Holder (including any entity that is a party to any merger or business combination transaction to which such Permitted Holder shall be a party; provided that immediately after such transaction Equity Interests having a majority of the voting power of such entity’s outstanding Equity Interests shall be held by holders of Equity Interests of such Permitted Holder immediately prior to such transaction), and the respective Subsidiaries of any of the foregoing.

“Permitted Investments” means:

(i) any Investment in Equistar or in a Restricted Subsidiary of Equistar that is engaged in a Permitted Business;

(ii) any Investment in Cash Equivalents;

(iii) any Investment by Equistar or any Subsidiary of Equistar in a Person, if as a result of such Investment; (a) such Person becomes a Restricted Subsidiary of Equistar engaged in a Permitted Business or (b) such Person is merged, consolidated or amalgamated with or into, or transfers or conveys substantially all its assets to, or is liquidated into, Equistar or a Restricted Subsidiary of Equistar engaged in a Permitted Business;

(iv) any non-cash consideration received as consideration in an Asset Sale that was made pursuant to and in compliance with the covenant described above under the caption “—Repurchase at Option of Holders—Asset Sales;” (other than a joint venture interest received in full or partial satisfaction of the 75% requirement in clause (ii) of the first paragraph of such covenant);

131

(v) any acquisition of assets or Equity Interests solely in exchange for, or out of the net cash proceeds of a substantially concurrent, issuance of Equity Interests (other than Disqualified Stock) of Equistar;

(vi) Hedging Obligations entered into in the ordinary course of business and otherwise permitted under the Indenture;

(vii) Investments in an Accounts Receivable Subsidiary that, as conclusively determined by the Partnership Governance Committee, are necessary or advisable to effect a Receivables Facility;

(viii) Investments in Unrestricted Subsidiaries and Joint Ventures in an aggregate amount, taken together with all other Investments made in reliance on this clause (viii), not to exceed at any time outstanding $75 million (after giving effect to any reductions in the aggregate amount of such Investments as a result of the disposition thereof, including through liquidation, repayment or other reduction, including by way of dividend or distribution, for cash, the aggregate amount of such reductions not to exceed the aggregate amount of such Investments outstanding and previously made pursuant to this clause (viii));

(ix) any Investment received by Equistar or any Restricted Subsidiary as consideration for the settlement of any litigation, arbitration or claim in bankruptcy or in partial or full satisfaction of accounts receivable owed by a financially troubled Person to the extent reasonably necessary in order to prevent or limit any loss by Equistar or any of its Restricted Subsidiaries in connection with such accounts receivable;

(x) loans to Lyondell; provided that such loans are made in compliance with the covenant described under “—Selected Covenants—Transactions with Affiliates;” and

(xi) Limited Recourse Stock Pledges.

“Permitted Liens” means:

(i) Liens in favor of Equistar or any Subsidiary Guarantor;

(ii) Liens securing the notes and the Subsidiary Guarantees;

(iii) Limited Recourse Stock Pledges;

(iv) Liens on property of a Person existing at the time it becomes a Subsidiary or at the time it is merged into or consolidated with Equistar or a Subsidiary; provided that such Liens were in existence prior to the contemplation of such merger, consolidation or acquisition and do not extend to any assets of Equistar or its Restricted Subsidiaries other than those of the Person merged into or consolidated with Equistar or that becomes a Restricted Subsidiary of Equistar;

(v) Liens on property (together with general intangibles and proceeds related to such property) existing at the time of acquisition thereof by Equistar or any Restricted Subsidiary of Equistar; provided that such Liens were in existence prior to the contemplation of such acquisition;

(vi) Liens (including the interest of a lessor under a capital lease) on any asset (together with general intangibles and proceeds related to such property) existing at the time of acquisition thereof or incurred within 180 days of the time of acquisition or completion of construction thereof, whichever is later, to secure or provide for the payment of all or any part of the purchase price (or construction price) thereof (including obligations of the lessee under any such capital lease);

(vii) Liens imposed by law, such as carriers’, warehousemen’s and mechanics’ Liens on the property of Equistar or any Restricted Subsidiary;

(viii) easements, building restrictions, rights-of-ways, irregularities of title, and such other encumbrances or charges not interfering in any material respect with the ordinary conduct of business of Equistar or any of its Restricted Subsidiaries;

(ix) Leases, subleases or licenses by Equistar or any of its Restricted Subsidiaries as lessor, sublessor or licensor in the ordinary course of business and otherwise permitted by the Indenture;

132

(x) Liens securing reimbursement obligations with respect to commercial letters of credit obtained in the ordinary course of business which encumber documents and other property or assets relating to such letters of credit and products and proceeds thereof;

(xi) Liens in favor of custom and revenue authorities arising as a matter of law to secure payment of nondelinquent customs duties in connection with the importation of goods;

(xii) Liens encumbering customary initial deposits and margin deposits, netting provisions and setoff rights, in each case securing Indebtedness under Hedging Obligations;

(xiii) Liens incurred in the ordinary course of business to secure nondelinquent obligations arising from statutory, regulatory, contractual or warranty requirements of Equistar or its Restricted Subsidiaries or any tender, bid, performance, government contract, surety or appeal bonds or other obligations of a like nature for which a reserve or other appropriate provision, if any, as shall be required by GAAP shall have been made;

(xiv) Liens arising out of consignment or similar arrangements for the sale of goods entered into by Equistar or any Restricted Subsidiary in the ordinary course of business in accordance with industry practice;

(xv) Liens incurred or assumed in connection with the issuance of revenue bonds the interest on which is exempt from federal income taxation pursuant to Section 103(b) of the Internal Revenue Code;

(xvi) Liens arising by reason of deposits necessary to qualify Equistar or any Restricted Subsidiary to conduct business, maintain self insurance or comply with any law;

(xvii) until the notes are rated Investment Grade, Liens securing Obligations with respect to Indebtedness under the Credit Facility that is permitted to be incurred under clause (i) of the second paragraph of the covenant described under “—Selected Covenants—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock” (including any paid-in-kind interest thereon) and Hedging Obligations owed to any lender thereunder or Affiliate thereof;

(xviii) Liens for taxes, assessments or governmental charges or claims that are not yet delinquent or that are being contested in good faith by appropriate proceedings, prejudgment Liens that are being contested in good faith by appropriate proceedings and Liens arising out of judgments or awards against Equistar or any Restricted Subsidiary with respect to which Equistar or such Restricted Subsidiary at the time shall be prosecuting an appeal or proceedings for review and with respect to which it shall have secured a stay of execution pending such appeal or proceedings for review; provided that in each case any reserve or other appropriate provision as shall be required in conformity with GAAP shall have been made therefor;

(xix) Liens securing assets under construction arising from progress or partial payments by a customer of Equistar or its Restricted Subsidiaries relating to such property or assets;

(xx) Liens resulting from the deposit of funds or evidences of Indebtedness in trust for the purpose of (A) defeasing Indebtedness of Equistar or any of its Restricted Subsidiaries (which defeasance is otherwise permitted under the Indenture) having an aggregate principal amount at any one time outstanding not to exceed $25 million or (B) defeasing Indebtedness ranking pari passu with the notes; provided that the notes are defeased concurrently with such Indebtedness;

(xxi) customary Liens for the fees, costs and expenses of trustees and escrow agents pursuant to any indenture, escrow agreement or similar agreement establishing a trust or escrow arrangement, and Liens pursuant to merger agreements, stock purchase agreements, asset sale agreements, option agreements and similar agreements in respect of the disposition of property or assets of Equistar or any Restricted Subsidiary on the property to be disposed of, to the extent such dispositions are permitted hereunder;

(xxii) from and after the first date when the notes are rated Investment Grade, Liens on any asset of Equistar other than Restricted Property;

133

(xxiii) Liens on assets (other than Restricted Property) of Equistar or any Restricted Subsidiary arising as a result of a Sale and Lease-Back Transaction with respect to such assets; provided that the proceeds from such Sale and Lease-Back Transaction are applied to the repayment of Indebtedness or acquisition of Additional Assets or the making of capital expenditures pursuant to the covenant described above under the caption “—Repurchase at Option of Holders—Asset Sales;”

(xxiv) other Liens on assets of Equistar or any Restricted Subsidiary of Equistar securing Indebtedness or other obligations that is permitted by the terms of the Indenture to be outstanding having an aggregate principal amount at any one time outstanding not to exceed $50 million;

(xxv) Liens existing on the Issue Date, other than Liens securing Indebtedness under the Credit Facility;

(xxvi) Liens on accounts receivable and related property deemed to arise in connection with any Receivables Facility;

(xxvii) the interest of a lessor or licensor under an operating lease or license under which Equistar or any of its Restricted Subsidiaries are lessee, sublessee, or licensee, including protective financing statement filings;

(xxviii) Liens to secure a Permitted Refinancing incurred to refinance Indebtedness that was secured by a Lien permitted under the Indenture and that was incurred in accordance with the provisions of the Indenture; provided that such Liens do not extend to or cover any property or assets of Equistar or any Restricted Subsidiary other than assets or property securing the Indebtedness so refinanced; and

(xxix) from and after the first date when the notes are rated Investment Grade, Liens upon Restricted Property securing Indebtedness or other obligations in an aggregate principal amount which, together with the aggregate outstanding principal amount of all other Indebtedness or other obligations secured by Restricted Property of Equistar and its Restricted Subsidiaries which would otherwise be subject to the restrictions set forth in the covenant “—Selected Covenants—Limitation on Liens” (not including Indebtedness or other obligations permitted to be secured under clauses (i) to (xxviii) inclusive above) and the aggregate Value of the Sale and Lease-Back Transactions of any Restricted Property in existence at the time of the incurrence of such Indebtedness or other obligations (not including Sale and Lease-Back Transactions as to which the proceeds from such Sale and Lease-Back Transaction are applied to the repayment of Indebtedness or acquisition of Additional Assets or the making of capital expenditures pursuant to the covenant described above under the caption “—Repurchase at Option of Holders—Asset Sales”), does not at such time exceed 15% of the Consolidated Net Tangible Assets of Equistar and its consolidated Subsidiaries as shown on the most recent audited annual consolidated balance sheet delivered at such time pursuant to the covenant “—Selected Covenants—Reports.”

“Permitted Refinancing” means any Indebtedness of Equistar or any of its Subsidiaries or Preferred Stock of a Finance Subsidiary issued in exchange for, or the net proceeds of which are used solely to extend, refinance, renew, replace, defease or refund, other Indebtedness of Equistar or any of its Restricted Subsidiaries; provided that:

(i) the principal amount (or liquidation preference in the case of Preferred Stock) of such Permitted Refinancing (or if such Permitted Refinancing is issued at a discount, the initial issuance price of such Permitted Refinancing) does not exceed the principal amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded (plus the amount of any premiums paid and reasonable expenses incurred in connection therewith);

(ii) such Permitted Refinancing or, in the case of Preferred Stock of a Finance Subsidiary, the Indebtedness issued to such Finance Subsidiary, has a Stated Maturity date later than the Stated Maturity date of, and has a Weighted Average Life to Maturity equal to or greater than the Weighted Average Life to Maturity of, the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;

134

(iii) if the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded is subordinated by its terms in right of payment to the notes or the Subsidiary Guarantees, such Permitted Refinancing, or, in the case of Preferred Stock, the Indebtedness issued to such Finance Subsidiary, has a Stated Maturity date later than the Stated Maturity date of, and is subordinated by it terms in right of payment to, the notes on subordination terms at least as favorable to the holders of notes as those contained in the documentation governing the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded;

(iv) such Indebtedness is incurred by Equistar or a Subsidiary Guarantor (or such Preferred Stock is issued by a Finance Subsidiary) if Equistar or a Subsidiary Guarantor is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded; and

(v) such Indebtedness is incurred by Equistar or a Restricted Subsidiary (or such Preferred Stock is issued by a Finance Subsidiary) if a Restricted Subsidiary that is not a Subsidiary Guarantor is the obligor on the Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded.

“Person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint stock company, trust, unincorporated organization or government or any agency or political subdivision thereof or other entity of any kind.

“Preferred Stock” means, with respect to any Person, any and all shares, interests, participations or other equivalents (however designated, whether voting or non-voting) of preferred or preference stock of such Person which is outstanding or issued on or after the date of the Indenture.

“Qualified Equity Interests” shall mean all Equity Interests of a Person other than Disqualified Stock of such Person.

“Rating Agency” means (i) Standard & Poor’s and (ii) Moody’s or (iii) if neither Standard & Poor’s nor Moody’s shall exist, a nationally recognized securities rating agency or agencies, as the case may be, selected by Equistar, which shall be substituted for Standard & Poor’s or Moody’s or both, as the case may be.

“Receivables Facility” means one or more receivables financing facilities or arrangements, as amended from time to time, pursuant to which Equistar or any of its Restricted Subsidiaries sells (including a sale in exchange for a promissory note of or Equity Interest in an Accounts Receivable Subsidiary) its accounts receivable, related assets and the provision of billing, collection and other services in connection therewith, in each case to an Accounts Receivable Subsidiary.

“Receivables Fees” means distributions or payments made directly or by means of discounts with respect to any participation interests issued or sold in connection with, and other fees paid to a Person that is not Equistar or a Restricted Subsidiary in connection with, any Receivables Facility.

“Restricted Investment” means an Investment other than a Permitted Investment.

“Restricted Property” means:

(a) Any plant for the production of petrochemicals owned by Equistar or a Subsidiary, except (i) related facilities which in the opinion of the Partnership Governance Committee are transportation or marketing facilities, and (ii) any plant for the production of petrochemicals which in the opinion of the Partnership Governance Committee is not a principal plant of Equistar and its Subsidiaries; and

(b) Any shares of Capital Stock or Indebtedness of a Subsidiary owning Restricted Property owned by Equistar or a Subsidiary.

135

“Restricted Subsidiary” of a Person means any Subsidiary of such Person that is not an Unrestricted Subsidiary. Unless the context otherwise requires, each reference to a “Restricted Subsidiary” shall refer to a Restricted Subsidiary of Equistar.

“Standard & Poor’s” means Standard & Poor’s Ratings Group and its successors.

“Sale and Lease-Back Transaction” means any arrangement with any Person (other than Equistar or a Subsidiary), or to which any such Person is a party, providing for the leasing, pursuant to a capital lease that would at such time be required to be capitalized on a balance sheet in accordance with GAAP, to Equistar or a Restricted Subsidiary of any property or asset which has been or is to be sold or transferred by Equistar or such Restricted Subsidiary to such Person or to any other Person (other than Equistar or a Subsidiary), to which funds have been or are to be advanced by such Person.

“Significant Subsidiary” means (1) Equistar Funding and (2) any Restricted Subsidiary of Equistar that would be a “significant subsidiary” as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the Securities Act of 1933, as amended, as such Regulation was in effect on August 24, 2001.

“Stated Maturity” means, with respect to any installment of interest or principal on any series of Indebtedness, the date on which such payment of interest or principal was scheduled to be paid in the original documentation governing such Indebtedness (or any later date established by any amendment to such original documentation) and shall not include any contingent obligations to repay, redeem or repurchase any such interest or principal prior to the date originally scheduled for the payment thereof.

“Subsidiary” means, with respect to any Person, (i) any corporation, association or other business entity of which more than 50% of the total voting power of shares of Capital Stock entitled (without regard to the occurrence of any contingency) to vote in the election of directors, managers or trustees thereof is at the time owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of that Person (or a combination thereof) or (ii) any partnership (a) the sole general partner or the managing general partner of which is such Person or a Subsidiary of such Person or (b) the only general partners of which are such Person or of one or more Subsidiaries of such Person (or any combination thereof).

“Subsidiary Guarantor” means any Subsidiary that executes a Subsidiary Guarantee in accordance with the provisions of the Indenture, in each case, until the Subsidiary Guarantee of such Person is released in accordance with the provisions of the Indenture.

“Unrestricted Subsidiary” means (i) any Subsidiary of Equistar that is designated by the Partnership Governance Committee of Equistar as an Unrestricted Subsidiary pursuant to a resolution, (ii) any Subsidiary of an Unrestricted Subsidiary and (iii) any Accounts Receivable Subsidiary. The Partnership Governance Committee may designate any Subsidiary of Equistar (including any newly acquired or newly formed Subsidiary) to be an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Equity Interest or Indebtedness of, or holds any Lien on any property of, Equistar or any other Subsidiary of Equistar that is not a Subsidiary of the Subsidiary to be so designated; provided that

(a) any Guarantee by Equistar or any Restricted Subsidiary of any Indebtedness of the Subsidiary being so designated or any of its Subsidiaries shall be deemed an “incurrence” of such Indebtedness and an “Investment” by Equistar or such Restricted Subsidiary (or both, if applicable) at the time of such designation,

(b) either (1) the Subsidiary to be so designated has total assets of $1,000 or less or (2) if such Subsidiary has assets greater than $1,000 such designation would be permitted under the covenant described above under the caption “—Selected Covenants—Restricted Payments,” and

(c) if applicable, the Investment and the incurrence of Indebtedness referred to in clause (a) of this proviso would be permitted under the covenants described above under the caption “—Selected

136

Covenants—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock” and “—Restricted Payments.”

Any such designation by the Partnership Governance Committee of Equistar pursuant to clause (i) above shall be evidenced to the Trustee by filing with the Trustee a certified copy of the resolution giving effect to such designation and an Officers’ Certificate certifying that such designation complied with the foregoing conditions and was permitted by the covenants described above under the caption “—Selected Covenants—Restricted Payments” and “—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock.”

If at any time Equistar or any Restricted Subsidiary Guarantees any Indebtedness of such Unrestricted Subsidiary or makes any other Investment in such Unrestricted Subsidiary and such incurrence of Indebtedness or Investment would not be permitted under the covenants described above under the caption “—Selected Covenants—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock” and “—Restricted Payments,” it shall thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted Subsidiary of Equistar as of such date (and, if such Indebtedness is not permitted to be incurred as of such date under the covenant described above under the caption “—Selected Covenants—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock,” Equistar shall be in default of such covenant). The Partnership Governance Committee of Equistar may at any time designate any Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such designation shall be deemed to be an incurrence of Indebtedness by a Restricted Subsidiary of Equistar of any outstanding Indebtedness of such Unrestricted Subsidiary and such designation shall only be permitted if (i) such Indebtedness is permitted under the covenant described above under the caption “—Selected Covenants—Limitation on Incurrence of Additional Indebtedness and Issuance of Preferred Stock” and (ii) no Default or Event of Default would be in existence following such designation.

“Value” means, with respect to a Sale and Lease-Back Transaction, the amount equal to the greater of (i) the net proceeds of the sale or transfer of the property leased pursuant to such Sale and Lease-Back Transaction or (ii) the fair value, in the opinion of the Partnership Governance Committee, of such property at the time of entering into such Sale and Lease-Back Transaction, in either case divided first by the number of full years of the term of the lease and then multiplied by the number of full years of such term remaining at the time of determination, without regard to any renewal or extension options contained in the lease.

“Weighted Average Life to Maturity” means, when applied to any Indebtedness at any date, the number of years obtained by dividing:

(i) the sum of the products obtained by multiplying

(a) the amount of each then remaining installment, sinking fund, serial maturity or other required payments of principal, including payment at final maturity, in respect thereof, by

(b) the number of years (calculated to the nearest one-twelfth) that will elapse between such date and the making of such payment, by

(ii) the then outstanding principal amount of such Indebtedness.

“Wholly Owned Restricted Subsidiary” of any Person means a Restricted Subsidiary of such Person all the outstanding Equity Interests of which (other than directors’ qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Restricted Subsidiaries of such Person or by such Person and one or more Wholly Owned Restricted Subsidiaries of such Person.

“Wholly Owned Subsidiary” of any Person means a Subsidiary of such Person all the outstanding Equity Interests of which (other than directors’ qualifying shares) shall at the time be owned by such Person or by one or more Wholly Owned Subsidiaries of such Person or by such Person and one or more Wholly Owned Subsidiaries of such Person.

137

REGISTRATION RIGHTS AGREEMENT

The description of the registration rights agreement set forth below is a summary of the material provisions of the registration rights agreement. This summary is qualified in its entirety by reference to the full and complete text of the registration rights agreement, a copy of which has been filed as an exhibit to the registration statement of which this prospectus is a part.

In connection with the issuance of the outstanding notes, we entered into a registration rights agreement with the initial purchasers of the outstanding notes on November 21, 2003, which is the Offering Date. In the registration rights agreement, we agreed to file an exchange offer registration statement with the SEC within 120 days after the Offering Date, and use our respective reasonable best efforts to have it declared effective at the earliest possible time, but in no event later than 210 days following the Offering Date. We also agreed to use our reasonable best efforts to:

• cause the exchange offer registration statement to be effective continuously;

• keep the exchange offer for the notes open for a period of not less than 20 business days; and

• cause the exchange offer to be consummated no later than the 30th business day after the exchange offer registration statement is declared effective by the SEC.

Under the exchange offer, holders of outstanding unregistered notes may exchange their outstanding notes for new registered notes. To participate in an exchange offer, a holder must represent, as applicable, that:

• it is not our affiliate, as defined in Rule 405 under the Securities Act, or a broker-dealer tendering outstanding notes acquired directly from us for its own account;

• it has no arrangement or understanding with any person to participate in a distribution of the outstanding notes or the new notes within the meaning of the Securities Act;

• if the holder is a broker-dealer, or is a broker-dealer but will not receive new notes for its own account, neither the holder or the person for whom the new notes are received are engaged in or intends to participate in a distribution of the new notes;

• it is acquiring the new notes in the exchange offer in its ordinary course of business; and

• if the holder is a broker-dealer that will receive new notes for its own account in exchange for outstanding notes, it represents that the outstanding notes to be exchanged for new notes were acquired by it as a result of market-making activities or other trading activities and it acknowledges that it will deliver a prospectus meeting the requirements of the Securities Act in connection with the resale of any new notes. It is understood that the holder is not admitting that it is an “underwriter” within the meaning of the Securities Act by acknowledging that it will deliver, and by delivery of, a prospectus.

If the holder is a broker-dealer that will receive new notes for its own account in exchange for outstanding notes that were acquired as a result of market-making activities or other trading activities, it will be required to acknowledge that it will deliver a prospectus in connection with any resale of such new notes.

If the exchange offer is not permitted by applicable law or SEC policy or any holder of outstanding notes notifies us before the 20th business day following the consummation of the exchange offer that:

• it is prohibited by law or SEC policy from participating in the exchange offer;

• it may not resell the new notes acquired by it in the exchange offer to the public without delivering a prospectus, and the prospectus contained in the exchange offer registration statement is not appropriate or available for such resales by it; or

• it is a broker-dealer and holds outstanding notes acquired directly from the issuers or any of their affiliates,

138

then we will file with the SEC a shelf registration statement to register for public resale the outstanding notes held by any such holder. A holder who sells notes pursuant to the shelf registration statement generally will be required to be named as a selling securityholder in the related prospectus and to deliver a prospectus to purchasers, will be subject to certain of the civil liability provisions under the Securities Act in connection with such sales and will be bound by the provisions of the registration rights agreement which are applicable to such a holder (including certain indemnification obligations). In addition, each holder of the notes will be required to deliver information to be used in connection with the shelf registration statement in order to have its notes included in the shelf registration statement, and we will not be required to pay liquidated damages to a holder who has not timely furnished certain information specified in the registration rights agreement.

The registration rights agreement also provides that:

• if we fail to file any registration statement on or prior to the applicable deadline;

• if such registration statement is not declared effective by the SEC on or before the applicable deadline;

• if the exchange offer is not consummated on or before the 30th business day after the exchange offer registration statement is declared effective; or

• if any registration statement is declared effective but thereafter ceases to be effective or useable in connection with resales of the outstanding notes during the periods specified in the registration rights agreement, for such time of non-effectiveness or non-usability (each, a “Registration Default”),

then we will pay to each holder of outstanding notes affected thereby liquidated damages in an amount equal to $0.05 per week per $1,000 in principal amount of outstanding notes held by such holder for each week or portion thereof that the Registration Default continues for the first 90 day period immediately following the occurrence of such Registration Default. The amount of the liquidated damages shall increase by an additional $0.05 per week per $1,000 in principal amount of outstanding notes with respect to each subsequent 90 day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages of $0.25 per week per $1,000 in principal amount of outstanding notes. We shall not be required to pay liquidated damages for more than one Registration Default at any given time. Following the cure of all Registration Defaults, the accrual of liquidated damages will cease.

We will pay all accrued liquidated damages to holders entitled thereto in the same manner and at the same time as interest on the notes is paid.

139

MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES

The following is a summary of the material United States federal income tax consequences of the exchange of outstanding notes for new notes and the ownership and disposition of new notes. Unless otherwise stated, this summary deals only with notes held as capital assets by U.S. Holders. As used in this summary, “U.S. Holders” are any beneficial owners of the notes that are, for United States federal income tax purposes: (1) citizens or residents of the United States, (2) corporations created or organized in or under the laws of the United States, any state thereof or the District of Columbia, (3) estates, the income of which is subject to United States federal income taxation regardless of its source or (4) trusts if (A) a court within the United States is able to exercise primary supervision over the administration of the trust and (B) one or more United States persons have the authority to control all substantial decisions of the trust. As used in this summary, “Non-U.S. Holders” are beneficial owners of the notes that are, for United States federal income tax purposes (1) nonresident alien individuals; (2) foreign corporations; or (3) foreign estates or trusts that are not subject to United States federal income taxation on their worldwide income. If a partnership (including for this purpose any entity treated as a partnership for United States federal income tax purposes) is a beneficial owner of notes, the treatment of a partner in the partnership will generally depend upon the status of the partner and upon the activities of the partnership. Holders of notes that are a partnership or partners in such partnership should consult their tax advisors about the United States federal income tax consequences of holding and disposing of the notes. This summary does not deal with special classes of holders such as banks, thrifts, real estate investment trusts, regulated investment companies, insurance companies, dealers in securities or currencies, or tax-exempt investors and does not discuss notes held as part of a hedge, straddle, “synthetic security” or other integrated transaction. This summary also does not address the tax consequences to U.S. expatriates, persons who own, directly or indirectly, 10% or more of our capital or profits interests or U.S. Holders that have a functional currency other than the U.S. dollar or the tax consequences to shareholders, partners or beneficiaries of a holder of the notes. Further, it does not include any description of any alternative minimum tax consequences, United States federal estate or gift tax laws or the tax laws of any state or local government or of any foreign government that may be applicable to the notes.

This summary is based on the Internal Revenue Code of 1986, as amended, the Treasury regulations promulgated thereunder and administrative and judicial interpretations thereof, all as of the date hereof, and all of which are subject to change and differing interpretations, possibly on a retroactive basis. There can be no assurance that the Internal Revenue Service, or IRS, will not challenge one or more of the conclusions described in this offering memorandum, and we have not obtained, nor do we currently intend to obtain, a ruling from the IRS with respect to the United States federal income tax consequences of exchanging outstanding notes for new notes or owning or disposing of new notes.

The outstanding notes were, and the new notes will be, issued pursuant to an indenture dated as of April 22, 2003 among Equistar, Equistar Funding and The Bank of New York. At the time the outstanding notes were issued, there were $450 million of pre-existing notes already outstanding under the indenture. The outstanding notes constitute, and the new notes will constitute, “additional notes” under the indenture. The new notes are expected to trade under the same CUSIP number as the $450 million of pre-existing notes under the indenture after the $450 million in pre-existing notes have been exchanged for registered notes in a separate exchange offer. Except as discussed below, the new notes will be subject to the same information reporting for federal income tax purposes as, and will be fungible with, the $450 million of pre-existing notes under the indenture. This discussion pertains only to the new notes hereby being issued and not to the $450 million of pre-existing notes under the indenture. This summary applies only to an initial purchaser of outstanding notes in connection with their original issuance.

You should consult with your own tax advisor regarding the federal, state, local and foreign income, franchise, personal property, and any other tax consequences of the exchange of outstanding notes for new notes and the ownership and disposition of new notes.

140

Exchange Offer

The exchange of any outstanding note for a new note in the exchange offer should not constitute a taxable exchange of the outstanding note for a new note. As a result, the new notes should have the same adjusted issue price (as defined below) immediately after the exchange as the outstanding notes, and each holder should have the same adjusted tax basis and holding period in the new notes as it had in the outstanding notes. The following discussion assumes that the exchange of outstanding notes for new notes pursuant to the exchange offer will not be treated as a taxable exchange and that the outstanding notes and the new notes will be treated as the same security for federal income tax purposes. Accordingly, the discussion below generally makes no distinction between the outstanding notes and the new notes and references to the original issuance of the notes below are to the original issuance of the outstanding notes.

Applicability of Contingent Payment Rules

The notes include certain contingent rights to payments of amounts in addition to principal and stated interest, including the right to receive liquidated damages as described under “Registration Rights Agreement” and the right to receive distributions of Additional Dividend Notes as described under “Description of Notes—Selected Covenants—Additional Interest Upon Payment of Certain Permitted Dividends.” As a result, the tax consequences of ownership and disposition of the notes will be governed by the rules applicable to contingent payment debt obligations unless an exception to those rules applies.

The contingent payment rules do not apply if, at the issue date of the notes and at the date of any later “deemed reissuance” of the notes as described in “—U.S. Holders—Accrual of Original Issue Discount if the Contingent Payment Rules Apply,” the likelihood that any of the contingent payments will be made, whether considered separately or in the aggregate, is remote or if the timing and amount of every combination of contingent payments that could possibly be made upon the notes is known and it is significantly more likely than not that the only payments made on the notes will be the scheduled payments of principal and stated interest. If the notes constitute a “qualified reopening,” within the meaning of Treasury Regulation §1.1275-2(k), of the $450 million of pre-existing notes under the indenture, the issue date of the notes would be the date when the pre-existing notes were issued. We believe, and will take the position that, the notes were not subject to the contingent payment rules as of their issue date because they qualified under at least one of these exceptions to those rules and no event of “deemed reissuance” has occurred or is expected to occur.

In general, a holder of notes is bound by our determination herein that the contingent payment rules do not apply unless the holder discloses in the proper manner to the IRS that the holder is taking a different position. However, the IRS is not bound by this determination. The IRS may determine, and a court may agree, that neither exception applies. In that event, the contingent payment rules would apply in the manner described in “—U.S. Holders—Accrual of Original Issue Discount if the Contingent Payment Rules Apply.” If the IRS were to challenge our position that the contingent payment rules do not apply, we would take such action as we considered prudent at that time, which could include changing our position. In addition, if, contrary to our expectations, holders of notes become entitled to receive a contingent payment in the future, the notes may become subject to the contingent payment rules at that time, as discussed below in “—U.S. Holders—Accrual of Interest if the Contingent Payment Rules Do Not Apply.”

In the event the notes are subject to the contingent payment rules, they may be subject to different federal income tax reporting requirements than the $450 million of pre-existing notes under the indenture. It is not clear what effect the trading of the $450 million of pre-existing notes and the new notes under the same CUSIP would have in that event.

The discussion above of the likelihood that contingent payments will be made is solely for the purpose of determining a holder’s interest accruals in respect of the notes for United States federal income tax purposes and does not constitute a representation that events giving rise to payments of liquidated damages or Additional Dividend Notes will not occur.

141

U.S. Holders

Accrual of Interest if the Contingent Payment Rules Do Not Apply

As described above under “—Applicability of Contingent Payment Rules,” we believe that the contingent payment rules will not apply to the notes. Assuming this is the case, all stated interest on the notes will be “qualified stated interest,” taxable to a U.S. Holder as ordinary interest income, as received or accrued, in accordance with the holder’s federal income tax method of accounting, and there will be no “original issue discount” on the notes.

“Original issue discount” is the excess of all amounts, other than any qualified stated interest, payable on the notes over the issue price of the notes. The “issue price” of the notes is the first price at which a substantial amount of the notes were originally sold for cash, not including sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers, or, if the notes constitute a “qualified reopening,” within the meaning of Treasury Regulation § 1.1275-2(k), of the $450 million of pre-existing notes under the indenture, the first price at which a substantial amount of the pre-existing notes were sold for cash, not including sales to bond houses, brokers or similar persons or organizations acting in the capacity of underwriters, placement agents or wholesalers.

If the notes do not constitute a “qualified reopening” of the $450 million of pre-existing notes, a U.S. Holder who purchased a note at its original issuance may elect to exclude from the U.S. Holder’s income the portion of the May 1, 2004 interest payment on the note that is attributable to interest that accrued on the note prior to issuance. A U.S. Holder making this election would reduce the issue price and basis of the note by the same amount. However, Equistar is entitled to, and will, file its own federal income tax return and any required federal income tax information returns on the basis that the entire amount of the May 1, 2004 interest payment is interest income to U.S. Holders.

In the event that, contrary to our expectations, holders of notes became entitled to receive liquidated damages, as described under “Registration Rights Agreement,” we would take the position that the payment must be taken into account as ordinary interest income, as received or accrued, in accordance with the holder’s federal income tax method of accounting; it is possible that the IRS would take a contrary position, which could affect the timing and character of a U.S. Holder’s income with respect to the payment. In the event that, contrary to our expectations, holders of notes became entitled to distributions of Additional Dividend Notes as described under “Description of Notes—Selected Covenants—Additional Interest Upon Payment of Certain Permitted Dividends,” the distribution of the Additional Dividend Notes would not be treated as a payment on the underlying notes; instead, the Additional Dividend Notes would be aggregated with the underlying notes and payments of interest and principal on the Additional Dividend Notes would be treated as payments on the underlying notes.

As a further consequence of the holders of the notes becoming entitled to receive an unexpected contingent payment (other than a payment whose amount is insignificant relative to the total expected amount of remaining payments on the notes or that is made upon redemption of the relevant notes), the notes would, solely for purposes of determining the amount and timing of future interest or original issue discount income for federal income tax purposes, be treated as redeemed, then reissued for an amount equal to their adjusted issue price (as defined below). At the time of any such “deemed reissuance,” the notes would become subject to the contingent payment rules unless they qualified for an exception to the contingent payment rules, such as the exception for remote contingent payments described above at “—Applicability of Contingent Payment Rules,” as of the date of the deemed reissuance. Any determination we made as to whether or not the exception for remote contingent payments applied at the time of the deemed reissuance would be binding on the holders, but not the IRS, to the same extent and in the same manner as described above with respect to determinations made by us upon the original issuance of the notes.

If the unexpected contingent payment was in the form of Additional Dividend Notes and the underlying notes qualified for an exception to the contingent payment rules upon their deemed reissuance as described

142

above, the stated interest payable on the Additional Dividend Notes would constitute “qualified stated interest” on the underlying notes, taxable in the manner described above. The right to receive payments of principal on the Additional Dividend Notes would constitute original issue discount on the underlying notes to the extent the principal amount of a note and any related Additional Dividend Notes exceeds the adjusted issue price (as defined below) of the notes. If the original issue discount on the underlying notes was not “de minimis,” it would be taken into account as interest income by a U.S. Holder as it accrued over the life of the notes on a constant yield basis, without regard to the holder’s method of accounting. Original issue discount would be “de minimis” if it was less than the product of (i) 0.0025, (ii) the number of complete years from the date of the deemed reissuance to maturity and (iii) the aggregate principal amount due on the underlying notes (including the principal amount of the Additional Dividend Notes). U.S. Holders may wish to contact their tax advisors about the manner in which accruals of non-de minimis original issue discount income would be calculated under the constant yield method and about the effect on such calculations of possible treatment of the notes as a “qualified reopening” of the $450 million of pre-existing notes.

Under some circumstances, an unexpected contingent payment on the notes may cause them to be subject to different federal income tax reporting requirements than the $450 million of pre-existing notes under the indenture. It is not clear what effect the trading of the $450 million of pre-existing notes and the new notes under the same CUSIP would have in that event.

Amortizable Bond Premium if the Contingent Payment Rules Do Not Apply

If a U.S. Holder’s initial tax basis in a note exceeds its stated principal amount, such holder generally will be considered to have acquired the note with ‘amortizable bond premium.’ The amount of amortizable bond premium is computed based on the redemption price on an earlier call date if such computation results in a smaller amortizable bond premium attributable to the period of such earlier call date. A U.S. Holder generally may elect to amortize such premium using the constant yield method. The amount amortized in any year generally will be treated as a reduction of a holder’s interest income on the note. If the amortizable bond premium allocable to a year exceeds the amount of interest allocable to that year, the excess would be allowed as a deduction for that year but only to the extent that a holder’s prior interest inclusions exceed bond premium deductions on the note. The election to amortize the premium on a constant yield method, once made, generally applies to all bonds held or subsequently acquired by a U.S. Holder on or after the first day of the first taxable year to which the election applies. A U.S. Holder may not revoke this election without the consent of the IRS.

Accrual of Original Issue Discount if the Contingent Payment Rules Apply

The contingent payment rules would apply to the notes (1) from the date they were originally issued, if the IRS asserted, and a court agreed, that our position, described above under “—Applicability of Contingent Payment Rules,” that the notes qualified for one or more exceptions to the contingent payment rules, was incorrect or (2) from the date of any deemed reissuance of the notes, as described above at “—Accrual of Interest if the Contingent Payment Rules Do Not Apply,” if the notes qualified for an exception to the contingent payment rules on their issue date and at the time of any prior deemed reissuance but did not qualify for such an exception at the time of the latest deemed reissuance.

Under the contingent payment rules, a U.S. Holder generally would be required to accrue original issue discount income (taxable as interest) on the notes, in the amounts described below, regardless of whether the holder uses the cash or accrual method of tax accounting. Accordingly, U.S. Holders probably would be required to include accruals of original issue discount in taxable income in each year in excess of the stated interest rate of the notes and in excess of any contingent interest payments actually received in that year, subject to adjustments as described below. The amount of the original issue discount income accruing each year would be determined using the four steps described below.

First, we would be required to establish the “comparable yield” for the notes. We would determine the comparable yield for the notes as the annual yield we would incur, as of the initial issue date (or date of the

143

deemed reissuance that caused the rules to apply), on a fixed rate debt security with no contingent payments, but with terms and conditions otherwise comparable to those of the notes, including the level of subordination, term, timing of payments and general market conditions, but excluding any adjustments for liquidity or the riskiness of the contingencies with respect to the notes.

Second, we would be required to provide to U.S. Holders, solely for United States federal income tax purposes, a schedule of the projected amounts of payments on the notes. This schedule would be required to produce the comparable yield. Our determination of the projected payment schedule for the notes might include estimates for payments of interest on Additional Dividend Notes prior to maturity and principal on the Additional Dividend Notes at maturity.

The comparable yield and the schedule of projected payments would not be determined for any purpose other than for the determination of a holder’s interest accruals and adjustments thereof in respect of the notes for United States federal income tax purposes and would not constitute a projection or representation regarding the actual amounts payable to holders of the notes.

Since, as discussed above at “—Applicability of Contingent Payment Rules,” we do not believe the contingent payment rules applied to the original issuance of the notes, we have not attempted to determine a comparable yield or projected payment schedule for the notes. In the event of a deemed reissuance of the notes as a result of a contingent payment actually becoming payable on the notes, we would make an evaluation at that time whether the reissued notes were subject to the contingent payment rules and make that information available to holders of notes.

Third, a U.S. Holder would be required to accrue an amount of original issue discount income (taxable as interest) for United States federal income tax purposes, for each accrual period prior to and including the maturity date of the notes that equals:

• the product of (i) the adjusted issue price (as defined below) of the notes as of the beginning of the accrual period; and (ii) the comparable yield of the notes, adjusted for the length of the accrual period;

• divided by the number of days in the accrual period; and

• multiplied by the number of days during the accrual period that the holder held the notes.

The adjusted issue price of a note would be its issue price (as defined above) at the beginning of the first accrual period, and for any accrual period after the first accrual period would be the sum of the issue price increased by any interest income previously accrued, determined without regard to any positive or negative adjustments to interest accruals described below and decreased by the projected amounts of any payments with respect to the notes through the beginning of the accrual period as set forth in the projected payment schedule. For this purpose, none of the stated interest would be treated as “qualified stated interest.”

Finally, a U.S. Holder would be required to recognize additional original issue discount income equal to the amount of any net positive adjustment, i.e., the excess of actual payments over projected payments, in respect of the notes for a taxable year. If a U.S. Holder incurred a net negative adjustment, i.e., the excess of projected payments over actual payments, in respect of the notes for a taxable year, the net negative adjustment generally would (i) reduce the holder’s original issue discount income on the notes for that taxable year, and (ii) to the extent of any excess after the application of (i), give rise to an ordinary loss to the extent of the holder’s original issue discount income on the notes during the prior taxable years, reduced to the extent such original issue discount income was offset by prior negative adjustments. A difference between projected payments and actual payments would not produce a deemed reissuance of the type described above at “—U.S. Holders—Accrual of Interest if the Contingent Payment Rules Do Not Apply” as to notes that were already subject to the contingent payment rules.

For purposes of applying the contingent payment rules to any Additional Dividend Notes that may be distributed as described under “Description of Notes—Selected Covenants—Additional Interest Upon Payment

144

of Certain Permitted Dividends,” the possible issuance of Additional Dividend Notes generally would not be treated as a projected payment on the underlying notes in creating the projected payment schedule and the actual issuance of Additional Dividend Notes would not be treated as a payment on the underlying notes in making positive and negative adjustments as described above; rather, the payments of principal and interest on the Additional Dividend Notes would be treated as payments on the underlying notes. However, any positive or negative adjustment on account of payments due on an Additional Dividend Note more than six months after the date the Additional Dividend Note was issued would be taken into account, on a present value basis, at the time the Additional Dividend Note was issued, or, if the Additional Dividend Note constituted contingent interest on account of a decline in our credit quality, over the period to which the contingent interest related in a reasonable manner.

U.S. Holders should consult their tax advisors as to the tax considerations relating to debt instruments providing for payments such as the liquidated damages or Additional Dividend Notes described above, particularly in connection with the possible application of the contingent payment rules and about the effect upon any accruals required under the contingent payment rules of possible treatment of the notes as a “qualified reopening” of the $450 million of pre-existing notes.

Sale, Exchange or Redemption

Generally, the sale, exchange or redemption of notes will result in taxable gain or loss to a U.S. Holder. The amount of gain or loss on a taxable sale, exchange or redemption will be equal to the difference between (a) the amount of cash plus the fair market value of any other property received by the U.S. Holder in the sale, exchange or redemption (other than amounts attributable to accrued but unpaid interest, which will be taxable as interest income to the extent not previously taken into account by the U.S. Holder) and (b) the U.S. Holder’s adjusted tax basis in the notes. A U.S. Holder’s adjusted tax basis in notes will generally be equal to the holder’s original purchase price for the notes, reduced for any amortizable bond premium previously taken into account as an offset to interest.

However, if, contrary to our expectations, the notes were subject to the original issue discount rules as a result of the application of the contingent payment rules as discussed above under “—U.S. Holders—Accrual of Original Issue Discount if the Contingent Payment Rules Apply” or as a result of a deemed reissuance of the notes upon which the contingent payment rules did not apply, as described under “—U.S. Holders—Accrual of Interest if the Contingent Payment Rules Do Not Apply,” the holder’s basis would be increased by any original issue discount income previously accrued by the holder, and decreased by the amount of any payments on the notes, other than payments of qualified stated interest, to the holder. For this purpose, in the case of a note to which the contingent payment rules applied, the prior accruals of income would be determined without regard to any positive or negative adjustments to original issue discount accruals and the amounts listed in the projected payment schedule for the notes would be treated as the amounts actually paid on the notes.

If, contrary to our expectations, Additional Dividend Notes were issued as described under “Description of Notes—Selected Covenants—Additional Interest Upon Payment of Certain Permitted Dividends,” the Additional Dividend Notes would be treated as part of the underlying notes as described above under “—U.S. Holders—Accrual of Interest if the Contingent Payment Rules Do Not Apply” and “—U.S. Holders—Accrual of Original Issue Discount if the Contingent Payment Rules Apply.” A holder’s tax basis would be allocated proportionately between the underlying notes and the Additional Dividend Notes distributed with respect to the underlying notes and no distinction would be made between the two types of notes upon any sale, exchange or redemption.

Assuming the contingent payment rules do not apply, gain or loss recognized on the disposition of a note generally will be capital gain or loss, and will be long-term capital gain or loss if, at the time of such disposition, the U.S. Holder’s holding period for the note is more than one year. A reduced tax rate on capital gain will apply to an individual U.S. Holder if such holder’s holding period for the note is more than one year at the time of disposition.

If the contingent payment rules applied to the notes, gain recognized upon a sale, exchange or redemption of notes would generally be treated as original issue discount income (taxable as interest); any loss would be an

145

ordinary loss to the extent (i) the original issue discount previously included in income by the holder as to the notes (including the total net positive adjustments of the holder) exceeded (ii) the total net negative adjustments previously claimed as ordinary loss by the holder, and thereafter would be a capital loss (which would be long-term if the notes were held for more than one year). The deductibility of net capital losses by individuals and corporations is subject to limitations.

Non-U.S. Holders

The rules governing United States federal income taxation of Non-U.S. Holders are complex and no attempt will be made in this offering memorandum to provide more than a summary of such rules. Non-U.S. Holders should consult with their own tax advisors to determine the effect of federal, state, local and foreign income tax laws, as well as treaties, with regard to an investment in the notes including any reporting requirements and, in particular, the proper application of the United States federal withholding tax rules.

Payments Made With Respect to the Notes

Except as described below, the 30% United States federal withholding tax on interest (including any amount that may accrue as original issue discount under the various rules described above under “—U.S. Holders”) will not apply to any payment on the notes to a Non-U.S. Holder; provided that: (i) the Non-U.S. Holder does not own, actually or constructively, 10% or more of our capital or profits interests; (ii) the Non-U.S. Holder is not a controlled foreign corporation related, directly or indirectly, to us or either of our constituent partners; (iii) the Non- U.S. Holder is not a bank which acquired the notes in consideration for an extension of credit made pursuant to a loan agreement entered into in the ordinary course of business; (iv) the notes are deemed not to be a United States real property interest within the meaning of Section 897(c)(1) of the Internal Revenue Code (as described below under “—Sale or Exchange of Notes”); and (v) either (A) the beneficial owner of notes certifies to us or our paying agent on IRS Form W-8BEN, under penalties of perjury, that it is not a United States person and provides its name, address and certain other information or (B) the beneficial owner holds its notes through certain foreign intermediaries or certain foreign partnerships and such holder satisfies certain certification requirements.

The exemption from United States federal withholding tax described in the preceding paragraph does not apply to any contingent interest or original issue discount on the notes that is determined by reference to distributions we make on our equity interests, such as Permitted Dividends. As a result, the portion of any interest or original issue discount on the notes attributable to a Non-U.S. Holder’s right to receive Additional Dividend Notes upon our payment of certain Permitted Dividends may not be eligible for the exemption from withholding tax described above. This could include the portion of any accruals of original issue discount under the contingent payment rules (if those rules were to apply) attributable to the right to receive Additional Dividend Notes (see “—Applicability of Contingent Payment Rules”) as well as any gain on the redemption of the notes treated as original issue discount under the contingent payment rules (see “—Sale or Exchange of Notes” below). Since we believe that only the stated interest payments on the notes currently are required to be accrued for federal income tax purposes, we do not currently intend to treat payments made on the originally issued notes as ineligible for the exemption described in the preceding paragraph. If we were to withhold from payments on notes to Non-U.S. Holders in the future, such Non-U.S. Holders should consult their own tax advisors as to whether they may be able to obtain a refund for all or a portion of the withholding tax.

To the extent a Non-U.S. Holder for any reason does not qualify for the withholding exemption described above, interest (including any amounts that may accrue as original issue discount under the various rules described above under “—U.S. Holders”) will be subject to the 30% United States federal withholding tax as payments are made on the notes unless the Non-U.S. Holder provides us with a properly executed (1) IRS Form W-8BEN (or successor form) claiming an exemption from or reduction in withholding under an applicable tax treaty or (2) IRS Form W-ECI (or successor form) stating that interest paid on the notes is not subject to withholding tax because it is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States.

146

If a Non-U.S. Holder of the notes is engaged in a trade or business in the United States, and if interest or original issue discount on the notes is effectively connected with the conduct of such trade or business, the Non-U.S. Holder, although exempt from the withholding tax discussed in the preceding paragraphs, will generally be subject to regular United States federal income tax on interest, original issue discount and any gain realized on the sale or exchange of the notes in the same manner as if it were a U.S. Holder. Such a Non-U.S. Holder will be required to provide to the withholding agent a properly executed IRS Form W-8ECI (or successor form) in order to claim an exemption from withholding tax. In addition, if such a Non-U.S. Holder is a foreign corporation, such Non-U.S. Holder may be subject to a branch profits tax equal to 30% (or such lower tax rate provided by an applicable treaty) of its effectively connected earnings and profits for the taxable year, subject to certain adjustments.

Sale or Exchange of Notes

A Non-U.S. Holder will generally not be subject to United States federal income or withholding tax with respect to gain upon the sale, exchange or other disposition of notes, unless: (1) the income or gain is “U.S. trade or business income,” which means income or gain that is effectively connected with the conduct by the Non-U.S. Holder of a trade or business, or, in the case of a treaty resident, attributable to a permanent establishment or a fixed base, in the United States; (2) such Non-U.S. Holder is an individual who is present in the United States for 183 days or more in the taxable year of disposition and certain other conditions are met; (3) such Non-U.S. Holder is subject to tax pursuant to the provisions of the Internal Revenue Code applicable to certain United States expatriates; or (4) in the case of an amount which is attributable to interest or original issue discount (including any gain treated as original issue discount under the contingent payment rules, as described above under “—U.S. Holders—Sale, Exchange or Redemption), the Non-U.S. Holder does not meet the conditions for exemption from United States federal withholding tax described above.

U.S. trade or business income of a Non-U.S. Holder will generally be subject to regular United States income tax in the same manner as if it were realized by a U.S. Holder. Non-U.S. Holders that realize U.S. trade or business income with respect to the notes should consult their tax advisors as to the treatment of such income or gain. In addition, U.S. trade or business income of a Non-U.S. Holder that is a corporation may be subject to a branch profits tax at a rate of 30%, or such lower rate as provided by an applicable income tax treaty.

Under the Foreign Investment in Real Property Tax Act, any person who acquires a “United States real property interest” (as described below) from a foreign person must deduct and withhold a tax equal to 10% of the amount realized by the foreign transferor. In addition, a foreign person who disposes of a United States real property interest generally is required to recognize gain or loss that is subject to United States federal income tax. A “United States real property interest” includes, under some circumstances, a portion of any interest (other than an interest solely as a creditor) in a partnership that owns United States real property. The notes should qualify as interests in the partnership solely as creditors, regardless of whether any contingent payments are made on the notes. Accordingly, the Foreign Investment in Real Property Tax Act withholding tax should not apply to the notes.

Backup Withholding and Information Reporting

U.S. Holders

Payments of interest made by us on, or the proceeds of the sale or other disposition of, the notes may be subject to information reporting and U.S. federal backup withholding tax (currently 28%) if the recipient of such payment fails to supply an accurate taxpayer identification number or otherwise fails to comply with applicable United States information reporting or certification requirements. Any amount withheld from a payment to a U.S. Holder under the backup withholding rules is allowable as a credit against the holder’s U.S. federal income tax, provided that the required information is furnished to the IRS.

147

Non-U.S. Holders

A Non-U.S. Holder may be required to comply with certification procedures to establish that the holder is not a U.S. person in order to avoid backup withholding tax requirements with respect to our payments of principal and interest, including cash payments in respect of original issue discount, on the notes.

The proper tax treatment of a holder of notes is uncertain in several respects. Holders should consult their tax advisors regarding the federal, state, local and foreign tax consequences of the exchange of outstanding notes for new notes and the ownership and disposition of new notes.

148

PLAN OF DISTRIBUTION

Based on interpretations by the staff of the SEC in no action letters issued to third parties, we believe that you may transfer new notes issued under the exchange offer in exchange for the outstanding notes if:

• you acquire the new notes in the ordinary course of your business; and

• you are not engaged in, and do not intend to participate in, and have no arrangement or understanding with any person to participate in, a distribution of new notes.

We believe that you may not transfer new notes issued under the exchange offer in exchange for the outstanding notes if you are:

• our “affiliate” within the meaning of Rule 405 under the Securities Act;

• a broker-dealer that acquired outstanding notes directly from us; or

• a broker-dealer that acquired outstanding notes as a result of market-making or other trading activities, unless you comply with the registration and prospectus delivery provisions of the Securities Act.

If you wish to exchange your outstanding notes for new notes in the exchange offer, you will be required to make representations to us as described under “The Exchange Offer—Purpose and Effect of the Exchange Offer” and “The Exchange Offer—Your Representations to Us” and in the letter of transmittal.

Further, if you are a broker-dealer receiving new notes for your own account in exchange for outstanding notes that were acquired by you as a result of market-making activities or other trading activities, you will be required to acknowledge that you will deliver a prospectus in connection with any resale by you of new notes. To date, the staff of the SEC has taken the position that participating broker-dealers may fulfill their prospectus delivery requirements with respect to transactions involving an exchange of securities such as this exchange offer, other than a resale of an unsold allotment from the original sale of the outstanding notes, with the prospectus contained in the exchange offer registration statement. In the registration rights agreement, we have agreed to permit participating broker-dealers use of this prospectus in connection with the resale of new notes. We have agreed that, for a period of up to 180 days after the consummation of the exchange offer, we will make this prospectus, and any amendment or supplement to this prospectus, available to any broker-dealer that requests these documents in the letter of transmittal. In addition, until             , 2003 all dealers effecting transactions in the new notes may be required to deliver a prospectus.

We will not receive any proceeds from any sale of new notes by broker-dealers. Broker-dealers who receive new notes for their own account in the exchange offer may sell them from time to time in one or more transactions either:

• in the over-the-counter market;

• in negotiated transactions;

• through the writing of options on the new notes; or

• a combination of methods of resale.

The prices at which these sales occur may be:

• at market prices prevailing at the time of resale;

• at prices related to prevailing market rates; or

• at negotiated prices.

Any resale may be made directly to purchasers or to or through brokers or dealers who may receive compensation in the form of commissions or concessions from any broker-dealer or the purchasers of any new notes. Any broker-dealer that resells new notes it received for its own account in the exchange offer and any broker or dealer that participates in a distribution of new notes may be deemed to be an “underwriter” within the

149

meaning of the Securities Act. Any profit on any resale of new notes and any commissions or concessions or received by any persons may be deemed to be underwriting compensation under the Securities Act. The letter of transmittal states that, by acknowledging that it will deliver and by delivering a prospectus, a broker-dealer will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

We have agreed to pay all expenses incidental to the exchange offer, other than commissions and concessions of any broker or dealers. We will indemnify holders of the outstanding notes, including any broker-dealers, against some liabilities, including liabilities under the Securities Act, as provided in the registration rights agreement.

TRANSFER RESTRICTIONS ON OUTSTANDING NOTES

The outstanding notes were not registered under the Securities Act. Accordingly, we offered and sold the outstanding notes only in private sales exempt from or not subject to the registration requirements of the Securities Act to “qualified institutional buyers” under Rule 144A under the Securities Act and outside the United States in accordance with Regulation S under the Securities Act. You may not offer or sell those outstanding notes in the United States or to, or for the account or benefit of, U.S. persons except in transactions exempt from or not subject to the Securities Act registration requirements.

LEGAL MATTERS

Baker Botts L.L.P., Houston, Texas, counsel for Equistar and Equistar Funding, has issued an opinion about the legality of the new notes.

EXPERTS

The consolidated financial statements of Equistar Chemicals, LP as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 included in this prospectus, have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of Lyondell Chemical Company as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 included in this prospectus, have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

The consolidated financial statements of Millennium Chemicals Inc. as of December 31, 2002 and 2001 and for each of the three years in the period ended December 31, 2002 included in this prospectus, have been so included in reliance on the report of PricewaterhouseCoopers LLP, independent accountants, given on the authority of said firm as experts in auditing and accounting.

150

FORWARD-LOOKING STATEMENTS

This prospectus, including the information we incorporate by reference, includes forward-looking statements within the meaning of the federal securities laws. You can identify our forward-looking statements by words such as “estimate,” “believe,” “expect,” “anticipate,” “plan,” “budget,” or other words that convey the uncertainty of future events or outcomes. When considering these forward-looking statements, you should keep in mind the risk factors and other cautionary statements contained in this prospectus and the documents we have incorporated by reference.

The forward-looking statements are not guarantees of future performance, and we caution you not to rely unduly on them. We have based many of these forward-looking statements on expectations and assumptions about future events that may prove to be inaccurate. While our management considers these expectations and assumptions to be reasonable, they are inherently subject to significant business, economic, competitive, regulatory and other risks, contingencies and uncertainties, most of which are difficult to predict and many of which are beyond our control. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including:

• the cyclical nature of the chemical industry;

• the availability, cost and volatility of raw materials and utilities;

• uncertainties associated with the United States and worldwide economies, including those due to events, conditions and political tensions in the Middle East and elsewhere;

• current and potential governmental regulatory actions in the United States and regulatory actions and political unrest in other countries;

• industry production capacity and operating rates;

• the supply/demand balance for our products;

• competitive products and pricing pressures;

• access to capital markets;

• potential terrorist acts;

• operating interruptions (including leaks, explosions, fires, weather-related incidents, mechanical failure, unscheduled downtime, labor difficulties, transportation interruptions, spills and releases and other environmental risks);

• technological developments; and

• our ability to implement our business strategies, including cost reductions.

Many of such factors are beyond our ability to control or predict. Any of these factors, or a combination of these factors, could materially affect future results of operations and the ultimate accuracy of the forward-looking statements. See “Risk Factors.” These forward-looking statements are not guarantees of our future performance, and our actual results and future developments may differ materially from those projected in the forward-looking statements. Management cautions against putting undue reliance on forward-looking statements or projecting any future results based on such statements or present or prior earnings levels.

All forward-looking statements in this prospectus are qualified in their entirety by the cautionary statements contained in this section and in this prospectus. See “Risk Factors,” “About Equistar Chemicals, LP,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Disclosure of Market and Regulatory Risk” for additional information about factors that may affect our businesses and operating results. In addition, this prospectus contains summaries of contracts and other documents. These summaries may not contain all of the information that is important to an investor, and reference is made to the actual contract or document for a more complete understanding of the contract or document involved.

151

WHERE YOU CAN FIND MORE INFORMATION

We file reports and other information with the SEC. You may read and copy any document we file with the SEC at the SEC’s public reference room located at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain further information regarding the operation of the SEC’s Public Reference Room by calling the SEC at 1-800-SEC-0330. Our filings are also available to the public on the SEC’s Internet site located at www.sec.gov. Our SEC filings are also available free of charge from our website at www.equistarchem.com. Information contained on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.

While the notes remain outstanding, and if we are not required to file reports under the Securities Exchange Act of 1934, we will furnish to you or any prospective purchaser designated by you, upon request, the information required to be delivered pursuant to Rule 144A(d)(4) under the Securities Act, to allow you to comply with Rule 144A in connection with resales of the notes.

We are “incorporating by reference” into this prospectus information we file with the SEC, which means we are disclosing important information to you by referring you to those documents. The information we incorporate by reference is considered to be part of this prospectus, unless we update or supersede that information by the information contained in this prospectus or the information we file subsequently that is incorporated by reference into this prospectus. We are incorporating by reference the following documents that we have filed with the SEC:

• our Current Reports on Form 8-K dated March 31, 2003 and November 18, 2003;

• the Item 5 disclosure set forth on our Current Report on Form 8-K dated November 17, 2003;

• our Quarterly Reports on Form 10-Q for the quarters ending March 31, 2003 (excluding Exhibit 99.3 thereto), June 30, 2003 (excluding Exhibit 99.1 thereto) and September 30, 2003 (excluding Exhibit 99.1 thereto); and

• our Annual Report on Form 10-K for the fiscal year ending December 31, 2002 (excluding Exhibit 99.3 thereto).

We also incorporate by reference all documents we file with the SEC before termination of this offering under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934.

You may also obtain a copy of our filings with the SEC, other than an exhibit to those filings unless we have specifically incorporated an exhibit by reference, as well as copies of the indenture, registration rights agreement and other documents described herein, at no cost, by writing to or telephoning us at the following address:

Equistar Chemicals, LP

1221 McKinney, Suite 700

Houston, Texas 77010

Attn: Investor Relations

(713) 652-4590

152

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	PAGE
EQUISTAR CHEMICALS, LP
Unaudited Financial Statements
Consolidated Statements of Income and Comprehensive Income— Three and Nine Months Ended September 30, 2003 and 2002	F-2
Consolidated Balance Sheets—As of September 30, 2003 and December 31, 2002	F-3
Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2003 and 2002	F-4
Notes to the Consolidated Financial Statements (Unaudited)	F-5
Audited Financial Statements
Report of Independent Accountants	F-11
Consolidated Statements of Income—Years Ended December 31, 2002, 2001 and 2000	F-12
Consolidated Balance Sheets—As of December 31, 2002 and 2001	F-13
Consolidated Statements of Cash Flows—Years Ended December 31, 2002, 2001 and 2000	F-14
Consolidated Statements of Partners’ Capital—Years Ended December 31, 2002, 2001 and 2000	F-15
Notes to the Consolidated Financial Statements	F-16

The consolidated financial statements and notes thereto of each of Lyondell Chemical Company on pages F-34 through F-99 and Millennium Chemicals Inc. on pages F-100 through F-174 are included because each such company guarantees to Equistar certain performance obligations of its wholly owned subsidiary that serves as a general partner of Equistar. The guarantee of the performance obligations is not a guarantee of Equistar’s debt obligations.

LYONDELL CHEMICAL COMPANY
Unaudited Financial Statements
Consolidated Statements of Income— Three and Nine Months Ended September 30, 2003 and 2002	F-34
Consolidated Balance Sheets—As of September 30, 2003 and December 31, 2002	F-35
Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2003 and 2002	F-36
Notes to the Consolidated Financial Statements (Unaudited)	F-37
Audited Financial Statements
Report of Independent Accountants	F-55
Consolidated Statements of Income—Years Ended December 31, 2002, 2001 and 2000	F-56
Consolidated Balance Sheets—As of December 31, 2002 and 2001	F-57
Consolidated Statements of Cash Flows—Years Ended December 31, 2002, 2001 and 2000	F-58
Consolidated Statements of Stockholders’ Equity—Years Ended December 31, 2002, 2001 and 2000	F-59
Notes to the Consolidated Financial Statements	F-60
MILLENNIUM CHEMICALS INC
Unaudited Financial Statements
Consolidated Balance Sheets—As of September 30, 2003 and December 31, 2002	F-100
Consolidated Statements of Operations — Three and Nine Months Ended September 30, 2003 and 2002	F-101
Consolidated Statements of Cash Flows—Nine Months Ended September 30, 2003 and 2002	F-102
Notes to Consolidated Financial Statements (Unaudited)	F-103
Audited Financial Statements
Report of Independent Accountants	F-127
Consolidated Balance Sheets—As of December 31, 2002 and 2001	F-128
Consolidated Statements of Operations—Years Ended December 31, 2002, 2001 and 2000	F-129
Consolidated Statements of Cash Flows—Years Ended December 31, 2002, 2001 and 2000	F-130
Consolidated Statements of Changes in Shareholders’ Equity (Deficit)— Years Ended December 31, 2002, 2001 and 2000	F-131
Notes to Consolidated Financial Statements	F-132

F-1

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (UNAUDITED)

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
	Millions of dollars
Sales and other operating revenues:
Trade	$	1,225		$	1,222		$	3,669		$	3,228
Related parties		417			286			1,211			878
		1,642			1,508			4,880			4,106
Operating costs and expenses:
Cost of sales		1,561			1,386			4,754			3,938
Selling, general and administrative expenses		47			41			131			122
Research and development expense		10			10			29			28
Losses on asset dispositions		12			—			26			—
		1,630			1,437			4,940			4,088
Operating income (loss)		12			71			(60	)		18
Interest expense		(53	)		(51	)		(159	)		(154	)
Interest income		2			—			6			1
Other income (expense), net		(1	)		2			(22	)		3
Income (loss) before cumulative effect of accounting change		(40	)		22			(235	)		(132	)
Cumulative effect of accounting change		—			—			—			(1,053	)
Net income (loss) and comprehensive income (loss)	$	(40	)	$	22		$	(235	)	$	(1,185	)

See Notes to the Consolidated Financial Statements.

F-2

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30, 2003			December 31, 2002
	Millions of dollars
ASSETS
Current assets:
Cash and cash equivalents	$	128		$	27
Accounts receivable:
Trade, net		463			490
Related parties		106			135
Inventories		448			424
Prepaid expenses and other current assets		51			50
Total current assets		1,196			1,126
Property, plant and equipment, net		3,346			3,565
Investments		63			65
Other assets, net		340			296
Total assets	$	4,945		$	5,052
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade	$	410		$	421
Related parties		41			38
Current maturities of long-term debt		2			32
Accrued liabilities		172			223
Total current liabilities		625			714
Long-term debt		2,252			2,196
Other liabilities and deferred revenues		382			221
Commitments and contingencies
Partners’ capital:
Partners’ accounts		1,723			1,958
Accumulated other comprehensive loss		(37	)		(37	)
Total partners’ capital		1,686			1,921
Total liabilities and partners’ capital	$	4,945		$	5,052

See Notes to the Consolidated Financial Statements.

F-3

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the nine months ended September 30,
	2003			2002
	Millions of dollars
Cash flows from operating activities:
Net loss	$	(235	)	$	(1,185	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Cumulative effect of accounting change		—			1,053
Depreciation and amortization		230			221
Debt prepayment premium		19			—
Losses on asset dispositions		26			—
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		56			(139	)
Inventories		(36	)		(59	)
Accounts payable		(8	)		78
Accrued interest		(29	)		(44	)
Deferred revenues		151			—
Other assets and liabilities, net		(76	)		(43	)
Cash provided by (used in) operating activities		98			(118	)
Cash flows from investing activities:
Proceeds from sales of assets		69			—
Expenditures for property, plant and equipment		(62	)		(43	)
Contributions to affiliates		—			(6	)
Cash provided by (used in) investing activities		7			(49	)
Cash flows from financing activities:
Issuance of long-term debt		439			—
Repayment of long-term debt		(469	)		(103	)
Net borrowing under lines of credit		29			89
Other		(3	)		(2	)
Cash used in financing activities		(4	)		(16	)
Increase (decrease) in cash and cash equivalents		101			(183	)
Cash and cash equivalents at beginning of period		27			202
Cash and cash equivalents at end of period	$	128		$	19

See Notes to the Consolidated Financial Statements.

F-4

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Preparation

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Equistar Chemicals, LP (“Equistar”) in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2002 included in the Equistar 2002 Annual Report on Form 10-K. Certain amounts from prior periods have been reclassified to conform to the current period presentation.

2. Company Ownership

Equistar is a Delaware limited partnership, which commenced operations on December 1, 1997. Prior to August 2002, Equistar was owned 41% by Lyondell Chemical Company and subsidiaries (“Lyondell”), 29.5% by Millennium Chemicals Inc. and subsidiaries (“Millennium”) and 29.5% by Occidental Petroleum Corporation and subsidiaries (“Occidental”). On August 22, 2002, Lyondell completed the purchase of Occidental’s interest in Equistar and, as a result, Lyondell’s ownership interest in Equistar increased to 70.5%.

3. Accounting Changes

Early Extinguishment of Debt—Beginning January 1, 2003, Equistar adopted Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of SFAS No. 145 on Equistar is the classification of gains or losses that result from the early extinguishment of debt as an element of income before extraordinary items. Previously such gains and losses were classified as extraordinary items. The Consolidated Statements of Income and Comprehensive Income reflect this change for all periods presented.

Financial Instruments—Effective July 1, 2003, Equistar adopted SFAS No. 150 – Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement established standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that certain financial instruments be classified as liabilities or, in some circumstances, as assets. Equistar’s adoption of the provisions of SFAS No. 150 had no material impact on its consolidated financial statements.

Goodwill and Other Intangible Assets—Effective January 1, 2002, Equistar adopted SFAS No. 142, Goodwill and Other Intangible Assets. Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge that was reported as the cumulative effect of the accounting change as of January 1, 2002.

Variable Interest Entities—In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, which addresses certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. FIN 46 applies immediately to entities created after January 31, 2003. In October 2003, the FASB issued a Staff Position deferring the effective date for other variable interest entities to December 31, 2003. The application of FIN 46 would result in the consolidation of an entity from which Equistar leases certain railcars. The consolidation of this entity as of September 30, 2003 would have resulted in a net increase in property, plant and equipment of $111 million, a decrease in prepaid expense and accrued liabilities of approximately $8 million

F-5

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

and $3 million, respectively, a $101 million increase in debt and a $5 million credit to be reported as the cumulative effect of the accounting change.

4. Accounts Receivable

Under the terms of an October 2002 receivables sales agreement, Equistar agreed to sell, on an ongoing basis and without recourse, designated accounts receivable, up to a maximum of $100 million. The agreement is subject to Equistar maintaining its current debt rating by Standard & Poor’s rating service of the McGraw-Hill Companies and maintaining a rating no lower than one notch below its current debt rating by Moody’s Investors Service. At September 30, 2003 and December 31, 2002, the balances of Equistar’s accounts receivable sold under this arrangement were $77 million and $81 million, respectively.

5. Inventories

Inventories consisted of the following components:

	September 30, 2003		December 31, 2002
	Millions of dollars
Finished goods	$	261	$	233
Work-in-process		14		12
Raw materials		83		85
Materials and supplies		90		94
Total inventories	$	448	$	424

6. Property, Plant and Equipment, Net

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows:

	September 30, 2003		December 31, 2002
	Millions of dollars
Land	$	76	$	80
Manufacturing facilities and equipment		5,958		6,037
Construction in progress		73		60
Total property, plant and equipment		6,107		6,177
Less accumulated depreciation		2,761		2,612
Property, plant and equipment, net	$	3,346	$	3,565

In the third quarter 2003, Equistar refocused certain polymer research and development (“R&D”) programs, resulting in a charge of $11 million to write off the net book value of certain R&D facilities at Equistar’s Morris, Illinois plant that will be shutdown by the end of 2003. In March 2003, Equistar sold a polypropylene production facility in Pasadena, Texas for a loss of $12 million. The effects of these transactions were included in losses on asset dispositions in the Consolidated Statements of Income and Comprehensive Income.

F-6

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Depreciation and amortization of asset costs is summarized as follows:

	For the three months ended September 30,				For the nine months ended September 30,
	2003		2002		2003		2002
	Millions of dollars
Property, plant and equipment	$	61	$	60	$	185	$	179
Turnaround costs		8		6		22		18
Software costs		4		4		12		12
Other		3		4		11		12
Total depreciation and amortization	$	76	$	74	$	230	$	221

In addition, amortization of debt issuance costs of $2 million for each of the three-month periods ended September 30, 2003 and 2002 and $6 million and $5 million for the nine months ended September 30, 2003 and 2002, respectively, is included in interest expense in the Consolidated Statements of Income and Comprehensive Income.

7. Deferred Revenues

In December 2002, Equistar received a $25 million initial advance from a customer in connection with a long-term product supply agreement under which Equistar is obligated to deliver product at cost-based prices. Equistar will recognize this deferred revenue as the product is delivered, expected to be over 9 years.

On March 31, 2003, Equistar received an advance of $159 million, representing a partial prepayment for product to be delivered under another long-term product supply arrangement, primarily at cost-based prices. Equistar will recognize this deferred revenue over 15 years, as the associated product is delivered.

8. Long-Term Debt

Long-term debt consisted of the following:

	September 30, 2003		December 31, 2002
	Millions of dollars
Bank credit facility:
Revolving credit facility	$	29	$	—
Term loan due 2007		173		296
Other debt obligations:
Medium-term notes due 2003-2005		1		30
Senior Notes due 2004, 8.50%		—		300
Notes due 2006, 6.50%		150		150
Senior Notes due 2008, 10.125%		700		700
Senior Notes due 2009, 8.75%		599		599
Senior Notes due 2011, 10.625%		450		—
Debentures due 2026, 7.55%		150		150
Other		2		3
Total		2,254		2,228
Less current maturities		2		32
Total long-term debt	$	2,252	$	2,196

F-7

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

In April 2003, Equistar issued $450 million of 10.625% senior notes due in 2011. The proceeds, net of related fees, were used to prepay $300 million of 8.5% notes due in the first quarter 2004, approximately $122 million of the $296 million of outstanding term loans under Equistar’s credit facility and prepayment premiums of approximately $17 million. Other income (expense), net for the nine-month period ended September 30, 2003 included prepayment premiums of $17 million and the write-off of $2 million of unamortized debt issuance costs related to the prepaid term loan.

In March 2003, Equistar obtained amendments to its credit facility that provided additional financial flexibility by generally making certain financial ratio requirements less restrictive, with the exception that the maximum permitted debt ratios become more restrictive beginning September 30, 2004, the definition of total indebtedness became more restrictive at March 31, 2003 and the defined limitation on expenditures for property, plant and equipment was extended to apply through 2004. In addition, the financial ratio requirements become increasingly restrictive over time beginning in the fourth quarter 2003.

Lyondell remains a guarantor of $300 million of Equistar debt, consisting of the 6.5% notes due 2006 and the 7.55% debentures due 2026. The unaudited consolidated financial statements of Lyondell are filed as an exhibit to Equistar’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2003.

9. Commitments and Contingencies

Leased Facility—Equistar’s Lake Charles facility has been temporarily idled since the first quarter of 2001. The facility and land, which are included in property, plant and equipment at a net book value of $154 million, are leased from an affiliate of Occidental, Occidental Chemical Corporation. In May 2003, Equistar and Occidental Chemical Corporation entered into a new one-year lease, which has renewal provisions for two additional one-year periods at either party’s option.

Indemnification Arrangements—Lyondell, Millennium and Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar has agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are asserted prior to December 1, 2004 as to Lyondell and Millennium, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. From formation through September 30, 2003, Equistar had incurred a total of $20 million for these claims and liabilities. Lyondell, Millennium and Occidental each remain liable under these indemnification arrangements to the same extent as they were before Lyondell’s acquisition of Occidental’s interest in Equistar.

Environmental Remediation—Equistar’s accrued liability for environmental remediation as of September 30, 2003 was $1 million and primarily related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of possible loss in excess of the liability recorded for environmental remediation.

Clean Air Act—The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”). Emission reduction controls for nitrogen oxides (“NOx”) must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Recently adopted revisions by the regulatory agencies changed the required NOx reduction levels from 90% to 80%. Compliance with the previously proposed 90% reduction standards would have resulted in increased capital investment, estimated at between $200 million and $260 million, before the 2007 deadline, as well as higher annual operating costs for Equistar. Under the revised 80% standard, Equistar

F-8

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

estimates that the incremental capital expenditures would decrease to between $165 million and $200 million, of which $45 million had been incurred as of September 30, 2003. However, the savings from this revision could be offset by the costs of stricter proposed controls over highly reactive, volatile organic compounds, or HRVOCs. Equistar is still assessing the impact of the proposed HRVOC regulations and there can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals.

The Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl ether (“MTBE”), in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. Equistar’s MTBE sales represented approximately 3% of its total revenues for 2002 and for the first nine months of 2003. At this time, Equistar cannot predict the impact that these initiatives will have on MTBE margins or volumes longer term, but any effect on Equistar’s financial position, liquidity, or the results of operations is not expected to be material.

General—Equistar is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect on the financial position, liquidity or results of operations of Equistar.

10. Segment and Related Information

Equistar operates in two reportable segments:

• Petrochemicals, including ethylene, ethylene glycol, ethylene oxide and derivatives, propylene, butadiene, and aromatics; and

• Polymers, primarily polyethylene.

F-9

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Summarized financial information concerning Equistar’s reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were based on then-current market prices.

	Petrochemicals		Polymers			Unallocated			Eliminations			Total
	Millions of dollars
For the three months ended September 30, 2003:
Sales and other operating revenues:
Customers	$	1,125	$	517		$	—		$	—		$	1,642
Intersegment		366		—			—			(366	)		—
Total sales and other operating revenues		1,491		517			—			(366	)		1,642
Operating income (loss)		66		(19	)		(35	)		—			12
Interest expense		—		—			(53	)		—			(53	)
Interest income		—		—			2			—			2
Other expense, net		—		—			(1	)		—			(1	)
Net loss													(40	)
For the three months ended September 30, 2002:
Sales and other operating revenues:
Customers	$	1,005	$	503		$	—		$	—		$	1,508
Intersegment		357		—			—			(357	)		—
Total sales and other operating revenues		1,362		503			—			(357	)		1,508
Operating income (loss)		96		6			(31	)		—			71
Interest expense		—		—			(51	)		—			(51	)
Other income, net		—		2			—			—			2
Net income													22
For the nine months ended September 30, 2003:
Sales and other operating revenues:
Customers	$	3,404	$	1,476		$	—		$	—		$	4,880
Intersegment		1,104		—			—			(1,104	)		—
Total sales and other operating revenues		4,508		1,476			—			(1,104	)		4,880
Operating income (loss)		119		(81	)		(98	)		—			(60	)
Interest expense		—		—			(159	)		—			(159	)
Interest income		—		—			6			—			6
Other expense, net		—		—			(22	)		—			(22	)
Net loss													(235	)
For the nine months ended September 30, 2002:
Sales and other operating revenues:
Customers	$	2,713	$	1,393		$	—		$	—		$	4,106
Intersegment		960		—			—			(960	)		—
Total sales and other operating revenues		3,673		1,393			—			(960	)		4,106
Operating income (loss)		151		(41	)		(92	)		—			18
Interest expense		—		—			(154	)		—			(154	)
Interest income		—		—			1			—			1
Other income, net		—		3			—			—			3
Loss before cumulative effect of accounting change													(132	)

The unallocated amounts included in operating losses consisted principally of general and administrative expenses.

F-10

REPORT OF INDEPENDENT ACCOUNTANTS

To the Partnership Governance Committee

of Equistar Chemicals, LP

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, of partners’ capital and of cash flows present fairly, in all material respects, the financial position of Equistar Chemicals, LP (the “Partnership”) and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Partnership’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Partnership adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets”.

As discussed in Note 2 to the consolidated financial statements, the Partnership adopted Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”.

/s/    PRICEWATERHOUSECOOPERS LLP            

PRICEWATERHOUSECOOPERS LLP

Houston, Texas

March 10, 2003, except for matters as discussed under the heading “Adoption of SFAS No. 145” in Note 2, as to which the date is November 13, 2003

F-11

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF INCOME

	For the year ended December 31,
	2002			2001			2000
	Millions of dollars
Sales and other operating revenues:
Unrelated parties	$	4,295		$	4,583		$	5,770
Related parties		1,242			1,326			1,725
		5,537			5,909			7,495
Operating costs and expenses:
Cost of sales		5,388			5,755			6,908
Selling, general and administrative expenses		155			181			182
Research and development expense		38			39			38
Amortization of goodwill		—			33			33
		5,581			6,008			7,161
Operating income (loss)		(44	)		(99	)		334
Interest expense		(205	)		(192	)		(185	)
Interest income		1			3			4
Other income, net		2			5			—
Income (loss) before cumulative effect of accounting change		(246	)		(283	)		153
Cumulative effect of accounting change		(1,053	)		—			—
Net income (loss)	$	(1,299	)	$	(283	)	$	153

See Notes to the Consolidated Financial Statements.

F-12

EQUISTAR CHEMICALS, LP

CONSOLIDATED BALANCE SHEETS

	December 31,
	2002			2001
	Millions of dollars
ASSETS
Current assets:
Cash and cash equivalents	$	27		$	202
Accounts receivable:
Trade, net		490			470
Related parties		135			100
Inventories		424			448
Prepaid expenses and other current assets		50			36
Total current assets		1,126			1,256
Property, plant and equipment, net		3,565			3,705
Investment in PD Glycol		46			47
Goodwill, net		—			1,053
Other assets, net		315			277
Total assets	$	5,052		$	6,338
LIABILITIES AND PARTNERS’ CAPITAL
Current liabilities:
Accounts payable:
Trade	$	421		$	331
Related parties		38			29
Current maturities of long-term debt		32			104
Accrued liabilities		223			227
Total current liabilities		714			691
Long-term debt		2,196			2,233
Other liabilities		221			177
Commitments and contingencies
Partners’ capital:
Partners’ accounts		1,958			3,257
Accumulated other comprehensive loss		(37	)		(20	)
Total partners’ capital		1,921			3,237
Total liabilities and partners’ capital	$	5,052		$	6,338

See Notes to the Consolidated Financial Statements.

F-13

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the year ended December 31,
	2002			2001			2000
	Millions of dollars
Cash flows from operating activities:
Net income (loss)	$	(1,299	)	$	(283	)	$	153
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Cumulative effect of accounting change		1,053			—			—
Depreciation and amortization		298			319			308
Net (gain) loss on disposition of assets		—			(3	)		5
Debt prepayment charges and fees		—			3			—
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(54	)		222			(50	)
Inventories		24			61			14
Accounts payable		99			(129	)		28
Other assets and liabilities, net		(66	)		40			(119	)
Net cash provided by operating activities		55			230			339
Cash flows from investing activities:
Expenditures for property, plant and equipment		(118	)		(110	)		(131	)
Other		(6	)		3			4
Net cash used in investing activities		(124	)		(107	)		(127	)
Cash flows from financing activities:
Issuance of long-term debt		—			981			—
Repayment of long-term debt		(104	)		(91	)		(42	)
Net borrowing (repayment) under lines of credit		—			(820	)		20
Distributions to partners		—			—			(280	)
Other		(2	)		(9	)		—
Net cash provided by (used in) financing activities		(106	)		61			(302	)
Increase (decrease) in cash and cash equivalents		(175	)		184			(90	)
Cash and cash equivalents at beginning of period		202			18			108
Cash and cash equivalents at end of period	$	27		$	202		$	18

See Notes to the Consolidated Financial Statements.

F-14

EQUISTAR CHEMICALS, LP

CONSOLIDATED STATEMENTS OF PARTNERS’ CAPITAL

	Partners’ Accounts												Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)
	Lyondell			Millennium			Occidental			Total
	Millions of dollars
Balance at January 1, 2000	$	522		$	1,555		$	1,585		$	3,662		$	—
Net income		63			45			45			153			—		$	153
Distributions to partners		(114	)		(83	)		(83	)		(280	)		—			—
Other		5			—			—			5			—			—
Comprehensive income																$	153
Balance at December 31, 2000	$	476		$	1,517		$	1,547		$	3,540		$	—
Net loss		(115	)		(84	)		(84	)		(283	)		—		$	(283	)
Other comprehensive income:
Unrealized loss on securities		—			—			—			—			(1	)		(1	)
Minimum pension liability		—			—			—			—			(19	)		(19	)
Comprehensive loss																$	(303	)
Balance at December 31, 2001	$	361		$	1,433		$	1,463		$	3,257		$	(20	)
Net loss		(569	)		(383	)		(347	)		(1,299	)		—		$	(1,299	)
Lyondell purchase of Occidental interest		1,116			—			(1,116	)		—			—
Other comprehensive income:
Minimum pension liability		—			—			—			—			(17	)		(17	)
Comprehensive loss																$	(1,316	)
Balance at December 31, 2002	$	908		$	1,050		$	—		$	1,958		$	(37	)

See Notes to the Consolidated Financial Statements.

F-15

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1.    Formation of the Partnership and Operations

Lyondell Chemical Company (“Lyondell”) and Millennium Chemicals Inc. (“Millennium”) formed Equistar Chemicals, LP (“Equistar” or “the Partnership”), a Delaware limited partnership, which commenced operations on December 1, 1997. On May 15, 1998, Equistar was expanded with the contribution of certain assets from Occidental Petroleum Corporation (“Occidental”). Prior to August 2002, Lyondell owned 41% of Equistar and Millennium and Occidental each owned 29.5%. On August 22, 2002, Lyondell completed the purchase of Occidental’s interest in Equistar and, as a result, Lyondell’s ownership interest in Equistar increased to 70.5%.

Equistar owns and operates the petrochemicals and polymers businesses contributed by Lyondell, Millennium and Occidental. The petrochemicals segment manufactures and markets olefins, oxygenated products, aromatics and specialty products. Olefins include ethylene, propylene and butadiene, and oxygenated products include ethylene oxide, ethylene glycol, ethanol and methyl tertiary butyl ether (“MTBE”). The petrochemicals segment also includes the production and sale of aromatics, including benzene and toluene. The polymers segment manufactures and markets polyolefins, including high-density polyethylene (“HDPE”), low-density polyethylene (“LDPE”), linear low-density polyethylene (“LLDPE”), polypropylene, and performance polymers, all of which are used in the production of a wide variety of consumer and industrial products. The performance polymers include enhanced grades of polyethylene, including wire and cable insulating resins, and polymeric powders.

Equistar is governed by a Partnership Governance Committee consisting of six representatives, three appointed by each general partner. Most of the significant decisions of the Partnership Governance Committee require unanimous consent, including approval of the Partnership’s strategic plan, capital expenditures and annual budget, issuance of additional debt and the appointment of executive management of the partnership. Distributions are made to the partners based upon their percentage ownership of Equistar. Additional cash contributions required by the Partnership are also based upon the partners’ percentage ownership of Equistar.

2.    Summary of Significant Accounting Policies

Basis of Presentation—The consolidated financial statements include the accounts of Equistar and its wholly owned subsidiaries.

Revenue Recognition—Revenue from product sales is recognized as risk and title to the product transfer to the customer, which usually occurs when shipment is made.

Cash and Cash Equivalents—Cash equivalents consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts purchased with an original maturity date of three months or less. Cash equivalents are stated at cost, which approximates fair value. Equistar’s policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution.

Equistar has no requirements for compensating balances in a specific amount at a specific point in time. The Partnership does maintain compensating balances for some of its banking services and products. Such balances are maintained on an average basis and are solely at Equistar’s discretion. As a result, none of Equistar’s cash is restricted.

Inventories—Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) basis, except for materials and supplies, which are valued using the average cost method.

Inventory exchange transactions, which involve fungible commodities and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy.

F-16

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful asset lives, generally 25 years for major manufacturing equipment, 30 years for buildings, 10 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information systems equipment. Upon retirement or sale, Equistar removes the cost of the assets and the related accumulated depreciation from the accounts and reflects any resulting gains or losses in the Consolidated Statement of Income. Equistar’s policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year.

Long-Lived Asset Impairment—Equistar evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell the assets.

Investment in PD Glycol—Equistar holds a 50% interest in a joint venture that owns an ethylene glycol facility in Beaumont, Texas (“PD Glycol”). The investment in PD Glycol is accounted for using the equity method of accounting.

Turnaround Maintenance and Repair Costs—Costs of maintenance and repairs exceeding $5 million incurred in connection with turnarounds of major units at Equistar’s manufacturing facilities are deferred and amortized using the straight-line method over the period until the next planned turnaround, generally four to six years. These costs are maintenance, repair and replacement costs that are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units.

Deferred Software Costs—Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over periods of 3 to 10 years.

Environmental Remediation Costs—Anticipated expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimated expenditures have not been discounted to present value.

Income Taxes—The Partnership is not subject to federal income taxes as income is reportable directly by the individual partners; therefore, there is no provision for income taxes in the accompanying financial statements.

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

Adoption of SFAS No. 145—In April 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Equistar is the classification of gains or losses that result from the early extinguishment of debt in other income, net as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect these changes for all periods presented. Equistar incurred a $3 million loss on early debt extinguishment in the year ended December 31, 2001.

F-17

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Accounting Changes—Effective January 1, 2002, Equistar implemented SFAS No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Implementation of SFAS No. 141 and SFAS No. 144 did not have a material effect on the consolidated financial statements of Equistar.

Upon implementation of SFAS No. 142, Equistar reviewed goodwill for impairment and concluded that the entire balance of goodwill was impaired, resulting in a $1.1 billion charge to earnings that was reported as the cumulative effect of an accounting change as of January 1, 2002. The conclusion was based on a comparison to Equistar’s indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value.

As a result of implementing SFAS No. 142, income in 2002 and subsequent years is favorably affected by $33 million annually because of the elimination of goodwill amortization. The following table presents Equistar’s results of operations for all periods presented as adjusted to eliminate goodwill amortization.

	For the year ended December 31,
	2002			2001			2000
	Millions of dollars
Reported income (loss) before cumulative effect of accounting change	$	(246	)	$	(283	)	$	153
Add back: goodwill amortization		—			33			33
Adjusted income (loss) before cumulative effect of accounting change	$	(246	)	$	(250	)	$	186
Reported net income (loss)	$	(1,299	)	$	(283	)	$	153
Add back: goodwill amortization		—			33			33
Adjusted net income (loss)	$	(1,299	)	$	(250	)	$	186

Anticipated Accounting Changes—Equistar expects to implement two significant accounting changes in 2003, as discussed below.

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”), Consolidation of Variable Interest Entities. FIN No. 46 addresses situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. FIN No. 46 applies immediately to entities created after January 31, 2003 and, for Equistar, will apply to existing entities beginning in the third quarter 2003. Equistar expects the application of FIN No. 46 to result in the consolidation of the entity from which it leases certain railcars. See Note 10. The consolidation of this entity as of December 31, 2002 would have resulted in a net increase in property, plant and equipment of $116 million, a decrease in prepaid expense of approximately $13 million, a $103 million increase in debt and an immaterial charge to be reported as the cumulative effect of an accounting change.

Other Recent Accounting Pronouncements—In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets. In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. SFAS No. 146 will be effective for activities initiated after December 31, 2002. Equistar does not expect adoption of SFAS No. 143 or SFAS No. 146 to have a material impact on its consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (“FIN No. 45”), Guarantor’s Accounting and Disclosure Requirements. FIN No. 45 expands required disclosures for certain types of guarantees for the period

F-18

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

ended December 31, 2002 and requires recognition of a liability at fair value for guarantees granted after December 31, 2002. Equistar has provided the required disclosure with respect to guarantees in Notes 10 and 11.

Reclassifications—Certain previously reported amounts have been reclassified to conform to classifications adopted in 2002.

3.    Facility Closing Costs

Equistar shut down its Port Arthur, Texas polyethylene facility in February 2001. The asset values of the Port Arthur production units were previously adjusted as part of a $96 million restructuring charge recognized in 1999. During the first quarter 2001, Equistar recorded an additional $22 million charge, which is included in cost of sales. The charge included environmental remediation liabilities of $7 million, severance benefits of $5 million, pension benefits of $2 million, and other exit costs of $3 million. The severance and pension benefits covered approximately 125 people employed at the Port Arthur facility. The remaining $5 million of the charge related primarily to the write down of certain assets. Payments of $5 million for severance, $3 million for exit costs and $5 million for environmental remediation were made through December 31, 2002. The pension benefits of $2 million will be paid from the assets of the pension plans. As of December 31, 2002, the remaining liability included $2 million for environmental remediation costs. See Note 13.

4.    Related Party Transactions

Prior to August 22, 2002, Equistar was owned 41% by Lyondell, 29.5% by Millennium and 29.5% by Occidental. On August 22, 2002, Lyondell completed the purchase of Occidental’s interest in Equistar, increasing its ownership interest in Equistar to 70.5%. As a result of this transaction, Occidental has two representatives on Lyondell’s board of directors and, as of December 31, 2002, Occidental owned approximately 22% of Lyondell. In view of Occidental’s ownership position with Lyondell, which owns 70.5% of Equistar, Occidental’s transactions with Equistar subsequent to August 22, 2002 will continue to be reported as related party transactions in Equistar’s Consolidated Statements of Income and Consolidated Balance Sheets.

Product Transactions with Lyondell—Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar under various agreements expiring in 2013 and 2014. With the exception of one pre-existing supply agreement for a product, expiring in 2015, Lyondell is required, under the agreements, to purchase 100% of its ethylene, propylene and benzene requirements for its Channelview and Bayport, Texas facilities from Equistar. Lyondell licenses MTBE technology to Equistar, and purchases a significant portion of the MTBE produced by Equistar at one of its two Channelview units at market-related prices.

Equistar acts as sales agent for the methanol products of Lyondell Methanol Company, L.P. (“LMC”), which was wholly owned by Lyondell effective May 1, 2002. The natural gas for LMC’s plant is purchased by Equistar as agent for LMC under Equistar master agreements with various third party suppliers. Equistar provides operating and other services for LMC under the terms of existing agreements that were assumed by Equistar from Lyondell, including the lease to LMC by Equistar of the real property on which LMC’s methanol plant is located. Pursuant to the terms of those agreements, LMC pays Equistar a management fee and reimburses certain expenses of Equistar at cost.

Product Transactions with Millennium—Equistar sells ethylene to Millennium at market-related prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Millennium is required to purchase 100% of its ethylene requirements for its LaPorte, Texas facility from Equistar. The contract expired December 1, 2002 and is renewed annually. The contract was renewed through

F-19

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

December 31, 2003. Also, under an agreement entered into in connection with the formation of Equistar, Equistar is required to purchase 100% of its vinyl acetate monomer raw material requirements at market-related prices from Millennium for its LaPorte, Texas, Clinton, Iowa and Morris, Illinois plants for the production of ethylene vinyl acetate products at those locations. This contract also expired December 31, 2002 and was renewed through December 31, 2003.

Product Transactions with Occidental—In connection with the contribution of Occidental assets to Equistar, Equistar and Occidental entered into a long-term agreement for Equistar to supply 100% of the ethylene requirements for Occidental’s U.S. manufacturing plants at market-related prices. The ethylene is exclusively for internal use in production at these plants, less any quantities up to 250 million pounds per year tolled in accordance with the provisions of the agreement. Upon three years notice from either party, sales may be “phased down” over a period not less than five years. No phase down may commence before January 1, 2009. Therefore, the annual required minimum cannot decline to zero prior to December 31, 2013, unless certain specified force majeure events occur. In addition to ethylene, Equistar sells methanol, ethers and glycols to Occidental. Also, from time to time, Equistar has entered into over-the-counter derivatives, primarily price swap contracts, for crude oil with Occidental to help manage its exposure to commodity price risk with respect to crude oil-related raw material purchases. See Note 11. Equistar also purchases various other products from Occidental at market-related prices.

Product Transactions with Oxy Vinyls, LP—Occidental owns 76% of Oxy Vinyls, LP (“Oxy Vinyls”), a joint venture partnership. Equistar sells ethylene to Oxy Vinyls for Oxy Vinyls’ LaPorte, Texas facility at market-related prices pursuant to an agreement that expires December 31, 2003.

Transactions with LYONDELL-CITGO Refining LP—Substantially all of Lyondell’s rights and obligations under the terms of its product sales and raw material purchase agreements with LYONDELL-CITGO Refining LP (“LCR”), a joint venture investment of Lyondell, have been assigned to Equistar. Accordingly, certain olefins by-products are sold by Equistar to LCR for processing into gasoline and certain refinery products are sold by LCR to Equistar as raw materials. Equistar also has assumed certain processing arrangements as well as storage obligations between Lyondell and LCR and provides certain marketing services for LCR. All of the agreements between LCR and Equistar are on terms generally representative of prevailing market prices.

Shared Services Agreement with Lyondell—Under a shared services agreement, Lyondell provides office space and various services to Equistar including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Lyondell charges Equistar for its share of the cost of such services. Direct costs, incurred exclusively for Equistar, also are charged to Equistar. Costs related to a limited number of shared services, primarily engineering, continue to be incurred by Equistar. In such cases, Equistar charges Lyondell for its share of such costs.

Shared Services and Shared-Site Agreements with Millennium Petrochemicals—Equistar and Millennium Petrochemicals have agreements under which Equistar provides utilities, fuel streams and office space to Millennium Petrochemicals. In addition, Millennium Petrochemicals provides Equistar with certain operational services, including utilities, as well as barge dock access and related services.

F-20

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Related party transactions are summarized as follows:

	For the year ended December 31,
	2002		2001		2000
	Millions of dollars
Equistar billed related parties for:
Sales of products and processing services:
Lyondell	$	459	$	405	$	572
Occidental Chemical		358		441		558
LCR		340		377		438
Millennium Petrochemicals		43		55		90
Oxy Vinyls		42		48		67
Shared services and shared site agreements:
LCR		4		3		2
Lyondell/LMC		16		18		26
Millennium Petrochemicals		9		17		24
Gas purchased for Lyondell/LMC		76		86		85
Related parties billed Equistar for:
Purchases of products:
LCR	$	218	$	203	$	264
Millennium Petrochemicals		10		15		16
Lyondell		1		4		2
Occidental Chemical		1		1		2
Shared services, transition and lease agreements:
Lyondell		134		135		111
Millennium Petrochemicals		16		19		22
Occidental Chemical		7		6		6
LCR		1		2		—

5.    Accounts Receivable

Equistar sells its products primarily to other chemical manufacturers in the petrochemicals and polymers industries. Equistar performs ongoing credit evaluations of its customers’ financial condition and, in certain circumstances, requires letters of credit from them. The Partnership’s allowance for doubtful accounts, which is reflected in the accompanying Consolidated Balance Sheets as a reduction of accounts receivable, totaled $16 million and $14 million at December 31, 2002 and 2001, respectively.

During October 2002, Equistar entered into an agreement with an unaffiliated issuer of receivables-backed commercial paper under which Equistar sold accounts receivable and received cash proceeds of $100 million. Under the terms of the agreement, Equistar agreed to sell, on an ongoing basis and without recourse, designated new accounts receivable as existing receivables are collected. The agreement has annual renewal provisions for up to three years and is subject to maintaining at least a specified debt rating. Equistar is seeking an amendment to reduce the minimum required debt ratings and expects the amendment to be effective prior to March 31, 2003. Upon entering into the agreement, the commitment under the revolving credit facility was reduced by $50 million. See Note 9.

At December 31, 2002, the balance of Equistar’s accounts receivable sold under this arrangement was $81 million. Increases and decreases in the amount sold are reflected in operating cash flows in the Consolidated

F-21

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Statements of Cash Flows. Fees related to the sales are included in “Other income, net” in the Consolidated Statements of Income. During 2001, Equistar terminated a similar agreement.

6.    Inventories

Inventories consisted of the following components at December 31:

	2002		2001
	Millions of dollars
Finished goods	$	233	$	243
Work-in-process		12		12
Raw materials		95		104
Materials and supplies		84		89
Total inventories	$	424	$	448

The excess of the current cost of inventories over book value was approximately $55 million at December 31, 2002.

7.    Property, Plant and Equipment and Other Assets

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:

	2002			2001
	Millions of dollars
Land	$	80		$	79
Manufacturing facilities and equipment		6,037			5,929
Construction in progress		60			92
Total property, plant and equipment		6,177			6,100
Less accumulated depreciation		(2,612	)		(2,395	)
Property, plant and equipment, net	$	3,565		$	3,705

Equistar did not capitalize any interest during 2002, 2001 and 2000 with respect to construction projects.

The components of other assets, at cost, and the related accumulated amortization were as follows at December 31:

	2002							2001
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
	Millions of dollars
Intangible assets:
Turnaround costs	$	193	$	(94	)	$	99	$	151	$	(81	)	$	70
Software costs		150		(66	)		84		152		(55	)		97
Debt issuance costs		43		(13	)		30		41		(7	)		34
Catalyst costs		23		(11	)		12		11		(4	)		7
Other		58		(17	)		41		37		(9	)		28
Total intangible assets	$	467	$	(201	)		266	$	392	$	(156	)		236
Pension asset							21							22
Other							28							19
Total other assets						$	315						$	277

F-22

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Scheduled amortization of these intangible assets for the next five years is estimated at $56 million in 2003, $56 million in 2004, $57 million in 2005, $57 million in 2006 and $57 million in 2007. Depreciation and amortization expense is summarized as follows:

	For the year ended December 31,
	2002		2001		2000
	Millions of dollars
Property, plant and equipment	$	242	$	237	$	229
Goodwill		—		33		33
Turnaround costs		24		20		24
Software costs		15		12		13
Other		17		17		9
Total depreciation and amortization	$	298	$	319	$	308

In addition, amortization of debt issuance costs of $7 million, $2 million and $2 million in 2002, 2001 and 2000, respectively, is included in interest expense in the Consolidated Statements of Income.

8.    Accrued Liabilities

Accrued liabilities consisted of the following components at December 31:

	2002		2001
	Millions of dollars
Taxes other than income	$	65	$	67
Interest		65		68
Payroll and benefits		42		49
Contractual obligations		34		30
Other		17		13
Total accrued liabilities	$	223	$	227

9.    Long-Term Debt

During October 2002, Equistar entered into an agreement to sell certain accounts receivable and received cash proceeds of $100 million. See Note 5. As a result, the commitment under its revolving credit facility was reduced by $50 million, to $450 million, in accordance with the terms of the revolving credit facility and would not be restored if the receivables agreement were terminated. Equistar used the $100 million proceeds to reduce borrowing under the revolving credit facility and for general corporate purposes. The revolving credit facility was undrawn at December 31, 2002. Amounts available under the revolving credit facility are reduced to the extent of certain outstanding letters of credit provided under the credit facility, which totaled $16 million as of December 31, 2002.

In March 2002, Equistar obtained amendments to its credit facility making certain financial ratio requirements less restrictive, making the covenant limiting acquisitions more restrictive and adding a covenant limiting certain non-regulatory capital expenditures. As a result of the amendment, the interest rate on the credit facility was increased by 0.5% per annum.

In August 2001, Equistar completed a $1.5 billion debt refinancing. The refinancing included a credit facility consisting of a $500 million secured revolving credit facility maturing in August 2006 and a $300 million

F-23

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

secured term loan, maturing in August 2007, with scheduled quarterly amortization payments, beginning December 31, 2001. The refinancing also included the issuance of $700 million of new unsecured 10.125% senior notes maturing in August 2008. The 10.125% senior notes rank pari passu with existing Equistar notes. Certain financial ratio requirements were modified in the refinancing to make them less restrictive.

Borrowing under the revolving credit facility generally bears interest based on a margin over, at Equistar’s option, LIBOR or a base rate. The sum of the applicable margin plus a facility fee varies between 1.5% and 2.5%, in the case of LIBOR loans, and 0.5% and 1.5%, in the case of base rate loans, depending on Equistar’s ratio of debt to EBITDA, as defined in the credit facility. The credit facility is secured by a lien on substantially all of Equistar’s personal property, including accounts receivable, inventory, other personal property as well as a portion of its real property.

The August 2001 refinancing replaced a five-year, $1.25 billion credit facility that would have expired November 2002. Borrowing under the facility was $820 million at December 31, 2000. Millennium America Inc., a subsidiary of Millennium, provided limited guarantees with respect to the payment of principal and interest on a total of $750 million principal amount of indebtedness under the $1.25 billion revolving credit facility. As a result of the refinancing, the related guarantees have been terminated.

The credit facility and the indenture governing Equistar’s 10.125% senior notes contain covenants that, subject to certain exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, sales of assets, investments, non-regulatory capital expenditures, certain payments, and mergers. In addition, the bank credit facility requires Equistar to maintain specified financial ratios. The breach of these covenants could permit the lenders to declare the loans immediately payable and could permit the lenders under Equistar’s credit facility to terminate future lending commitments.

As a result of continuing adverse conditions in the industry, in March 2003, Equistar obtained amendments to its credit facility to provide additional financial flexibility by easing certain financial ratio requirements.

Long-term debt consisted of the following at December 31:

	2002		2001
	Millions of dollars
Bank credit facility:
Revolving credit facility due 2006	$	—	$	—
Term loan due 2007		296		299
Other debt obligations:
Medium-term notes due 2003-2005		30		31
9.125% Notes due 2002		—		100
8.50% Notes due 2004		300		300
6.50% Notes due 2006		150		150
10.125% Senior Notes due 2008		700		700
8.75% Notes due 2009		599		598
7.55% Debentures due 2026		150		150
Other		3		9
Total long-term debt		2,228		2,337
Less current maturities		32		104
Total long-term debt, net	$	2,196	$	2,233

F-24

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The term loan due 2007 generally bears interest at a rate equal to LIBOR plus 3% or the base rate plus 2%, at Equistar’s option. Borrowing under the term loan had a weighted average interest rate of 5.25% and 6.26% during 2002 and 2001, respectively. The medium-term notes had a weighted average interest rate of 9.75% and 9.75% at December 31, 2002 and 2001, respectively. The 8.75% notes have a face amount of $600 million and are shown net of unamortized discount.

The medium-term notes, the 9.125% notes, the 6.5% notes and the 7.55% debentures were assumed by Equistar from Lyondell when Equistar was formed in 1997. As between Equistar and Lyondell, Equistar is primarily liable for this debt. Lyondell remains a co-obligor for the medium-term notes and certain events involving only Lyondell could give rise to events of default under those notes, permitting the obligations to be accelerated. Under certain limited circumstances, the holders of the medium-term notes have the right to require repurchase of the notes. Following amendments to the indentures for the 6.5% notes and the 7.55% debentures in November 2000, Lyondell remains a guarantor of that debt. The 9.125% notes were repaid in 2002. The consolidated financial statements of Lyondell are filed as an exhibit to Equistar’s Annual Report on Form 10-K for the year ended December 31, 2002.

Aggregate maturities of long-term debt during the next five years are $32 million in 2003; $303 million in 2004; $4 million in 2005; $153 million in 2006; $284 million in 2007 and $1.5 billion thereafter.

10.    Lease Commitments

Equistar leases various facilities and equipment under noncancelable lease arrangements for various periods. Operating leases include leases of railcars used in the distribution of products in Equistar’s business. During 2002, Equistar leased certain of these railcars, under three operating leases, from unaffiliated entities established for the purpose of serving as lessors with respect to these leases.

One of these three leases remains outstanding at December 31, 2002. This lease includes an option for Equistar to purchase the railcars during the lease term. If Equistar does not exercise the purchase option, the affected railcars will be sold upon termination of the lease. In the event the sales proceeds are less than the related guaranteed residual value, Equistar will pay the difference to the lessor. The guaranteed residual value, which is not included in future minimum lease payments in the table below, was $83 million at December 31, 2002.

The second of these three leases terminated in December 2002, and Equistar entered into a new lease arrangement with another lessor. The new lease covered a substantial portion of the subject railcars, and Equistar purchased the remaining railcars for $10 million. The third of these leases terminated in November 2002, and Equistar purchased the subject railcars for $37 million.

At December 31, 2002, future minimum lease payments relating to noncancelable operating leases, including railcar leases, with lease terms in excess of one year were as follows:

	Minimum Lease Payments
	Millions of dollars
2003	$	73
2004		65
2005		53
2006		41
2007		35
Thereafter		287
Total minimum lease payments	$	554

F-25

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Operating lease net rental expense was $125 million, $110 million and $115 million for the years ending December 31, 2002, 2001 and 2000, respectively. Net rental expense in 2002 included the amortization of $34 million of prepayments, related to the first and second railcar leases described above, over the remaining lease terms.

11.    Financial Instruments and Derivatives

During 2000, Equistar entered into over-the-counter derivatives, primarily price swap contracts, related to crude oil with Occidental Energy Marketing, Inc., a subsidiary of Occidental Chemical, to help manage its exposure to commodity price risk with respect to crude oil-related raw material purchases. At December 31, 2000, price swap contracts covering 5.1 million barrels of crude oil were outstanding. The carrying value and fair market value of these derivative instruments at December 31, 2000 represented a liability of $13 million, which was based on quoted market prices. The resulting loss from these hedges of anticipated raw material purchases was deferred on the consolidated balance sheet. On January 1, 2001, in accordance with the transition provisions of SFAS No. 133, Equistar reclassified the deferred loss of $13 million to accumulated other comprehensive income as a transition adjustment, representing the cumulative effect of a change in accounting principle. The transition adjustment was reclassified to the Consolidated Statement of Income during the period January through July 2001 as the related raw material purchases occurred.

During 2001, Equistar entered into additional price swap contracts covering 7.2 million barrels of crude oil that primarily matured from July 2001 through December 2001. In the third quarter 2001, outstanding price swap contracts, covering 4.1 million barrels of crude oil that primarily matured from October 2001 through December 2001, were effectively terminated. The termination resulted in realization of a gain of nearly $9 million, which was recognized in the fourth quarter 2001 as the related forecasted transactions occurred. There were no outstanding price swap contracts at December 31, 2002 and December 31, 2001.

The following table summarizes activity included in accumulated other comprehensive income (“AOCI”) related to the fair value of derivative instruments for the year ended December 31, 2001:

	2001
	Millions of dollars
Gain (loss):
Balance at beginning of period	$	—
January 1, 2001 transition adjustment— reclassification of December 31, 2000 deferred loss		(13	)
Net gains on derivative instruments		35
Reclassification of gains on derivative instruments to earnings		(22	)
Net change included in AOCI for the period		—
Net gain on derivative instruments included in AOCI at December 31, 2001	$	—

The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities, approximated their carrying value due to their short maturity. Based on the borrowing rates currently available to Equistar for debt with terms and average maturities similar to Equistar’s debt portfolio, the fair value of Equistar’s long-term debt, including amounts due within one year, was approximately $2.0 billion and $2.3 billion at December 31, 2002 and 2001, respectively. Equistar estimates the fair value of its residual value guarantee under a railcar lease (see Note 10) is not significant due to the low probability of future payments under the guarantee provisions.

Equistar is exposed to credit risk related to its financial instruments in the event of nonperformance by the counterparties. Equistar does not generally require collateral or other security to support these financial

F-26

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

instruments. The counterparties to these transactions are major institutions deemed creditworthy by Equistar. Equistar does not anticipate nonperformance by the counterparties.

12.    Pension and Other Postretirement Benefits

All full-time regular employees are covered by defined benefit pension plans sponsored by Equistar. In connection with the formation of Equistar, no pension assets or obligations were contributed to Equistar, with the exception of union represented plans contributed by Occidental and Millennium.

Retirement benefits are based upon years of service and the employee’s highest three consecutive years of compensation during the last ten years of service. Equistar accrues pension costs based upon an actuarial valuation of the liabilities and funds the plans through periodic contributions to pension trust funds. Equistar also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the tax qualified plans’ limits. In addition, Equistar sponsors unfunded postretirement benefit plans other than pensions, which provide medical and life insurance benefits. The postretirement medical plans are contributory while the life insurance plans are, generally, noncontributory. The life insurance benefits will no longer be provided to employees retiring after July 1, 2002.

The following table provides a reconciliation of benefit obligations, plan assets and the funded status of these plans:

	Pension Benefits						Other Postretirement Benefits
	2002			2001			2002			2001
	Millions of dollars
Change in benefit obligation:
Benefit obligation, January 1	$	147		$	120		$	112		$	92
Service cost		16			16			2			2
Interest cost		11			10			7			6
Plan amendments		(2	)		—			(13	)		29
Actuarial loss (gain)		8			12			2			(14	)
Benefits paid		(10	)		(11	)		(2	)		(3	)
Benefit obligation, December 31		170			147			108			112
Change in plan assets:
Fair value of plan assets, January 1		107			117			—			—
Actual return on plan assets		(13	)		(6	)		—			—
Partnership contributions		18			7			2			3
Benefits paid		(10	)		(11	)		(2	)		(3	)
Fair value of plan assets, December 31		102			107			—			—
Funded status		(68	)		(40	)		(108	)		(112	)
Unrecognized actuarial and investment loss		76			48			7			5
Unrecognized prior service cost		(2	)		—			14			29
Net amount recognized	$	6		$	8		$	(87	)	$	(78	)
Amounts recognized in the Consolidated Balance Sheet consist of:
Prepaid benefit cost	$	21		$	22		$	—		$	—
Accrued benefit liability		(51	)		(33	)		(87	)		(78	)
Accumulated other comprehensive income		36			19			—			—
Net amount recognized	$	6		$	8		$	(87	)	$	(78	)

F-27

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The decrease in other postretirement benefit obligations due to plan amendments in 2002 primarily resulted from discontinuing life insurance benefits for employees retiring after July 1, 2002. The increase in other postretirement benefit obligations due to plan amendments in 2001 resulted from a change in the medical plan that increased Equistar’s minimum contribution level per employee by 25%.

Pension plans with projected benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

	2002		2001
Projected benefit obligation	$	170	$	129
Fair value of assets		102		81

Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

	2002		2001
Accumulated benefit obligation	$	123	$	106
Fair value of assets		81		81

Net periodic pension and other postretirement benefit costs included the following components:

	Pension Benefits									Other Postretirement Benefits
	2002			2001			2000			2002		2001		2000
	Millions of dollars
Components of net periodic benefit cost:
Service cost	$	16		$	16		$	17		$	2	$	2	$	2
Interest cost		11			10			9			7		6		6
Actual loss on plan assets		13			6			3			—		—		—
Less-unrecognized loss		(24	)		(17	)		(11	)		—		—		—
Recognized gain on plan assets		(11	)		(11	)		(8	)		—		—		—
Amortization of actuarial and investment loss		4			2			—			—		—		1
Prior service cost		—			—			—			2		—		—
Net effect of curtailments, settlements and special termination benefits		—			3			(1	)		—		2		1
Net periodic benefit cost	$	20		$	20		$	17		$	11	$	10	$	10

The assumptions used in determining the net pension cost and the net pension liability were as follows at December 31:

	Pension Benefits			Other Postretirement Benefits
	2002	2001	2000	2002	2001	2000
Weighted-average assumptions as of December 31:
Discount rate	6.50%	7.00%	7.50%	6.50%	7.00%	7.50%
Expected return on plan assets	9.50%	9.50%	9.50%	—	—	—
Rate of compensation increase	4.50%	4.50%	4.50%	—	4.50%	4.50%

F-28

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2002 was 10.0% for 2003 through 2004, 7.0% for 2005 through 2007 and 5.0% thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Equistar’s maximum contribution level under the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit liability as of December 31, 2002 by less than $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended. Equistar also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Equistar were $13 million, $16 million and $17 million for the years ended December 31, 2002, 2001 and 2000, respectively.

13.    Commitments and Contingencies

Commitments—Equistar has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for Equistar’s businesses and at prevailing market prices. See also Note 4, describing related party commitments.

Equistar is party to various unconditional purchase obligation contracts as a purchaser for products and services, principally for steam and power. At December 31, 2002, future minimum payments under those contracts with noncancelable contract terms in excess of one year and fixed minimum payments were as follows:

	Millions of dollars
2003	$	164
2004		168
2005		169
2006		157
2007		151
Thereafter through 2023		1,749
Total minimum contract payments	$	2,558

Equistar’s total purchases under these agreements were $230 million for the year ended December 31, 2002.

Leased Facility—The Lake Charles facility has been idled since the first quarter of 2001. The facility and land, which are included in property, plant and equipment, at a net book value of $160 million, are leased from an affiliate of Occidental under a lease that expires in May 2003. The parties are investigating alternatives related to the facility and land. Management believes that the resolution of these alternatives will not have a material adverse effect on the financial position, liquidity or results of operations of Equistar.

Indemnification Arrangements—Lyondell, Millennium Petrochemicals and Occidental and certain of its subsidiaries have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar has agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. From formation through December 31, 2002, Equistar had incurred a total of $20 million for these uninsured claims and liabilities. Lyondell, Millennium and Occidental each remain liable under these indemnification arrangements to the same extent following Lyondell’s acquisition of Occidental’s interest in Equistar as they were before.

F-29

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Environmental Remediation—Equistar’s accrued liability for environmental matters as of December 31, 2002 was $2 million and related to the Port Arthur facility, which was permanently shut down in February 2001. In the opinion of management, there is currently no material estimable range of loss in excess of the amounts recorded for environmental remediation.

Clean Air Act—The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”). Emission reduction controls for nitrogen oxides (“NOx”) must be installed at each of Equistar’s six plants located in the Houston/Galveston region during the next several years. Recently adopted revisions by the regulatory agencies changed the required NOx reduction levels from 90% to 80%. Compliance with the previously proposed 90% reduction standards would have resulted in increased capital investment, estimated at between $200 million and $260 million, before the 2007 deadline, as well as higher annual operating costs for Equistar. Under the revised 80% standard, Equistar estimates that capital expenditures would decrease to between $165 million and $200 million. However, the savings from this revision could be offset by the costs of stricter proposed controls over highly reactive, volatile organic compounds, or HRVOCs. Equistar is still assessing the impact of the proposed HRVOC regulations and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. The timing and amount of these expenditures are also subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. Equistar’s MTBE sales represented approximately 3% of its total 2002 revenues. The U.S. House of Representatives and the U.S. Senate each passed versions of an omnibus energy bill during 2001 and 2002, respectively. The Senate version of the energy bill would have resulted in a ban on the use of MTBE. The two energy bills were not reconciled during the conference process and an omnibus energy bill was not passed during 2002.

Both the U.S. House of Representatives and the U.S. Senate are expected to pursue an energy bill during the 2003/2004 legislative cycle. If this happens, it is likely that fuel content, including MTBE use, will be a subject of legislative debate. Factors which could be considered in this debate include the impact on gasoline price and supply and the potential for degradation of air quality.

At the state level, a number of states have legislated future MTBE bans. Of these, a number are mid-West states that use ethanol as the oxygenate of choice. Bans in these states should not have an impact on MTBE demand. However, Connecticut, California and New York have bans of MTBE in place effective October 1, 2003, January 1, 2004, and January 1, 2004, respectively. Equistar estimates that California represents 34% of the U.S. MTBE industry demand and 20% of the worldwide MTBE industry demand, while Connecticut and New York combined represent 12% of the U.S. MTBE industry demand and 7% of the worldwide MTBE industry demand.

At this time, Equistar cannot predict the impact that these initiatives will have on MTBE margins or volumes during 2003. However, several major oil companies have announced plans, beginning in 2003, to discontinue the use of MTBE in gasoline produced for California markets. Equistar estimates that the California-market MTBE volumes of these companies account for an estimated 18% of U.S. MTBE industry demand and 10% of worldwide MTBE industry demand. Equistar intends to continue marketing MTBE in the U.S. However,

F-30

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

should it become necessary or desirable to reduce MTBE production, Equistar would need to convert raw materials used in MTBE to production of other products. It may be desirable to make capital expenditures to add the flexibility to produce alternative gasoline blending components. The profit margins on these alternatives are likely to be lower than those historically realized on MTBE.

General—Equistar is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings, or any liability arising from the matters discussed in this note, will not have a material adverse effect on the financial position, liquidity or results of operations of Equistar.

14.    Supplemental Cash Flow Information

Supplemental cash flow information is summarized as follows for the periods presented:

	For the year ended December 31,
	2002		2001		2000
	Millions of dollars
Cash paid for interest	$	200	$	171	$	180

15.    Segment Information and Related Information

Equistar operates in two reportable segments, petrochemicals and polymers (see Note 1). The accounting policies of the segments are the same as those described in “Summary of Significant Accounting Policies” (see Note 2). No unaffiliated customer accounted for 10% or more of sales during any year in the three-year period ended December 31, 2002.

F-31

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information concerning Equistar’s reportable segments is shown in the following table. Intersegment sales between the petrochemicals and polymers segments were based on current market prices.

	Petrochemicals		Polymers			Unallocated			Eliminations			Consolidated
	Millions of dollars
For the year ended December 31, 2002:
Sales and other operating revenues:
Customers	$	3,669	$	1,868		$	—		$	—		$	5,537
Intersegment		1,288		—			—			(1,288	)		—
		4,957		1,868			—			(1,288	)		5,537
Operating income (loss)		146		(74	)		(116	)		—			(44	)
Total assets		3,410		1,438			204			—			5,052
Capital expenditures		58		59			1			—			118
Depreciation and amortization expense		217		58			23			—			298
For the year ended December 31, 2001:
Sales and other Operating revenues:
Customers	$	3,929	$	1,980		$	—		$	—		$	5,909
Intersegment		1,455		—			—			(1,455	)		—
		5,384		1,980			—			(1,455	)		5,909
Operating income (loss)		275		(186	)		(188	)		—			(99	)
Total assets		3,474		1,400			1,464			—			6,338
Capital expenditures		84		24			2			—			110
Depreciation and Amortization expense		204		58			57			—			319
For the year ended December 31, 2000:
Sales and other Operating revenues:
Customers	$	5,144	$	2,351		$	—		$	—		$	7,495
Intersegment		1,887		—			—			(1,887	)		—
		7,031		2,351			—			(1,887	)		7,495
Operating income (loss)		694		(185	)		(175	)		—			334
Total assets		3,705		1,575			1,334			—			6,614
Capital expenditures		79		46			6			—			131
Depreciation and amortization expense		199		55			54			—			308

The following table presents the details of “Operating income (loss)” as presented above in the “Unallocated” column for the years ended December 31, 2002, 2001 and 2000.

	2002			2001			2000
	Millions of dollars
Items not allocated to petrochemicals and polymers:
Principally general and administrative expenses	$	(116	)	$	(166	)	$	(175	)
Facility closing costs		—			(22	)		—
Operating income (loss)	$	(116	)	$	(188	)	$	(175	)

F-32

EQUISTAR CHEMICALS, LP

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the details of “Total assets” as presented above in the “Unallocated” column as of December 31, for the years indicated:

	2002		2001		2000
	Millions of dollars
Cash and cash equivalents	$	27	$	202	$	18
Accounts receivable—trade and related parties		—		17		16
Prepaid expenses and other current assets		22		20		17
Property, plant and equipment, net		18		23		35
Goodwill, net		—		1,053		1,086
Other assets, net		137		149		162
Total assets	$	204	$	1,464	$	1,334

F-33

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
	Millions of dollars, except per share data
Sales and other operating revenues	$	954		$	855		$	2,856		$	2,372
Operating costs and expenses:
Cost of sales		891			749			2,713			2,062
Selling, general and administrative expenses		34			40			121			126
Research and development expense		9			7			26			22
		934			796			2,860			2,210
Operating income (loss)		20			59			(4	)		162
Interest expense		(107	)		(98	)		(309	)		(285	)
Interest income		1			3			21			8
Other income (expense), net		2			(16	)		15			(19	)
Loss before equity investments and income taxes		(84	)		(52	)		(277	)		(134	)
Income (loss) from equity investments:
Equistar Chemicals, LP		(26	)		11			(158	)		(39	)
LYONDELL-CITGO Refining LP		43			32			99			98
Other		(4	)		1			(10	)		(4	)
		13			44			(69	)		55
Loss before income taxes		(71	)		(8	)		(346	)		(79	)
Benefit from income taxes		(27	)		(6	)		(121	)		(24	)
Net loss	$	(44	)	$	(2	)	$	(225	)	$	(55	)
Basic and diluted loss per share	$	(0.27	)	$	(0.02	)	$	(1.40	)	$	(0.44	)

See Notes to the Consolidated Financial Statements.

F-34

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	September 30, 2003			December 31, 2002
	Millions, except shares and par value data
ASSETS
Current assets:
Cash and cash equivalents	$	393		$	286
Other short-term investments		—			44
Accounts receivable:
Trade, net		313			340
Related parties		67			56
Inventories		342			344
Prepaid expenses and other current assets		62			66
Deferred tax assets		45			35
Total current assets		1,222			1,171
Property, plant and equipment, net		2,568			2,369
Investments and long-term receivables:
Investment in Equistar Chemicals, LP		1,022			1,184
Investment in PO joint ventures		835			770
Investment in and receivable from LYONDELL-CITGO Refining LP		215			297
Other investments and long-term receivables		79			98
Goodwill, net		1,137			1,130
Other assets, net		408			429
Total assets	$	7,486		$	7,448
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	277		$	260
Related parties		77			84
Current maturities of long-term debt		—			1
Accrued liabilities		331			279
Total current liabilities		685			624
Long-term debt		4,151			3,926
Other liabilities		695			673
Deferred income taxes		787			881
Commitments and contingencies
Minority interest		151			165
Stockholders’ equity:
Common stock, $1.00 par value, 340,000,000 shares authorized, 128,530,000 shares issued		128			128
Series B common stock, $1.00 par value, 80,000,000 shares authorized, 36,310,972 and 34,568,224 shares issued, respectively		37			35
Additional paid-in capital		1,405			1,380
Accumulated deficit		(357	)		(18	)
Accumulated other comprehensive loss		(130	)		(271	)
Treasury stock, at cost, 2,363,124 and 2,685,080 shares, respectively		(66	)		(75	)
Total stockholders’ equity		1,017			1,179
Total liabilities and stockholders’ equity	$	7,486		$	7,448

See Notes to the Consolidated Financial Statements.

F-35

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the nine months ended September 30,
	2003			2002
	Millions of dollars
Cash flows from operating activities:
Net loss	$	(225	)	$	(55	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		184			177
Losses from equity investments		170			43
Deferred income taxes		(122	)		1
Gain on sale of equity interest		(18	)		—
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		3			36
Inventories		12			(22	)
Accounts payable		(5	)		(10	)
Accrued interest		79			75
Refundable income taxes, net		36			82
Other assets and liabilities, net		22			17
Cash provided by operating activities		136			344
Cash flows from investing activities:
Expenditures for property, plant and equipment		(247	)		(20	)
Distributions from affiliates in excess of earnings		118			16
Contributions and advances to affiliates		(102	)		(85	)
Purchase of equity investment in Equistar		—			(440	)
Proceeds from sale of equity interest		28			—
Maturity of other short-term investments		44			—
Other		—			(3	)
Cash used in investing activities		(159	)		(532	)
Cash flows from financing activities:
Issuance of long-term debt		318			268
Repayment of long-term debt		(103	)		(221	)
Issuance of Series B common stock, warrants and right		—			440
Issuance of common stock		—			110
Dividends paid		(85	)		(81	)
Other		(3	)		(13	)
Cash provided by financing activities		127			503
Effect of exchange rate changes on cash		3			2
Increase in cash and cash equivalents		107			317
Cash and cash equivalents at beginning of period		286			146
Cash and cash equivalents at end of period	$	393		$	463

See Notes to the Consolidated Financial Statements.

F-36

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. Basis of Preparation

The accompanying consolidated financial statements are unaudited and have been prepared from the books and records of Lyondell Chemical Company (“Lyondell”) in accordance with the instructions to Form 10-Q and Rule 10-01 of Regulation S-X for interim financial information. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting only of normal, recurring adjustments, considered necessary for a fair presentation have been included. For further information, refer to the consolidated financial statements and notes thereto for the year ended December 31, 2002 included in the Lyondell 2002 Annual Report on Form 10-K. Certain amounts from prior periods have been reclassified to conform to the current period presentation.

2. Accounting Changes

Early Extinguishment of Debt—Beginning January 1, 2003, Lyondell adopted Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of SFAS No. 145 on Lyondell is the classification of gains or losses that result from the early extinguishment of debt as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect this change for all periods presented.

Employee Stock Options—To better reflect the full cost of employee compensation, Lyondell adopted the “fair value” method of accounting for employee stock options, the preferred method as defined by SFAS No. 123, Accounting for Stock-Based Compensation, in the first quarter of 2003. Lyondell is using the prospective transition method, one of three alternatives under SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, for a voluntary change to the fair value method. Under the prospective transition method, an estimate of the fair value of options granted to employees during 2003 and thereafter is charged to earnings over the related vesting periods. This change resulted in an after-tax charge of approximately $2 million for the nine-month period ended September 30, 2003.

Prior to 2003, Lyondell accounted for employee stock options under the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost was recognized in connection with stock options granted prior to 2003 under Lyondell’s plans. The pro forma effect on net income and earnings per share of measuring compensation expense for such grants in the manner prescribed in SFAS No. 123 is summarized in the table below:

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
	Millions of dollars, except per share data
Reported net loss	$	(44	)	$	(2	)	$	(225	)	$	(55	)
Add stock-based compensation expense included in net income, net of tax		1			—			2			—
Deduct stock-based compensation expense using fair value method for all awards, net of tax		(2	)		(2	)		(6	)		(6	)
Pro forma net loss	$	(45	)	$	(4	)	$	(229	)	$	(61	)
Basic and diluted loss per share:
Reported	$	(0.27	)	$	(0.02	)	$	(1.40	)	$	(0.44	)
Pro forma	$	(0.28	)	$	(0.03	)	$	(1.42	)	$	(0.49	)

F-37

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Financial Instruments—Effective July 1, 2003, Lyondell adopted SFAS No. 150 – Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity. The statement established standards for classifying and measuring certain financial instruments with characteristics of both liabilities and equity and requires that certain financial instruments be classified as liabilities or, in some circumstances, as assets. Lyondell’s adoption of the provisions of SFAS No. 150 had no material impact on its consolidated financial statements.

Variable Interest Entities—In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, which addresses certain situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. FIN 46 applies immediately to entities created after January 31, 2003. In October 2003, the FASB issued a Staff Position deferring the effective date for other variable interest entities to December 31, 2003. In May 2003, Lyondell purchased a butanediol (“BDO”) plant in The Netherlands known as BDO-2 (see Notes 7 and 8), which Lyondell previously leased under an arrangement to which FIN 46 would have applied. Lyondell’s application of FIN 46, as of December 31, 2003, is not expected to have a material impact on its consolidated financial statements.

3. Equity Interest in Equistar Chemicals, LP

Lyondell’s operations in the petrochemicals and polymers segments are conducted through its joint venture ownership interest in Equistar Chemicals, LP (“Equistar”). Prior to August 22, 2002, Lyondell had a 41% interest in Equistar, while Millennium Chemicals Inc. and subsidiaries (“Millennium”) and Occidental Petroleum Corporation and subsidiaries (“Occidental”) each had a 29.5% interest. On August 22, 2002, Lyondell acquired Occidental’s 29.5% interest in Equistar. Following the acquisition, Lyondell has a 70.5% interest in Equistar.

The partners jointly control certain key management decisions of Equistar, including approval of the strategic plan, capital expenditures and annual budget, issuance of additional debt and the appointment of executive management of the partnership. Accordingly, Lyondell accounts for its investment in Equistar using the equity method of accounting. As a partnership, Equistar is not subject to federal income taxes.

Summarized financial information for Equistar follows:

	September 30, 2003		December 31, 2002
	Millions of dollars
BALANCE SHEETS
Total current assets	$	1,196	$	1,126
Property, plant and equipment, net		3,346		3,565
Investments and other assets, net		403		361
Total assets	$	4,945	$	5,052
Current maturities of long-term debt	$	2	$	32
Other current liabilities		623		682
Long-term debt		2,252		2,196
Other liabilities and deferred revenues		382		221
Partners’ capital		1,686		1,921
Total liabilities and partners’ capital	$	4,945	$	5,052

F-38

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
	Millions of dollars
STATEMENTS OF INCOME
Sales and other operating revenues	$	1,642		$	1,508		$	4,880		$	4,106
Cost of sales		1,561			1,386			4,754			3,938
Selling, general and administrative expenses		47			41			131			122
Research and development expense		10			10			29			28
Losses on asset dispositions		12			—			26			—
Operating income (loss)		12			71			(60	)		18
Interest expense, net		(51	)		(51	)		(153	)		(153	)
Other income (expense), net		(1	)		2			(22	)		3
Income (loss) before cumulative effect of accounting change		(40	)		22			(235	)		(132	)
Cumulative effect of accounting change		—			—			—			(1,053	)
Net income (loss)	$	(40	)	$	22		$	(235	)	$	(1,185	)
SELECTED ADDITIONAL INFORMATION
Depreciation and amortization							$	230		$	221
Expenditures for property, plant and equipment								62			43

As part of the implementation of SFAS No. 142, Goodwill and Other Intangible Assets, as of January 1, 2002, the entire unamortized balance of Equistar’s goodwill was determined to be impaired. Accordingly, Equistar’s earnings in the first quarter 2002 were reduced by a charge of $1.1 billion. Lyondell’s 41% share of the charge for impairment of Equistar’s goodwill was offset by a corresponding reduction in the difference between Lyondell’s investment in Equistar and its underlying equity in Equistar’s net assets.

Lyondell’s income (loss) from its equity investment in Equistar consists of Lyondell’s share of Equistar’s loss and accretion of the remaining difference between Lyondell’s underlying equity in Equistar’s net assets and its investment in Equistar. At September 30, 2003, Lyondell’s underlying equity in Equistar’s net assets exceeded its investment in Equistar by approximately $167 million. This difference is being recognized in income over the next 15 years.

4. Equity Interest in LYONDELL-CITGO Refining LP

Lyondell’s refining operations are conducted through its joint venture ownership interest in LYONDELL-CITGO Refining LP (“LCR”). Lyondell has a 58.75% interest in LCR, while CITGO Petroleum Corporation (“CITGO”) has a 41.25% interest. The partners jointly control certain key management decisions of LCR, including approval of the strategic plan, capital expenditures and annual budget, issuance of debt and the appointment of executive management of the partnership. Accordingly, Lyondell accounts for its investment in LCR using the equity method of accounting. As a partnership, LCR is not subject to federal income taxes.

Lyondell’s investment in and receivable from LCR consisted of the following:

	September 30, 2003			December 31, 2002
	Millions of dollars
Investment in LCR	$	(14	)	$	68
Receivable from LCR		229			229
Investment in and receivable from LCR	$	215		$	297

F-39

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Summarized financial information for LCR follows:

	September 30, 2003		December 31, 2002
	Millions of dollars
BALANCE SHEETS
Total current assets	$	243	$	357
Property, plant and equipment, net		1,253		1,312
Other assets		79		88
Total assets	$	1,575	$	1,757
Current maturities of long-term debt	$	450	$	—
Other current liabilities		323		514
Long-term debt		—		450
Loans payable to partners		264		264
Other liabilities		115		126
Partners’ capital		423		403
Total liabilities and partners’ capital	$	1,575	$	1,757

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
STATEMENTS OF INCOME
Sales and other operating revenues	$	1,030		$	891		$	3,118		$	2,436
Cost of sales		939			820			2,894			2,220
Selling, general and administrative expenses		14			13			42			39
Operating income		77			58			182			177
Interest expense, net		(8	)		(8	)		(27	)		(23	)
Net income	$	69		$	50		$	155		$	154
SELECTED ADDITIONAL INFORMATION
Depreciation and amortization							$	85		$	87
Expenditures for property, plant and equipment								36			53

Lyondell’s income from its equity investment in LCR consists of Lyondell’s share of LCR’s net income and accretion of the difference between Lyondell’s underlying equity in LCR’s net assets and its investment in LCR. At September 30, 2003, Lyondell’s underlying equity in LCR’s net assets exceeded its investment in LCR by approximately $267 million. This difference is being recognized in income over the next 25 years.

LCR maintains a $450 million bank term loan facility and a $70 million working capital revolving credit facility, both of which mature in June 2004. The $70 million revolving credit facility was undrawn at September 30, 2003. Amounts available under the revolving credit facility are reduced to the extent of outstanding letters of credit provided under the credit facility, which totaled $13 million as of September 30, 2003. The amount outstanding under the term loan facility at September 30, 2003 is classified as current maturities of long-term debt.

Loans payable to partners at September 30, 2003 included $229 million payable to Lyondell and $35 million payable to CITGO. These loans mature in December 2004. In the second quarter 2003, Lyondell and CITGO

F-40

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

contributed additional capital to LCR by converting $10 million and $7 million, respectively, of accrued interest on these loans to LCR partners’ capital.

5. Accounts Receivable

Under the terms of a December 2001 receivables sales agreement, Lyondell sells, without recourse, designated accounts receivable, up to a maximum of $85 million. The agreement is subject to Lyondell maintaining its current debt ratings. The balances of accounts receivable sold under this arrangement were $67 million as of September 30, 2003 and $65 million as of December 31, 2002.

6. Inventories

Inventories consisted of the following components:

	September 30, 2003		December 31, 2002
	Millions of dollars
Finished goods	$	271	$	271
Work-in-process		6		7
Raw materials		30		29
Materials and supplies		35		37
Total inventories	$	342	$	344

7. Property, Plant and Equipment, Net

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows:

	September 30, 2003		December 31, 2002
	Millions of dollars
Land	$	11	$	11
Manufacturing facilities and equipment		3,314		2,959
Construction in progress		31		30
Total property, plant and equipment		3,356		3,000
Less accumulated depreciation		788		631
Property, plant and equipment, net	$	2,568	$	2,369

As part of a refinancing during May 2003, Lyondell exercised its option under the terms of the BDO-2 lease to purchase the BDO production facility in The Netherlands for $218 million. See also Note 8.

F-41

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Depreciation and amortization of asset costs is summarized as follows:

	For the three months ended September 30,				For the nine months ended September 30,
	2003		2002		2003		2002
	Millions of dollars
Property, plant and equipment	$	50	$	35	$	133	$	98
MTBE contract		—		8		—		25
Investment in PO joint venture		9		8		24		23
Turnaround costs		3		3		10		11
Software costs		2		2		7		7
Other		2		6		10		13
Total depreciation and amortization	$	66	$	62	$	184	$	177

The increase in depreciation from the 2002 periods to the 2003 periods for property, plant and equipment was due to a reduction in the estimated remaining useful lives of certain production units and the currency translation effects of a stronger euro.

In addition to the depreciation and amortization shown above, amortization of debt issuance costs of $4 million for each of the three-month periods ended September 30, 2003 and 2002 and $14 million and $12 million for the nine-month periods ended September 30, 2003 and 2002, respectively, is included in interest expense in the Consolidated Statements of Income.

8. Long-Term Debt

Long-term debt consisted of the following:

	September 30, 2003		December 31, 2002
	Millions of dollars
Bank credit facility:
Revolving credit facility	$	—	$	—
Term Loan E due 2006		—		103
Other debt obligations:
Senior Secured Notes, Series A due 2007, 9.625%		900		900
Senior Secured Notes, Series B due 2007, 9.875%		1,000		1,000
Senior Secured Notes due 2008, 9.5%		393		393
Senior Secured Notes due 2008, 9.5%		331		330
Senior Secured Notes due 2012, 11.125%		276		276
Senior Secured Notes due 2013, 10.5%		325		—
Senior Subordinated Notes due 2009, 10.875%		500		500
Debentures due 2005, 9.375%		100		100
Debentures due 2010, 10.25%		100		100
Debentures due 2020, 9.8%		224		224
Other		2		1
Total		4,151		3,927
Less current maturities		—		1
Long-term debt	$	4,151	$	3,926

F-42

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

In May 2003, Lyondell issued $325 million of 10.5% senior secured notes due in 2013. The proceeds, net of related fees, were used to prepay the $103 million outstanding under Term Loan E and to purchase the leased BDO-2 facility. The related lease was terminated. Upon application of FIN 46, the BDO-2 lease arrangement would have resulted in a similar increase in total debt. See Notes 2 and 7.

In March 2003, Lyondell obtained amendments to its credit facility to provide additional financial flexibility by easing certain financial ratio requirements. Beginning in 2004, the financial ratio requirements under the facility become increasingly restrictive over time.

9. Commitments and Contingencies

Capital Commitments—Lyondell has various commitments related to capital expenditures, all made in the normal course of business. At September 30, 2003, major capital commitments primarily consisted of Lyondell’s 50% share of those related to the construction of a world-scale propylene oxide (“PO”) facility, known as PO-11, in The Netherlands, which is expected to begin production in the fourth quarter of 2003. Lyondell’s share of the outstanding commitments relating to PO-11, which will be funded through contributions and advances to affiliates, totaled approximately $35 million as of September 30, 2003.

Crude Supply Agreement—Under a crude supply agreement (“CSA”), PDVSA Petróleo, S.A. (“PDVSA Oil”) is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 86% of LCR’s refining capacity of 268,000 barrels per day of crude oil. Since April 1998, PDVSA Oil has, from time to time, declared itself in a force majeure situation and subsequently reduced deliveries of crude oil. Such reductions in deliveries were purportedly based on announced OPEC production cuts. At the time of delivery reduction notifications, PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. In certain circumstances, PDVSA Oil made payments to LCR under a different provision of the CSA in partial compensation for such reductions.

In January 2002, PDVSA Oil again declared itself in a force majeure situation and stated that crude oil deliveries could be reduced by up to 20.3% beginning March 1, 2002. Beginning in March 2002, deliveries of crude oil to LCR were reduced. Although deliveries increased to contract levels of 230,000 barrels per day during the third quarter 2002, PDVSA Oil did not revoke its January 2002 force majeure declaration during 2002. A national strike in Venezuela began in early December 2002 and disrupted deliveries of crude oil to LCR under the CSA. PDVSA Oil again declared a force majeure and reduced deliveries of crude oil to LCR. In March 2003, PDVSA Oil notified LCR that the force majeure had been lifted with respect to CSA crude oil.

LCR has consistently contested the validity of the reductions in deliveries by PDVSA Oil and Petróleos de Venezuela, S.A. (“PDVSA”) under the CSA. The parties have different interpretations of the provisions of the contracts concerning the delivery of crude oil. The contracts do not contain dispute resolution procedures, and the parties have been unable to resolve their commercial dispute. As a result, in February 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure declarations, which LCR is continuing to litigate.

From time to time, Lyondell and PDVSA have had discussions covering both a restructuring of the CSA and a broader restructuring of the LCR partnership. Lyondell is unable to predict whether changes in either arrangement will occur. Subject to the consent of the other partner and rights of first offer and first refusal, the partners each have a right to transfer their interests in LCR to unaffiliated third parties in certain circumstances. In the event that CITGO were to transfer its interest in LCR to an unaffiliated third party, PDVSA Oil would have an option to terminate the CSA.

F-43

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Depending on then-current market conditions, any breach or termination of the CSA, or reduction in supply thereunder, would require LCR to purchase all or a portion of its crude oil in the merchant market, could subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. There can be no assurance that alternative crude oil supplies with similar margins would be available for purchase by LCR.

Indemnification Arrangements Relating to Equistar—Lyondell, Millennium and Occidental have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are asserted prior to December 1, 2004 as to Lyondell and Millennium, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of September 30, 2003, Equistar had incurred approximately $7 million with respect to the indemnification basket for the business contributed by Lyondell. Lyondell, Millennium and Occidental each remain liable under these indemnification arrangements to the same extent as they were before Lyondell’s acquisition of Occidental’s interest in Equistar.

Environmental Remediation—As of September 30, 2003, Lyondell’s environmental liability for future remediation costs at its plant sites and a limited number of Superfund sites totaled $17 million. The liabilities range from less than $1 million to $4 million per site and are expected to be incurred primarily over the next ten years. In the opinion of management, there is currently no material estimable range of possible loss in excess of the liabilities recorded for environmental remediation. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Lyondell to reassess its potential exposure related to environmental matters.

Clean Air Act—The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”). Emission reduction controls for nitrogen oxides (“NOx”) must be installed at LCR’s refinery and each of Lyondell’s two facilities and Equistar’s six facilities in the Houston/Galveston region during the next several years. Recently adopted revisions by the regulatory agencies changed the required NOx reduction levels from 90% to 80%. Compliance with the previously proposed 90% reduction standards would have resulted in increased aggregate capital investment, estimated at between $400 million and $500 million, for Lyondell, Equistar and LCR before the 2007 deadline, as well as higher annual operating costs at Equistar. Under the revised 80% standard, Lyondell estimates that the incremental capital expenditures would decrease to between $250 million and $300 million for Lyondell, Equistar and LCR, collectively. However, the savings from this revision could be offset by the costs of stricter proposed controls over highly reactive, volatile organic compounds, or HRVOCs. Lyondell, Equistar and LCR are still assessing the impact of the proposed HRVOC revisions and there can be no guarantee as to the ultimate cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

F-44

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

The following table summarizes the ranges of projected capital expenditures for Lyondell and its joint ventures to comply with the 80% NOx emission reduction requirements:

	Ranges of Estimates
	Millions of dollars
NOx capital expenditures – 100% basis:
Lyondell	$	35  -    45
Equistar		165  -  200
LCR		50  -    55
Total NOx capital expenditures	$	250  -  300
NOx capital expenditures – Lyondell proportionate share:
Lyondell – 100%	$	35  -    45
Equistar – 70.5%		115  -  140
LCR – 58.75%		30  -    35
Total Lyondell proportionate share of NOx capital expenditures	$	180  -  220

Of these amounts, Lyondell’s proportionate share of spending through September 30, 2003 totaled $46 million. The timing and amount of future expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals.

The Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as methyl tertiary butyl ether (“MTBE”), in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain U.S. federal and state governmental initiatives have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. During 2003, the U.S. House of Representatives and the U.S. Senate each passed new versions of an omnibus energy bill. The Senate version of the new energy bill would ban the use of MTBE as a fuel additive in gasoline sold in the United States and the U.S. House of Representatives version would not ban the use of MTBE. The two new energy bills are not law and are being reconciled through the conference process. At this time, the final form and timing of that reconciliation is uncertain. Lyondell’s North American MTBE sales represented approximately 26% of its total 2002 revenues and 17% of its revenues for the first nine months of 2003.

At the state level, a number of states have legislated future MTBE bans. Of these, several are mid-West states that use ethanol as the oxygenate of choice. Bans in these states should not have an impact on MTBE demand. However, Connecticut, California and New York have bans of MTBE in place effective January 1, 2004. Lyondell estimates that, in 2002, California represented 32% of the U.S. MTBE industry demand and 19% of the worldwide MTBE industry demand, while Connecticut and New York combined represented 12% of the U.S. MTBE industry demand and 7% of the worldwide MTBE industry demand.

At this time, Lyondell cannot predict the full impact that these initiatives will have on MTBE margins or volumes longer term. However, in 2003 several major oil companies have substantially reduced or discontinued the use of MTBE in gasoline produced for California markets. Lyondell estimates that the 2002 California-market MTBE volumes of these companies represented approximately 21% of U.S. MTBE industry demand and 13% of worldwide MTBE industry demand. Lyondell intends to continue marketing MTBE in the U.S. However, should it become necessary or desirable to significantly reduce MTBE production, Lyondell would need to make

F-45

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

capital expenditures to add the flexibility to produce alternative gasoline blending components, such as iso-octane, iso-octene or ethyl tertiary butyl ether (“ETBE”), at its U.S.-based MTBE plant. Under the more expensive iso-octane alternative, the current estimated costs for converting Lyondell’s U.S.-based MTBE plant to iso-octane production range from $65 million to $75 million. Alternatively, Lyondell’s U.S.-based MTBE plant could be converted to ETBE production with minimal capital expenditure. Lyondell is pursuing ETBE viability through legislative efforts. One key hurdle is equal access to the federal subsidy provided for ethanol blended into gasoline for the ethanol component of ETBE. Lyondell has not made any capital commitments regarding any of these alternatives at this time, and any ultimate decision will depend upon further regulatory and market developments. The profit contribution related to alternative gasoline blending components is likely to be lower than that historically realized on MTBE.

The Clean Air Act also specified certain emissions standards for vehicles and, in 1998, the EPA concluded that additional controls on gasoline and diesel fuel were necessary. New standards for gasoline were finalized in 1999 and will require refiners to produce a low sulfur gasoline by 2004, with final compliance by 2006. A new “on-road” diesel standard was adopted in January 2001 and will require refiners of on-road diesel fuel to produce 80% as ultra low sulfur diesel (“ULSD”) by June 2006 and 100% by the end of 2009, with less stringent standards for “off road” diesel fuel. These gasoline and diesel fuel standards will result in increased capital investment for LCR.

In the first quarter 2003, LCR developed an alternative approach to complying with the low sulfur gasoline standard that will lead to a reduction in overall estimated capital expenditures for the project. As a result, LCR recognized impairment of value of $25 million of costs incurred to date for the project. The revised estimated spending for the new gasoline standards, excluding the $25 million charge, totaled between $100 million to $180 million. Also, as a result of LCR’s ability to retrofit current production units, the original estimate of between $250 million to $300 million for the new diesel standards has been significantly reduced. The revised estimated cost for the new diesel standards is not expected to exceed $100 million, and could be significantly lower, depending on the implementation strategy for producing and marketing ULSD and “off road” diesel. LCR has spent approximately $21 million, excluding the $25 million charge, as of September 30, 2003 for both the gasoline and diesel fuel standards projects. Lyondell’s 58.75% share of these incremental capital expenditures for these projects is not expected to exceed $165 million. In addition, these standards could result in higher operating costs for LCR. Equistar’s business may also be impacted if these standards increase the cost for processing fuel components.

General—Lyondell is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material effect on the financial position, liquidity or results of operations of Lyondell.

In the opinion of management, any liability arising from the matters discussed in this note is not expected to have a material adverse effect on the financial position or liquidity of Lyondell. However, the adverse resolution in any reporting period of one or more of these matters discussed in this note could have a material impact on Lyondell’s results of operations for that period, which may be mitigated by contribution or indemnification obligations of others, or by any insurance coverage that may be available.

10. Per Share Data

Basic loss per share for the periods presented is computed based upon the weighted average number of shares of original common stock and Series B common stock outstanding during the periods. Diluted earnings per share also include the effect of stock options issued under the 1999 Long-Term Incentive Plan and the Executive Long-Term Incentive Plan as well as outstanding warrants. These stock options and warrants were antidilutive for all periods presented.

F-46

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

During 2003, Lyondell elected to pay the regular quarterly dividend of $0.225 per share on each share of outstanding Series B common stock in kind in the form of additional shares of Series B common stock, or a total of 1,742,748 shares of Series B common stock, in lieu of dividend payments in cash of $24 million.

Loss per share data and dividends declared per share of common stock were as follows:

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
Basic and diluted weighted average shares, in thousands		161,574			140,258			161,009			125,212
Basic and diluted loss per share	$	(0.27	)	$	(0.02	)	$	(1.40	)	$	(0.44	)
Dividends declared per share of common stock	$	0.225		$	0.225		$	0.675		$	0.675

11. Comprehensive Income (Loss)

The components of comprehensive income (loss) were as follows:

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003			2002
	Millions of dollars
Net loss	$	(44	)	$	(2	)	$	(225	)	$	(55	)
Other comprehensive income (loss):
Foreign currency translation gain (loss)		22			(5	)		141			118
Net gains on derivative instruments		—			—			—			1
Minimum pension liability adjustment		—			—			—			4
Total other comprehensive income (loss)		22			(5	)		141			123
Comprehensive income (loss)	$	(22	)	$	(7	)	$	(84	)	$	68

12. Segment and Related Information

Lyondell operates in four reportable segments:

• Intermediate chemicals and derivatives (“IC&D”), including PO, propylene glycol, propylene glycol ethers, BDO, toluene diisocyanate, styrene monomer, and tertiary butyl alcohol and its derivative, MTBE;

• Petrochemicals, including ethylene, ethylene glycol, ethylene oxide and derivatives, propylene, butadiene and aromatics;

• Polymers, primarily polyethylene; and

• Refining of crude oil.

Lyondell’s entire $1.1 billion balance of goodwill is allocated to the IC&D segment.

F-47

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

Summarized financial information concerning reportable segments is shown in the following table:

	IC&D			Petrochemicals		Polymers			Refining		Other			Total
	Millions of dollars
For the three months ended September 30, 2003:
Sales and other operating revenues	$	954		$	—	$	—		$	—	$	—		$	954
Operating income		20			—		—			—		—			20
Interest expense		—			—		—			—		(107	)		(107	)
Interest income		—			—		—			—		1			1
Other income, net		—			—		—			—		2			2
Income (loss) from equity investments		(4	)		46		(14	)		43		(58	)		13
Loss before income taxes															(71	)
For the three months ended September 30, 2002:
Sales and other operating revenues	$	855		$	—	$	—		$	—	$	—		$	855
Operating income		59			—		—			—		—			59
Interest expense		—			—		—			—		(98	)		(98	)
Interest income		—			—		—			—		3			3
Other expense, net		—			—		—			—		(16	)		(16	)
Income (loss) from equity investments		1			46		5			32		(40	)		44
Loss before income taxes															(8	)
For the nine months ended September 30, 2003:
Sales and other operating revenues	$	2,856		$	—	$	—		$	—	$	—		$	2,856
Operating loss		(4	)		—		—			—		—			(4	)
Interest expense		—			—		—			—		(309	)		(309	)
Interest income		—			—		—			—		21			21
Other income, net		—			—		—			—		15			15
Income (loss) from equity investments		(10	)		84		(57	)		99		(185	)		(69	)
Loss before income taxes															(346	)
For the nine months ended September 30, 2002:
Sales and other operating revenues	$	2,372		$	—	$	—		$	—	$	—		$	2,372
Operating income		162			—		—			—		—			162
Interest expense		—			—		—			—		(285	)		(285	)
Interest income		—			—		—			—		8			8
Other expense, net		—			—		—			—		(19	)		(19	)
Income (loss) from equity investments		1			68		(13	)		98		(99	)		55
Loss before income taxes															(79	)

F-48

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

The following table presents the details of “Income (loss) from equity investments” as presented above in the “Other” column for the periods indicated:

	For the three months ended September 30,						For the nine months ended September 30,
	2003			2002			2003		2002
	Millions of dollars
Equistar items not allocated to segments:
Principally general and administrative expenses and interest expense, net	$	(58	)	$	(40	)	$	(185)	$	(94)
Other		—			—			—		(5)
Total	$	(58	)	$	(40	)	$	(185)	$	(99)

13. Subsequent Event

In October 2003, Lyondell sold 13.8 million shares of common stock, including 2.7 million shares purchased by Occidental. The net proceeds of approximately $171 million will be used to enhance liquidity and for general corporate purposes.

14. Supplemental Guarantor Information

ARCO Chemical Technology Inc. (“ACTI”), ARCO Chemical Technology L.P. (“ACTLP”) and Lyondell Chemical Nederland, Ltd. (“LCNL”) are guarantors, jointly and severally, (collectively “Guarantors”) of the 9.625% Series A Senior Secured Notes due 2007, 9.875% Series B Senior Secured Notes due 2007, 9.5% Senior Secured Notes due 2008, 10.875% Senior Subordinated Notes due 2009, 11.125% Senior Secured Notes due 2012 and 10.5% Senior Secured Notes due 2013 (see Note 8). LCNL, a Delaware corporation, is a wholly owned subsidiary of Lyondell, which owns a Dutch subsidiary that operates chemical production facilities near Rotterdam, The Netherlands. ACTI is a Delaware corporation, which holds the investment in ACTLP. ACTLP is a Delaware limited partnership, which holds and licenses technology to other Lyondell affiliates and to third parties. Separate financial statements of the Guarantors are not considered to be material to the holders of the senior subordinated notes and senior secured notes. The following condensed consolidating financial information present supplemental information for the Guarantors as of September 30, 2003 and December 31, 2002 and for the three-month and nine-month periods ended September 30, 2003 and 2002.

F-49

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)

BALANCE SHEET

As of September 30, 2003

	Lyondell		Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
Total current assets	$	625	$	197		$	400		$	—		$	1,222
Property, plant and equipment, net		827		825			916			—			2,568
Investments and long-term receivables		6,691		592			1,904			(7,036	)		2,151
Goodwill, net		733		178			226			—			1,137
Other assets		281		77			50			—			408
Total assets	$	9,157	$	1,869		$	3,496		$	(7,036	)	$	7,486
Current maturities of long-term debt	$	—	$	—		$	—		$	—		$	—
Other current liabilities		436		105			144			—			685
Long-term debt		4,149		—			2			—			4,151
Other liabilities		611		40			44			—			695
Deferred income taxes		521		183			83			—			787
Intercompany liabilities (assets)		2,423		(558	)		(1,865	)		—			—
Minority interest		—		—			151			—			151
Stockholders’ equity		1,017		2,099			4,937			(7,036	)		1,017
Total liabilities and stockholders’ equity	$	9,157	$	1,869		$	3,496		$	(7,036	)	$	7,486
BALANCE SHEET As of December 31, 2002
	Lyondell		Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
Total current assets	$	674	$	173		$	324		$	—		$	1,171
Property, plant and equipment, net		872		581			916			—			2,369
Investments and long-term receivables		7,043		504			2,196			(7,394	)		2,349
Goodwill, net		745		145			240			—			1,130
Other assets		313		83			33			—			429
Total assets	$	9,647	$	1,486		$	3,709		$	(7,394	)	$	7,448
Current maturities of long-term debt	$	1	$	—		$	—		$	—		$	1
Other current liabilities		431		90			102			—			623
Long-term debt		3,924		—			2			—			3,926
Other liabilities		602		48			23			—			673
Deferred income taxes		637		172			72			—			881
Intercompany liabilities (assets)		2,873		(1,223	)		(1,650	)		—			—
Minority interest		—		—			165			—			165
Stockholders’ equity		1,179		2,399			4,995			(7,394	)		1,179
Total liabilities and stockholders’ equity	$	9,647	$	1,486		$	3,709		$	(7,394	)	$	7,448

F-50

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF INCOME

For the Three Months Ended September 30, 2003

	Lyondell			Guarantors			Non- Guarantors		Eliminations			Consolidated Lyondell
	Millions of dollars
Sales and other operating revenues	$	575		$	271		$	551	$	(443	)	$	954
Cost of sales		599			255			480		(443	)		891
Selling, general and administrative expenses		16			6			12		—			34
Research and development expense		9			—			—		—			9
Operating income (loss)		(49	)		10			59		—			20
Interest income (expense), net		(112	)		5			1		—			(106	)
Other income (expense), net		(10	)		3			9		—			2
Income (loss) from equity investments		76			(4	)		17		(76	)		13
Intercompany income (expense)		26			2			17		(45	)		—
(Benefit from) provision for income taxes		(26	)		6			37		(44	)		(27	)
Net income (loss)	$	(43	)	$	10		$	66	$	(77	)	$	(44	)
STATEMENT OF INCOME For the Three Months Ended September 30, 2002
	Lyondell			Guarantors			Non- Guarantors		Eliminations			Consolidated Lyondell
	Millions of dollars
Sales and other operating revenues	$	559		$	208		$	510	$	(422	)	$	855
Cost of sales		578			187			406		(422	)		749
Selling, general and administrative expenses		22			5			13		—			40
Research and development expense		7			—			—		—			7
Operating income (loss)		(48	)		16			91		—			59
Interest income (expense), net		(100	)		4			1		—			(95	)
Other income (expense), net		(24	)		(1	)		9		—			(16	)
Income (loss) from equity investments		132			(1	)		45		(132	)		44
Intercompany income (expense)		(39	)		13			26		—			—
(Benefit from) provision for income taxes		(28	)		13			58		(49	)		(6	)
Net income (loss)	$	(51	)	$	18		$	114	$	(83	)	$	(2	)

F-51

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF INCOME

For the Nine Months Ended September 30, 2003

	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
Sales and other operating revenues	$	1,734		$	796		$	1,652		$	(1,326	)	$	2,856
Cost of sales		1,802			750			1,487			(1,326	)		2,713
Selling, general and administrative expenses		63			19			39			—			121
Research and development expense		26			—			—			—			26
Operating income (loss)		(157	)		27			126			—			(4	)
Interest income (expense), net		(307	)		15			4			—			(288	)
Other income (expense), net		(42	)		6			51			—			15
Income (loss) from equity investments		152			(9	)		(60	)		(152	)		(69	)
Intercompany income (expense)		28			24			50			(102	)		—
(Benefit from) provision for income taxes		(114	)		22			60			(89	)		(121	)
Net income (loss)	$	(212	)	$	41		$	111		$	(165	)	$	(225	)
STATEMENT OF INCOME For the Nine Months Ended September 30, 2002
	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
Sales and other operating revenues	$	1,612		$	583		$	1,323		$	(1,146	)	$	2,372
Cost of sales		1,637			523			1,048			(1,146	)		2,062
Selling, general and administrative expenses		77			13			36			—			126
Research and development expense		22			—			—			—			22
Operating income (loss)		(124	)		47			239			—			162
Interest income (expense), net		(289	)		8			4			—			(277	)
Other income (expense), net		(52	)		18			15			—			(19	)
Income (loss) from equity investments		350			(1	)		56			(350	)		55
Intercompany income (expense)		(68	)		33			75			(40	)		—
(Benefit from) provision for income taxes		(54	)		31			113			(114	)		(24	)
Net income (loss)	$	(129	)	$	74		$	276		$	(276	)	$	(55	)

F-52

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF CASH FLOWS

For the Nine Months Ended September 30, 2003

	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
Net income (loss)	$	(212	)	$	41		$	111		$	(165	)	$	(225	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		58			39			87			—			184
Deferred income taxes		(118	)		(8	)		4			—			(122	)
Gain on sale of equity interest		—			—			(18	)		—			(18	)
Net changes in working capital and other		185			301			(232	)		63			317
Cash provided by (used in) operating activities		(87	)		373			(48	)		(102	)		136
Expenditures for property, plant and equipment		(15	)		(223	)		(9	)		—			(247	)
Distributions from affiliates in excess of earnings		—			—			118			—			118
Contributions and advances to affiliates		—			(77	)		(25	)		—			(102	)
Proceeds from sale of equity interest		—			—			28			—			28
Maturity of other short-term investments		44			—			—			—			44
Cash provided by (used in) investing activities		29			(300	)		112			—			(159	)
Issuance of long-term debt		318			—			—			—			318
Repayment of long-term debt		(103	)		—			—			—			(103	)
Dividends paid		(85	)		—			(102	)		102			(85	)
Other		(3	)		—			—			—			(3	)
Cash provided by (used in) financing activities		127			—			(102	)		102			127
Effect of exchange rate changes in cash		—			(79	)		82			—			3
Increase (decrease) in cash and cash equivalents	$	69		$	(6	)	$	44		$	—		$	107

F-53

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION (UNAUDITED)—(Continued)

STATEMENT OF CASH FLOWS—(Continued)

For the Nine Months Ended September 30, 2002

	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
Net income (loss)	$	(129	)	$	74		$	276		$	(276	)	$	(55	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		82			30			65			—			177
Deferred income taxes		(13	)		(3	)		17			—			1
Net changes in working capital and other		322			(44	)		(293	)		236			221
Cash provided by (used in) operating activities		262			57			65			(40	)		344
Expenditures for property, plant and equipment		(12	)		(3	)		(5	)		—			(20	)
Distributions from affiliates in excess of earnings		—			—			16			—			16
Contributions and advances to affiliates		—			(38	)		(47	)		—			(85	)
Purchase of equity investment in Equistar		(440	)		—			—			—			(440	)
Other		(3	)		—			—			—			(3	)
Cash used in investing activities		(455	)		(41	)		(36	)		—			(532	)
Issuance of long-term debt		268			—			—			—			268
Repayment of long-term debt		(221	)		—			—			—			(221	)
Issuance of Series B common stock, warrants and right		440			—			—			—			440
Issuance of common stock		110			—			—			—			110
Dividends paid		(81	)		(1	)		(39	)		40			(81	)
Other		(13	)		—			—			—			(13	)
Cash provided by (used in) financing activities		503			(1	)		(39	)		40			503
Effect of exchange rate changes on cash		—			(6	)		8			—			2
Increase (decrease) in cash and cash equivalents	$	310		$	9		$	(2	)	$	—		$	317

F-54

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders

of Lyondell Chemical Company

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ equity and cash flows present fairly, in all material respects, the financial position of Lyondell Chemical Company and its subsidiaries at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 2 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets”.

As discussed in Note 2 to the consolidated financial statements, the Company adopted Statement of Financial Accounting Standards No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections”.

/s/ PricewaterhouseCoopers LLP

PRICEWATERHOUSECOOPERS LLP

Houston, Texas

March 10, 2003, except for matters as discussed under the heading “Adoption of SFAS No. 145” in Note 2, as to which the date is November 13, 2003

F-55

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF INCOME

	For the year ended December 31,
	2002			2001			2000
	Millions of dollars, except per share data
Sales and other operating revenues	$	3,262		$	3,193		$	4,003
Operating costs and expenses:
Cost of sales		2,898			2,862			3,403
Selling, general and administrative expenses		160			157			194
Research and development expense		30			32			35
Amortization of goodwill		—			30			32
		3,088			3,081			3,664
Gain on sale of assets		—			—			(590	)
Operating income		174			112			929
Interest expense		(384	)		(386	)		(514	)
Interest income		11			17			52
Other income (expense), net		(29	)		(11	)		(23	)
Income (loss) before equity investments, and income taxes		(228	)		(268	)		444
Income (loss) from equity investments:
Equistar Chemicals, LP		(117	)		(77	)		101
LYONDELL-CITGO Refining LP		135			129			86
Other		(4	)		(12	)		12
		14			40			199
Income (loss) before income taxes		(214	)		(228	)		643
Provision for (benefit from) income taxes		(66	)		(78	)		206
Net income (loss)	$	(148	)	$	(150	)	$	437
Basic earnings per share	$	(1.10	)	$	(1.28	)	$	3.72
Diluted earnings per share	$	(1.10	)	$	(1.28	)	$	3.71

See Notes to the Consolidated Financial Statements.

F-56

LYONDELL CHEMICAL COMPANY

CONSOLIDATED BALANCE SHEETS

	December 31,
	2002			2001
	Millions, except shares and par value data
ASSETS
Current assets:
Cash and cash equivalents	$	286		$	146
Other short-term investments		44			—
Accounts receivable:
Trade, net		340			317
Related parties		56			35
Inventories		344			316
Prepaid expenses and other current assets		66			116
Deferred tax assets		35			277
Total current assets		1,171			1,207
Property, plant and equipment, net		2,369			2,293
Investments and long-term receivables:
Investment in Equistar Chemicals, LP		1,184			522
Investment in PO joint ventures		770			717
Receivable from LYONDELL-CITGO Refining LP		229			229
Investment in LYONDELL-CITGO Refining LP		68			29
Other investments and long-term receivables		98			122
Goodwill, net		1,130			1,102
Other assets, net		429			482
Total assets	$	7,448		$	6,703
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable:
Trade	$	260		$	261
Related parties		84			58
Current maturities of long-term debt		1			7
Accrued liabilities		279			233
Total current liabilities		624			559
Long-term debt		3,926			3,846
Other liabilities		673			583
Deferred income taxes		881			790
Commitments and contingencies
Minority interest		165			176
Stockholders’ equity:
Common stock, $1.00 par value, 340,000,000 shares authorized, 128,530,000 and 120,250,000 shares issued, respectively		128			120
Series B common stock, $1.00 par value, 80,000,000 shares authorized, 34,568,224 shares issued		35			-—
Additional paid-in capital		1,380			854
Retained earnings (deficit)		(18	)		247
Accumulated other comprehensive loss		(271	)		(397	)
Treasury stock, at cost, 2,685,080 and 2,687,080 shares, respectively		(75	)		(75	)
Total stockholders’ equity		1,179			749
Total liabilities and stockholders’ equity	$	7,448		$	6,703

See Notes to the Consolidated Financial Statements.

F-57

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	For the year ended December 31,
	2002			2001			2000
	Millions of dollars
Cash flows from operating activities:
Net income (loss)	$	(148	)	$	(150	)	$	437
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		244			254			261
Gain on sale of assets		—			—			(590	)
Losses from equity investments		121			89			—
Restructuring charges		—			63			—
Deferred income taxes		(24	)		3			55
Debt prepayment charges and premiums		22			7			50
Changes in assets and liabilities that provided (used) cash:
Accounts receivable		(7	)		154			(160	)
Inventories		(14	)		48			3
Accounts payable		13			(74	)		67
Prepaid expenses and other current assets		62			(85	)		85
Other assets and liabilities, net		20			(110	)		(147	)
Net cash provided by operating activities		289			199			61
Cash flows from investing activities:
Purchase of equity investment in Equistar		(440	)		—			—
Contributions and advances to affiliates		(114	)		(173	)		(40	)
Purchase of other short-term investments		(44	)		—			—
Expenditures for property, plant and equipment		(22	)		(68	)		(104	)
Proceeds from sales of assets, net of cash sold		—			—			2,497
Distributions from affiliates in excess of earnings		—			50			85
Other		(3	)		—			—
Net cash provided by (used) in investing activities		(623	)		(191	)		2,438
Cash flows from financing activities:
Issuance of Series B common stock, warrants and right		440			—			—
Issuance of long-term debt		591			385			—
Repayment of long-term debt		(543	)		(394	)		(2,427	)
Issuance of common stock		110			—			—
Dividends paid		(109	)		(106	)		(106	)
Other		(18	)		(7	)		(10	)
Net cash provided by (used in) financing activities		471			(122	)		(2,543	)
Effect of exchange rate changes on cash		3			—			(3	)
Increase (decrease) in cash and cash equivalents		140			(114	)		(47	)
Cash and cash equivalents at beginning of period		146			260			307
Cash and cash equivalents at end of period	$	286		$	146		$	260

See Notes to the Consolidated Financial Statements.

F-58

LYONDELL CHEMICAL COMPANY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

	Common Stock					Series B Common Stock		Additional Earnings Capital		Retained Earnings (Deficit)			Accumulated Other Comprehensive Income (Loss)			Comprehensive Income (Loss)
	Issued		Treasury
	Millions, except shares and per share data
Balance, January 1, 2000	$	120	$	(75	)		—	$	854	$	172		$	(64	)
Net income		—		—			—		—		437			—		$	437
Cash dividends ($.90 per share)		—		—			—		—		(106	)		—
Reissuance of 60,436 treasury shares under restricted stock plan		—		2			—		—		—			—
Forfeiture of 71,127 shares under restricted stock plan		—		(2	)		—		—		1			—
Foreign currency translation		—		—			—		—		—			(183	)		(183	)
Minimum pension liability, net of tax of $5		—		—			—		—		—			(11	)		(11	)
Comprehensive income																$	243
Balance, December 31, 2000	$	120	$	(75	)		—	$	854	$	504		$	(258	)
Net loss		—		—			—		—		(150	)		—		$	(150	)
Cash dividends ($.90 per share)		—		—			—		—		(106	)		—
Reissuance of 2,587 treasury shares under restricted stock plan		—		—			—		—		(1	)		—
Foreign currency translation		—		—			—		—		—			(53	)		(53	)
Minimum pension liability, net of tax of $46		—		—			—		—		—			(84	)		(84	)
Other		—		—			—		—		—			(2	)		(2	)
Comprehensive loss																$	(289	)
Balance, December 31, 2001	$	120	$	(75	)	$	—	$	854	$	247		$	(397	)
Net loss		—		—					—		(148	)		—		$	(148	)
Issuance of 34,000,000 shares Series B common stock				—			34		405		—			—
Issuance of 8,280,000 shares of common stock		8		—			—		102		—			—
Issuance of warrants and right		—		—			—		11		—			—
Cash dividends ($.90 per share)		—		—			—		—		(109	)		—
Series B stock dividends, 568,224 shares		—		—			1		7		(8	)
Reissuance of 2,000 treasury shares		—		—			—		—		—			—
under restricted stock plan		—		—			—		—		—			—
Foreign currency translation		—		—			—		—		—			189			189
Minimum pension liability, net of tax of $34		—		—			—		—		—			(65	)		(65	)
Other		—		—			—		1		—			2			2
Comprehensive loss																$	(22	)
Balance, December 31, 2002	$	128	$	(75	)	$	35	$	1,380	$	(18	)	$	(271	)

See Notes to the Consolidated Financial Statements.

F-59

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Description of the Company and Operations

Lyondell Chemical Company (“Lyondell”) is a leading worldwide producer and marketer of propylene oxide (“PO”), propylene glycol, propylene glycol ethers, butanediol (“BDO”) toluene diisocyanate (“TDI”), styrene monomer (“SM”) and methyl tertiary butyl ether (“MTBE”), the principal derivative of tertiary butyl alcohol (“TBA”). These operations are consolidated and reported as the intermediate chemicals and derivatives (“IC&D”) segment.

Lyondell’s operations in the petrochemicals and polymers segments are conducted through its joint venture ownership interest in Equistar Chemicals, LP (“Equistar”) (see Note 6). Lyondell accounts for its investment in Equistar using the equity method of accounting. Equistar’s petrochemicals segment produces olefins, including ethylene, propylene and butadiene; aromatics, including benzene and toluene; oxygenated products, including ethylene oxide and derivatives, ethylene glycol, ethanol and MTBE. Equistar’s polymers segment produces polyolefins, including high density polyethylene (“HDPE”), low density polyethylene (“LDPE”), linear-low density polyethylene (“LLDPE”) and polypropylene; and performance polymers products, including wire and cable insulating resins, and polymeric powders.

Lyondell’s refining segment operations are conducted through its joint venture ownership interest in LYONDELL-CITGO Refining LP (“LCR”) (see Note 7). Lyondell accounts for its investment in LCR using the equity method of accounting. LCR produces refined petroleum products, including gasoline, low sulfur diesel, jet fuel, aromatics and lubricants.

Through April 30, 2002, Lyondell’s methanol operations were conducted through its joint venture ownership interest in Lyondell Methanol Company, L.P. (“LMC”). Effective May 1, 2002, LMC was wholly owned by Lyondell and the methanol results were included in the intermediate chemicals and derivatives segment from that date. The effects of consolidating the LMC operations, which previously had been accounted for using the equity method, were not material.

2. Summary of Significant Accounting Policies

Basis of Presentation—The consolidated financial statements include the accounts of Lyondell and its subsidiaries. Investments in joint ventures where Lyondell exerts a certain level of management control, but lacks full decision making ability over all major issues, are accounted for using the equity method of accounting. Under those circumstances, the equity method is used even though Lyondell’s ownership percentage may exceed 50%.

Revenue Recognition—Revenue from product sales is recognized as risk and title to the product transfer to the customer, which usually occurs when shipment is made.

Cash, Cash Equivalents and Other Short-Term Investments—Cash equivalents and other short-term investments consist of highly liquid debt instruments such as certificates of deposit, commercial paper and money market accounts. Cash equivalents include instruments with an original maturity date of three months or less. Other short-term investments have original maturity dates in excess of three months but no more than twelve months and are held to maturity. Cash equivalents and other short-term investments are stated at cost, which approximates fair value. Lyondell’s policy is to invest cash in conservative, highly rated instruments and limit the amount of credit exposure to any one institution.

Lyondell has no requirements for compensating balances in a specific amount at a specific point in time. Lyondell does maintain compensating balances for some of its banking services and products. Such balances are

F-60

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

maintained on an average basis and are solely at Lyondell’s discretion. As a result, none of Lyondell’s cash is restricted.

Inventories—Inventories are stated at the lower of cost or market. Cost is determined using the last-in, first-out (“LIFO”) basis for substantially all inventories, except for materials and supplies, which are valued using the average cost method.

Inventory exchange transactions, which involve fungible commodities and do not involve the payment or receipt of cash, are not accounted for as purchases and sales. Any resulting volumetric exchange balances are accounted for as inventory in accordance with the normal LIFO valuation policy.

Property, Plant and Equipment—Property, plant and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful asset lives, generally 25 years for major manufacturing equipment, 30 years for buildings, 10 to 15 years for light equipment and instrumentation, 15 years for office furniture and 3 to 5 years for information system equipment. Upon retirement or sale, Lyondell removes the cost of the asset and the related accumulated depreciation from the accounts and reflects any resulting gain or loss in the Consolidated Statement of Income. Lyondell’s policy is to capitalize interest cost incurred on debt during the construction of major projects exceeding one year.

Long-Lived Asset Impairment—Lyondell evaluates long-lived assets, including identifiable intangible assets, for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When it is probable that undiscounted future cash flows will not be sufficient to recover an asset’s carrying amount, the asset is written down to its estimated fair value. Long-lived assets to be disposed of are reported at the lower of carrying amount or estimated fair value less costs to sell the assets.

Goodwill—Goodwill represents the excess of purchase price paid over the fair value assigned to the net tangible and identifiable intangible assets of an acquired business. In 2000 and 2001, goodwill was amortized using the straight-line method over 40 years, the estimated useful life. Amortization of goodwill ceased effective January 1, 2002 as described below under Accounting Changes Adopted in 2002. Beginning in 2002, goodwill is reviewed for impairment annually.

Turnaround Maintenance and Repair Costs—Costs of maintenance and repairs exceeding $5 million incurred in connection with turnarounds of major units at Lyondell’s manufacturing facilities are deferred and amortized using the straight-line method over the period until the next planned turnaround, generally four to six years. These costs are maintenance, repair and replacement costs that are necessary to maintain, extend and improve the operating capacity and efficiency rates of the production units.

Deferred Software Costs—Costs to purchase and to develop software for internal use are deferred and amortized on a straight-line basis over periods of 3 to 7 years.

Other Deferred Charges—Other deferred charges are carried at amortized cost and primarily consist of deferred debt issuance costs, patents and licensed technology, capacity reservation fees and other long-term processing rights and costs. These assets are amortized using the straight-line method over their estimated useful lives or the term of the related agreement, if shorter.

Environmental Remediation Costs—Anticipated expenditures related to investigation and remediation of contaminated sites, which include operating facilities and waste disposal sites, are accrued when it is probable a liability has been incurred and the amount of the liability can reasonably be estimated. Estimated expenditures have not been discounted to present value.

F-61

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Minority Interest—Minority interest primarily represents the interest of unaffiliated investors in a partnership that owns Lyondell’s PO/SM II plant at the Channelview, Texas complex. The minority interest share of the partnership’s income or loss is reported in “Other income (expense), net” in the Consolidated Statement of Income.

Income Taxes—Deferred income taxes result from temporary differences in the recognition of revenues and expenses for tax and financial reporting purposes. Valuation allowances are provided against deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

Foreign Currency Translation—The functional currency of Lyondell’s principal non-U.S. operations is the local currency, except the Brazilian operation for which it is the U.S. dollar.

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

Adoption of SFAS No. 145—In April 2002, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. The primary impact of the statement on Lyondell is the classification of gains or losses that result from the early extinguishment of debt in other income (expense), net as an element of income before extraordinary items. Previously, such gains and losses were classified as extraordinary items. The Consolidated Statements of Income reflect these changes for all periods presented. Lyondell incurred a pretax loss on early extinguishment of debt of $22 million, $7 million and $50 million for the years ended December 31, 2002, 2001 and 2000, respectively.

Other Accounting Changes—Effective January 1, 2002, Lyondell implemented SFAS No. 141, Business Combinations, SFAS No. 142, Goodwill and Other Intangible Assets, and SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. Implementation of SFAS No. 141 and SFAS No. 144 did not have a material effect on the consolidated financial statements of Lyondell.

Upon implementation of SFAS No. 142, Lyondell reviewed its goodwill for impairment and concluded that goodwill was not impaired. However, Equistar reviewed its goodwill for impairment and concluded that the entire balance was impaired, resulting in a $1.1 billion charge to Equistar’s earnings as of January 1, 2002 (see Note 7). The conclusion was based on a comparison to Equistar’s indicated fair value, using multiples of EBITDA (earnings before interest, taxes, depreciation and amortization) for comparable companies as an indicator of fair value. Lyondell’s 41% share of the Equistar charge was offset by a corresponding reduction in the excess of Lyondell’s 41% share of Equistar’s partners’ capital over the carrying value of Lyondell’s investment in Equistar. Consequently, there was no net effect of the impairment on Lyondell’s earnings or investment in Equistar.

F-62

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As a result of implementing SFAS No. 142, Lyondell’s pretax income in 2002 and subsequent years is favorably affected by $30 million annually because of the elimination of Lyondell’s goodwill amortization. The following table presents Lyondell’s results of operations for all periods presented as adjusted to eliminate goodwill amortization.

	For the year ended December 31,
	2002			2001			2000
	Millions of dollars, except per share data
Reported net income (loss)	$	(148	)	$	(150	)	$	437
Add back: goodwill amortization, net of tax		—			22			23
Adjusted net income (loss)	$	(148	)	$	(128	)	$	460
Diluted earnings per share: (a)
Reported net income (loss)	$	(1.10	)	$	(1.28	)	$	3.71
Add back: goodwill amortization, net of tax		—			.19			.20
Adjusted net income (loss)	$	(1.10	)	$	(1.09	)	$	3.91

(a) Basic and diluted earnings (loss) per share are the same in all years except that basic earnings per share in 2000 are higher by $0.01.

Anticipated Accounting Changes—Lyondell expects to implement three significant accounting changes in 2003, as discussed below.

To better reflect the full cost of employee compensation, Lyondell has elected to adopt the “fair value” method of accounting for employee stock options, the preferred method as defined by SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, issued by the FASB in December 2002, provides three alternative methods of transition for a voluntary change to the fair value method, as well as requiring certain disclosures about the method employed and its effect on reported results. Lyondell will implement SFAS No. 148 in 2003, using the prospective method. Under this method, an estimate of the fair value of any options granted to employees during 2003 or thereafter will be charged to earnings over the related vesting period. This change is expected to reduce 2003 earnings by $0.01 to $0.02 per share.

Lyondell currently accounts for employee stock options under the intrinsic value based method prescribed by Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees. Accordingly, no compensation cost has been recognized in connection with stock option grants under the plans. The pro forma effect on net income and earnings per share from calculating compensation expense in the manner described in SFAS No. 123, Accounting for Stock-Based Compensation, in 2002, 2001 and 2000 and the assumptions used to estimate the fair value per share of options granted as of the date of grant using the Black-Scholes option-pricing model are summarized in the table below.

F-63

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

	For the year ended December 31,
	2002			2001			2000
	Millions of dollars, except per share data
Reported net income (loss)	$	(148	)	$	(150	)	$	437
Deduct pro forma effect of stock-based compensation using fair value based method, net of tax		(8	)		(7	)		(4	)
Pro forma net income (loss)	$	(156	)	$	(157	)	$	433
Diluted earnings per share: (a)
Reported	$	(1.10	)	$	(1.28	)	$	3.71
Pro forma	$	(1.16	)	$	(1.34	)	$	3.68
Assumptions:
Fair value per share of options granted	$	4.21		$	4.08		$	4.04
Fair value assumptions:
Dividend yield		6.06	%		5.88	%		5	%
Expected volatility		47	%		42	%		46	%
Risk-free interest rate		5.54	%		5.28	%		6.5	%
Maturity, in years		10			10			10

(a) Basic and diluted earnings (loss) per share are the same in all years except that basic earnings per share in 2000 are higher by $0.01.

The pro forma effect on earnings and earnings per share in 2000 is lower due to the effect of a three-year vesting period for stock options and the initiation of annual stock option awards beginning in 1999.

In January 2003, the FASB issued Interpretation No. 46 (“FIN No. 46”), Consolidation of Variable Interest Entities. FIN No. 46 addresses situations in which a company should include in its financial statements the assets, liabilities and activities of another entity. FIN No. 46 applies immediately to entities created after January 31, 2003 and, for Lyondell and Equistar, will apply to older entities beginning in the third quarter 2003. Lyondell expects the application of FIN 46 to result in the consolidation of the entity from which it leases BDO-2. See Note 14.

The consolidation of this entity as of December 31, 2002, using exchange rates as of that date, would result in a net increase in property, plant and equipment of approximately $181 million, a decrease in other liabilities of $12 million, a $197 million increase in debt and a $3 million after-tax charge, which will be reported as the cumulative effect of an accounting change. Equistar expects the application of FIN 46 to result in the consolidation of an entity from which it leases certain railcars. Consolidation of this entity as of December 31, 2002 would result in a net increase in property, plant and equipment of approximately $116 million, a decrease in prepaid expense of $13 million, a $103 million increase in debt and an immaterial charge to be reported as the cumulative effect of an accounting change.

F-64

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Other Recent Accounting Pronouncements— In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 143, Accounting for Asset Retirement Obligations, which addresses obligations associated with the retirement of tangible long-lived assets. In July 2002, the FASB issued SFAS No. 146, Accounting for Exit or Disposal Activities. SFAS No. 146 addresses the recognition, measurement, and reporting of costs associated with exit and disposal activities, including restructuring activities and facility closings. SFAS No. 146 will be effective for activities initiated after December 31, 2002. Lyondell does not expect adoption of SFAS No. 143 or SFAS No. 146 to have a material impact on its consolidated financial statements.

In November 2002, the FASB issued Interpretation No. 45 (FIN No. “45”), Guarantor’s Accounting and Disclosure Requirements. FIN No. 45 expands required disclosures for certain types of guarantees for the period ended December 31, 2002 and requires recognition of a liability at fair value for guarantees granted after December 31, 2002. Lyondell has provided required disclosures with respect to guarantees in Notes 12, 13 and 23.

Reclassifications—Certain previously reported amounts have been reclassified to conform to classifications adopted in 2002.

3.    Restructuring Charges

During 2001, Lyondell recorded a pretax charge of $63 million, which is included in cost of sales in the Consolidated Statements of Income, associated with its decision to exit the aliphatic diisocyanates (“ADI”) business. The decision reflected the limited ongoing strategic value to Lyondell of the ADI business and Lyondell’s poor competitive position in the ADI business. The decision involved the shutdown of the ADI manufacturing unit at the Lake Charles, Louisiana facility. The action included a 20% reduction of the Lake Charles workforce, as well as ADI-related research and sales positions at other locations. The $63 million charge included $45 million to adjust the carrying values of the ADI assets to their estimated net realizable value, $15 million of accrued liabilities for exit costs and $3 million for severance and other employee-related costs for nearly 100 employee positions that were eliminated. Payments of $9 million for exit costs and $3 million for severance and other employee-related costs were made through December 31, 2002. In addition, cash proceeds from asset sales exceeded asset carrying values by $2 million in 2002 and were credited to the accrual, resulting in a remaining accrued liability of $8 million at December 31, 2002, which will be paid out in 2003.

4.    Gain on Sale of Assets

Substantially all of Lyondell’s consolidated operations were acquired with the July 28, 1998 acquisition of ARCO Chemical Company. On March 31, 2000, Lyondell completed the sale of the polyols business and ownership interests in its U.S. PO manufacturing operations to Bayer AG and Bayer Corporation (collectively “Bayer”) for approximately $2.45 billion. Lyondell recorded a pretax gain on the sale of $590 million. Lyondell used net proceeds of the asset sale to retire a significant portion of its outstanding debt (see Note 12). The polyols business had sales of approximately $220 million for the three months ended March 31, 2000. The accompanying Consolidated Statements of Income included the operating results of the polyols business through March 31, 2000.

As part of the asset sale, Lyondell accrued liabilities of $53 million for employee severance and other employee benefits, covering approximately 850 employees. The affected employees were generally terminated on or about April 1, 2000, with a limited number providing transition services through mid-2001. During the third quarter 2000, Lyondell reduced the accrued liability by $25 million due to a reduction in the number of affected employees and significantly lower than expected payments of severance and other benefits. Payments of

F-65

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

$28 million for severance, relocation and other employee benefits were made through December 31, 2002, satisfying the remainder of the liability.

5.    Investment in PO Joint Ventures

As part of the sale of the polyols business and ownership interests in its U.S. PO manufacturing operations to Bayer (see Note 4), Lyondell entered into a U.S. PO manufacturing joint venture with Bayer (the “PO Joint Venture”) and a separate joint venture with Bayer for certain related PO technology (the “PO Technology Joint Venture”). Lyondell contributed approximately $1.2 billion of assets at historical book value to the joint ventures, and allocated $522 million of that book value to the partnership interest sold to Bayer. Lyondell’s continuing interest is reported as “Investment in PO joint ventures” in the accompanying Consolidated Balance Sheets.

Bayer’s ownership interest represents ownership of an in-kind portion of the PO production of the PO Joint Venture. Bayer’s share of PO production is approximately 1.5 billion pounds annually. Lyondell takes in kind the remaining PO production and all co-product (SM and TBA) production from the PO Joint Venture.

Lyondell operates the PO Joint Venture plants and arranges and coordinates the logistics of PO delivery. The partners share in the cost of production and logistics based on their product offtake. Lyondell reports the cost of its product offtake as inventory and cost of sales in its Consolidated Financial Statements. Related cash flows are reported in the operating cash flow section of the Consolidated Statement of Cash Flows. Lyondell’s investment in the PO Joint Venture and the PO Technology Joint Venture is reduced through recognition of its share of the depreciation and amortization of the assets of the joint ventures, which is included in cost of sales. Other changes in the investment balance are principally due to additional capital investments by Lyondell in the PO joint ventures.

In December 2000, Lyondell and Bayer formed a separate joint venture (“PO-11 Joint Venture”) for the construction of a world-scale PO/SM plant, known as PO-11, located in The Netherlands. At that time, Lyondell sold a 50% interest in the construction project to Bayer for approximately $52 million, based on project expenditures to date. Lyondell and Bayer each contributed their 50% interest in PO-11 into the PO-11 Joint Venture and, thereafter, each bears 50% of the continuing costs to complete the project. The plant is expected to begin operations in the second half of 2003. Lyondell and Bayer do not share marketing or product sales under either the PO Joint Venture or PO-11 Joint Venture. Lyondell’s contributions to the PO-11 Joint Venture are reported as “Investment in PO joint ventures” in the accompanying Consolidated Balance Sheets and as “Contributions and advances to affiliates” in the Consolidated Statements of Cash Flows. Total assets of the PO joint ventures, primarily property, plant and equipment, were $1,576 million and $1,458 at December 31, 2002 and 2001, respectively. During 2002 and 2001, Lyondell capitalized $10 million and $3 million, respectively, of interest related to the PO-11 construction project and included the capitalized amounts in its investment in the PO-11 Joint Venture.

6.    Investment in Equistar Chemicals, LP

Equistar was formed on December 1, 1997 as a joint venture between Lyondell and Millennium Chemicals Inc. (“Millennium”), to own and operate the businesses contributed by the partners. Lyondell contributed substantially all of the assets comprising its petrochemicals and polymers business segments, while Millennium contributed substantially all of the assets comprising its polyethylene and related products, performance polymers and ethanol businesses. On May 15, 1998, the ethylene, propylene and ethylene oxide and derivatives businesses of Occidental Petroleum Corporation (“Occidental”) were contributed to Equistar (“Occidental Contributed Business”).

F-66

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Prior to August 22, 2002, Lyondell had a 41% interest in Equistar, while Millennium and Occidental each had a 29.5% interest. On August 22, 2002, Lyondell acquired Occidental’s 29.5% interest in Equistar. See also Note 18. Following the acquisition, Lyondell has a 70.5% interest in Equistar. Because the partners jointly control certain key management decisions, including approval of the strategic plan, capital expenditures and annual budget, issuance of additional debt and the appointment of executive management of the partnership, Lyondell accounts for its investment in Equistar using the equity method of accounting. As a partnership, Equistar is not subject to federal income taxes.

Summarized financial information for Equistar follows:

	December 31,
	2002		2001
	Millions of dollars
BALANCE SHEETS
Total current assets	$	1,126	$	1,256
Property, plant and equipment, net		3,565		3,705
Goodwill, net		—		1,053
Other assets		361		324
Total assets	$	5,052	$	6,338
Current maturities of long-term debt	$	32	$	104
Other current liabilities		682		587
Long-term debt		2,196		2,233
Other liabilities		221		177
Partners’ capital		1,921		3,237
Total liabilities and partners’ capital	$	5,052	$	6,338

	For the year ended December 31,
	2002			2001			2000
STATEMENTS OF INCOME
Sales and other operating revenues	$	5,537		$	5,909		$	7,495
Cost of sales		5,388			5,755			6,908
Selling, general and administrative expenses		155			181			182
Research and development expense		38			39			38
Amortization of goodwill		—			33			33
Operating income (loss)		(44	)		(99	)		334
Interest expense, net		204			189			181
Other income, net		2			5			-—
Income (loss) before cumulative effect of accounting change		(246	)		(283	)		153
Cumulative effect of accounting change		(1,053	)		—			—
Net income (loss)	$	(1,299	)	$	(283	)	$	153
OTHER INFORMATION
Depreciation and amortization	$	298		$	319		$	308
Expenditures for property, plant and equipment		118			110			131

F-67

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

As discussed in Note 2, as part of the implementation of SFAS No. 142 as of January 1, 2002, the entire unamortized balance of Equistar’s goodwill was determined to be impaired. Accordingly, Equistar’s earnings in 2002 were reduced by $1.1 billion. Lyondell’s 41% share of charge for impairment of Equistar’s goodwill was offset by a corresponding reduction in the difference between Lyondell’s investment in Equistar and its underlying equity in Equistar’s net assets.

Lyondell’s income (loss) from its investment in Equistar consists of Lyondell’s share of Equistar’s income (loss) before the cumulative effect of the accounting change and the accretion of the difference between Lyondell’s investment and its underlying equity in Equistar’s net assets. At December 31, 2002, Lyondell’s underlying equity in Equistar’s net assets exceeded its investment in Equistar by approximately $170 million. This difference is being accreted over 15 years.

Lyondell purchases ethylene, propylene and benzene at market-related prices from Equistar under various agreements expiring in 2013 and 2014. With the exception of one pre-existing third-party supply agreement for a product, expiring in 2015, Lyondell is required to purchase 100% of its ethylene, propylene and benzene requirements for its Channelview and Bayport, Texas facilities from Equistar. In addition, a wholly owned subsidiary of Lyondell licenses MTBE technology to Equistar. Lyondell also purchases a significant portion of the MTBE produced by Equistar at one of its two Channelview units at market-related prices. Equistar’s sales to Lyondell were $459 million, $405 million and $572 million for the years ended December 31, 2002, 2001 and 2000, respectively. In addition, Equistar purchased $1 million, $4 million and $2 million of products from Lyondell for the years ended December 31, 2002, 2001 and 2000, respectively.

Equistar acts as sales agent for the methanol products of Lyondell Methanol Company, L.P. (“LMC”), which was wholly owned by Lyondell effective May 1, 2002. Equistar also provides operating and other services for LMC under the terms of existing agreements that were assumed by Equistar from Lyondell, including the lease to LMC by Equistar of the real property on which LMC’s methanol plant is located. Pursuant to the terms of those agreements, LMC pays Equistar a management fee. Equistar billed LMC $6 million annually in 2002, 2001 and 2000 for the aforementioned services and lease. The natural gas for LMC’s plant is purchased by Equistar as agent for LMC under Equistar master agreements with various third party suppliers. Equistar billed LMC $76 million, $86 million and $85 million in 2002, 2001 and 2000, respectively, for such natural gas purchases.

Sales by Equistar to LCR, primarily of certain olefins by-products and processing services, were $344 million, $380 million and $440 million for the years ended December 31, 2002, 2001 and 2000, respectively. Purchases by Equistar from LCR, primarily of refinery products, during the years ended December 31, 2002, 2001 and 2000 totaled $219 million, $205 million and $264 million, respectively.

Under a shared service agreement, Lyondell provides office space and various services to Equistar, including information technology, human resources, sales and marketing, raw material supply, supply chain, health, safety and environmental, engineering, research and development, facility services, legal, accounting, treasury, internal audit and tax. Lyondell charges Equistar for its share of the cost of such services. Direct costs, incurred exclusively for Equistar, are also charged to Equistar. Billings by Lyondell to Equistar were approximately $134 million, $135 million and $111 million for the years ended December 31, 2002, 2001 and 2000, respectively. Costs related to a limited number of shared services, primarily engineering, continue to be incurred by Equistar. In such cases, Equistar charges Lyondell for its share of such costs. Billings by Equistar to Lyondell were approximately $7 million, $9 million and $17 million for the years ended December 31, 2002, 2001 and 2000, respectively.

F-68

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

7.    Investment in LYONDELL-CITGO Refining LP

In July 1993, LCR was formed to own and operate Lyondell’s refining business. LCR is owned by subsidiaries of Lyondell and CITGO. Lyondell owns 58.75% of the partnership. Lyondell’s income from its investment in LCR presented in the Consolidated Statements of Income consists of Lyondell’s share of LCR’s net income and the accretion of the difference between Lyondell’s investment and its underlying equity in LCR’s net assets. The difference between Lyondell’s investment in LCR and its underlying equity in LCR’s net assets was approximately $275 million at December 31, 2002. This difference is being accreted over 25 years.

Summarized financial information for LCR is as follows:

	December 31,
	2002		2001
	Millions of dollars
BALANCE SHEETS
Total current assets	$	357	$	230
Property, plant and equipment, net		1,312		1,343
Other assets		88		97
Total assets	$	1,757	$	1,670
Notes payable	$	—	$	50
Other current liabilities		514		335
Long-term debt		450		450
Loans payable to partners		264		264
Other liabilities		126		79
Partners’ capital		403		492
Total liabilities and partners’ capital	$	1,757	$	1,670

	For the year ended December 31,
	2002			2001			2000
STATEMENTS OF INCOME
Sales and other operating revenues	$	3,392		$	3,284		$	4,075
Cost of sales		3,093			2,967			3,826
Selling, general and administrative expenses		53			61			60
Operating income		246			256			189
Interest expense, net		32			51			61
Other expense		(1	)		(2	)		—
Net income	$	213		$	203		$	128
OTHER INFORMATION
Depreciation and amortization	$	116		$	108		$	112
Expenditures for property, plant and equipment		65			109			60

In December 2002, LCR completed the refinancing of its credit facilities, with a new $450 million term bank loan facility and a $70 million working capital revolving credit facility with 18-month terms. The facilities, secured by substantially all of the assets of LCR, will mature in June 2004. They replace LCR’s $450 million term loan and $70 million revolving credit facility, which were scheduled to mature in January 2003. Loans payable to partners include $229 million payable to Lyondell and $35 million payable to CITGO. These loans have been extended and will mature in December 2004.

F-69

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Sales from LCR to Equistar, primarily of refinery products, were $219 million, $205 million and $264 million for the years ended December 31, 2002, 2001 and 2000, respectively. Purchases by LCR from Equistar, primarily of certain olefins by-products and processing services, during the years ended December 31, 2002, 2001 and 2000 totaled $344 million, $380 million and $440 million, respectively.

Lyondell has various service and cost sharing arrangements with LCR. Billings by Lyondell to LCR were approximately $3 million, $3 million and $4 million per year for the years ended December 31, 2002, 2001 and 2000, respectively. Billings from LCR to Lyondell were approximately $2 million, $3 million and $2 million for the years ended December 31, 2002, 2001 and 2000, respectively.

LCR has a long-term crude supply agreement (“Crude Supply Agreement” or “CSA”) with Lagoven, S.A., now known as PDVSA Petróleo, S.A. (“PDVSA Oil”), an affiliate of CITGO (see “Crude Supply Agreement” section of Note 17). The Crude Supply Agreement, which expires on December 31, 2017, incorporates formula prices to be paid by LCR for the crude oil supplied based on the market value of a slate of refined products deemed to be produced from each particular crude oil or feedstock, less: (1) certain deemed refining costs, adjustable for inflation and energy costs; (2) certain actual costs; and (3) a deemed margin, which varies according to the grade of crude oil or other feedstock delivered. The actual refining margin earned by LCR may vary from the formula amount depending on, among other things, timing differences in incorporating changes in refined product market values and energy costs into the Crude Supply Agreement’s deemed margin calculations and the efficiency with which LCR conducts its operations from time to time. Although LCR believes that the Crude Supply Agreement reduces the volatility of LCR’s earnings and cash flows over the long-term, the Crude Supply Agreement also limits LCR’s ability to enjoy higher margins during periods when the market price of crude oil is low relative to then-current market prices for refined products. In addition, if the actual yields, costs or volumes of the LCR refinery differ substantially from those contemplated by the Crude Supply Agreement, the benefits of this agreement to LCR could be substantially diminished, and could result in lower earnings and cash flow for LCR. Furthermore, there may be periods during which LCR’s costs for crude oil under the Crude Supply Agreement may be higher than might otherwise be available to LCR from other sources. A disparate increase in the price of heavy crude oil relative to the prices for its products has the tendency to make continued performance of its obligations under the Crude Supply Agreement less attractive to PDVSA Oil.

In addition, under the terms of a long-term product sales agreement (“Products Agreement”), CITGO purchases substantially all of the refined products produced by LCR. Both PDVSA Oil and CITGO are direct or indirect, wholly owned subsidiaries of Petróleos de Venezuela, S.A., the national oil company of the Republic of Venezuela.

8.    Accounts Receivable

Lyondell sells its products primarily to other industrial concerns in the petrochemicals and refining industries. Lyondell performs ongoing credit evaluations of its customers’ financial condition, and, in certain circumstances, requires letters of credit from them. Lyondell’s allowance for doubtful accounts receivable, which is reflected in the Consolidated Balance Sheets as a reduction of accounts receivable, totaled $6 million and $12 million at December 31, 2002 and 2001, respectively.

In December 2001, Lyondell amended its existing receivables purchase agreement with an independent issuer of receivables-backed commercial paper, extending the term until December 2004. Under the terms of the agreement, Lyondell agreed to sell, on an ongoing basis and without recourse, designated accounts receivable. Lyondell is obligated to sell new receivables as existing receivables are collected. The agreement currently permits the sale of up to $85 million of domestic accounts receivable. The amount of receivables permitted to be

F-70

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

sold is determined by a formula. As of December 31, 2002 and 2001, the balance of Lyondell’s accounts receivable sold under this arrangement was $65 million. Increases and decreases in the amount sold are reflected in operating cash flows in the Consolidated Statements of Cash Flows. Fees related to the sales are included in “Other income (expense), net” in the Consolidated Statements of Income.

9.    Inventories

Inventories consisted of the following components at December 31:

	2002		2001
	Millions of dollars
Finished goods	$	271	$	262
Work-in-process		7		5
Raw materials		29		19
Materials and supplies		37		30
Total inventories	$	344	$	316

The current cost of inventories approximated the book value for inventories carried under the LIFO method of inventory accounting.

10.    Property, Plant and Equipment, Goodwill and Other Assets

The components of property, plant and equipment, at cost, and the related accumulated depreciation were as follows at December 31:

	2002			2001
	Millions of dollars
Land	$	11		$	10
Manufacturing facilities and equipment		2,959			2,529
Construction in progress		30			113
Total property, plant and equipment		3,000			2,652
Less accumulated depreciation		(631	)		(359	)
Property, plant and equipment, net	$	2,369		$	2,293

No interest was capitalized to property, plant and equipment during 2002, 2001 and 2000. See Note 5 for other interest capitalized.

Goodwill, at cost, and the related accumulated amortization were as follows at December 31:

	2002			2001
	Millions of dollars
Goodwill	$	1,240		$	1,212
Less accumulated amortization		(110	)		(110	)
Goodwill, net	$	1,130		$	1,102

F-71

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The components of other assets at cost, and the related accumulated amortization were as follows at December 31:

	2002							2001
	Cost		Accumulated Amortization			Net		Cost		Accumulated Amortization			Net
	Millions of dollars
Intangible assets:
MTBE contract	$	—	$	—		$	—	$	150	$	(114	)	$	36
Debt issuance costs		135		(59	)		76		114		(42	)		72
Technology costs		132		(63	)		69		132		(51	)		81
Software costs		62		(19	)		43		57		(9	)		48
Turnaround costs		60		(26	)		34		46		(12	)		34
Other		87		(62	)		25		91		(53	)		38
Total intangible assets	$	476	$	(229	)		247	$	590	$	(281	)		309
Company-owned life insurance							147							147
Other							35							26
Total other assets						$	429						$	482

Scheduled amortization of these intangible assets for the next five years is estimated at $38 million in 2003, $37 million in 2004, $37 million in 2005, $37 million in 2006 and $37 million in 2007.

Depreciation and amortization expense is summarized as follows:

	2002		2001		2000
	Millions of dollars
Property, plant and equipment	$	137	$	124	$	136
MTBE contract		36		33		33
Investment in PO Joint Venture		32		31		24
Goodwill		—		30		32
Turnaround costs		14		16		10
Software costs		10		6		3
Other		15		14		23
Total depreciation and amortization	$	244	$	254	$	261

In addition, amortization of debt issuance costs of $16 million, $15 million and $18 million in 2002, 2001, and 2000, respectively, is included in interest expense in the Consolidated Statements of Income.

F-72

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

11.    Accrued Liabilities

Accrued liabilities consisted of the following components at December 31:

	2002		2001
	Millions of dollars
Interest	$	70	$	58
Payroll and benefits		63		46
Contractual obligations		55		52
Taxes other than income		51		46
Income taxes		25		21
Other		15		10
Total accrued liabilities	$	279	$	233

12.    Long-Term Debt

In December 2002, Lyondell issued $337 million principal amount of 9.5% senior secured notes due 2008, using net proceeds, after discount and fees, of $321 million to prepay $315 million of the principal amount outstanding under Term Loan E of the credit facility and to pay a $6 million prepayment premium.

In July 2002, Lyondell completed debt and equity offerings, as well as amendments to its credit facility, to the transaction documents related to the BDO-2 facility (see Note 13) and to the indentures related to its senior notes. Lyondell issued $278 million principal amount of 11.125% senior secured notes due 2012, using proceeds of $204 million to prepay $200 million of the principal amount outstanding under Term Loan E of the credit facility and to pay a $4 million prepayment premium. The remaining net proceeds, after discount and fees, of approximately $65 million were used for working capital and general corporate purposes. As discussed in Note 18, Lyondell also issued equity securities for net proceeds of $110 million that also were used for working capital and general corporate purposes.

The amended credit facility extended the maturity of the revolving credit facility from July 2003 to June 2005, reduced the size of the revolving credit facility from $500 million to $350 million, made certain financial ratio requirements less restrictive, made the covenant limiting acquisitions more restrictive and added a covenant limiting certain non-regulatory capital expenditures. The BDO-2 transaction documents were also amended to incorporate the revised covenants from the credit facility. Also, after receiving consents from the holders of the senior secured and senior subordinated notes, Lyondell amended the indentures related to those notes. The principal indenture amendment revised a limitation that had restricted payment of Lyondell’s current $0.90 per share annual cash dividend to a specified number of shares. As a result of the amendment, the number of shares with respect to which an annual cash dividend of up to $0.90 per share may be paid is no longer restricted by the covenants. Lyondell paid fees totaling $17 million related to the amendments. Lyondell had previously obtained amendments to the credit facility and the financial ratio requirements in September 2001 and March 2001.

The $350 million revolving credit facility, which matures in June 2005, was undrawn at December 31, 2002. Amounts available under the credit facility are reduced to the extent of certain outstanding letters of credit. Lyondell had outstanding letters of credit totaling $57 million at December 31, 2002, of which $49 million reduced the available credit facility.

In December 2001, Lyondell issued $393 million of 9.5% senior secured notes due December 15, 2008. The proceeds were used to prepay $384 million of variable-rate debt outstanding under Lyondell’s credit facility.

F-73

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Lyondell used the net proceeds of the March 31, 2000 asset sale (see Note 4) to reduce its variable-rate debt by $2.06 billion during 2000. During the fourth quarter 2000, Lyondell also repaid $200 million of debentures, which matured in November 2000 and reduced variable rate debt by an additional $150 million.

Long-term debt consisted of the following at December 31:

	2002		2001
	Millions of dollars
Bank credit facility
Revolving credit facility	$	—	$	—
Term Loan E due 2006, LIBOR plus 4.375%		103		634
Other debt obligations:
Senior Secured Notes, Series A due 2007, 9.625%		900		900
Senior Secured Notes, Series B due 2007, 9.875%		1,000		1,000
Senior Secured Notes due 2008, 9.5%		393		393
Senior Secured Notes due 2008, 9.5%		330		—
Senior Secured Notes due 2012, 11.125%		276		—
Senior Subordinated Notes due 2009, 10.875%		500		500
Debentures due 2005, 9.375%		100		100
Debentures due 2010, 10.25%		100		100
Debentures due 2020, 9.8%		224		224
Other		1		2
Total long-term debt		3,927		3,853
Less current maturities		1		7
Long-term debt, net	$	3,926	$	3,846

Borrowing under Term Loan E had a weighted average interest rate of 6.25% and 8.54% during 2002 and 2001, respectively. The 9.5% Senior Secured Notes due 2008 have a face amount of $337 million and are shown net of unamortized discount of $7 million.

The amended credit facility and the amended indentures pertaining to Lyondell’s senior secured notes and senior subordinated notes contain covenants that, subject to exceptions, restrict sale and leaseback transactions, lien incurrence, debt incurrence, dividends, investments, non-regulatory capital expenditures, certain payments, sales of assets and mergers. In addition, the credit facility requires Lyondell to maintain specified financial ratios and consolidated net worth, as defined in the credit facility. The breach of these covenants could permit the lenders to declare the loans immediately payable and could permit the lenders under Lyondell’s credit facility to terminate future lending commitments. Furthermore, a default under Equistar’s debt instruments which results in, or permits, the acceleration of more than $50 million of indebtedness would constitute a cross-default under Lyondell’s credit facility.

As a result of continuing adverse conditions in the industry, in March 2003, Lyondell obtained amendments to its credit facility to provide additional financial flexibility by easing certain financial ratio requirements. The BDO-2 transaction documents were also amended to incorporate the revised covenants from the credit facility.

Following amendments to the indentures for certain Equistar debt in November 2000, Lyondell is guarantor of $300 million of the Equistar debt and a co-obligor with Equistar for $30 million. Under certain limited circumstances the debt holders of the $30 million on which Lyondell is a co-obligor have the right to require repurchase of the debt by Lyondell.

F-74

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Aggregate maturities of all long-term debt during the next five years are $1 million in 2003, $1 million in 2004, $151 million in 2005, $50 million in 2006, $1.9 billion in 2007 and $1.8 billion thereafter.

13.    Lease Commitments

Lyondell leases various facilities and equipment under noncancelable lease arrangements for varying periods. As of December 31, 2002, future minimum lease payments for the next five years and thereafter, relating to all noncancelable operating leases with terms in excess of one year were as follows:

	Millions of dollars
2003	$	69
2004		67
2005		62
2006		54
2007		39
Thereafter		79
Total minimum lease payments	$	370

Operating lease net rental expenses for 2002, 2001 and 2000 were $71 million, $70 million and $74 million, respectively.

In July 2002, Lyondell began leasing a new butanediol (“BDO”) production facility in The Netherlands, known as BDO-2, under an operating lease with an initial term of 5 years. Construction of the facility, completed in June 2002, was financed by an unaffiliated entity that had been established for the purpose of serving as lessor with respect to this facility. Future minimum annual lease payments under the operating lease, amounting to $13 million per year using December 31, 2002 exchange and interest rates, are equivalent to interest on the lessor’s cost of construction, and are included for 5 years in the table above. The interest rate specified in the lease is based on EURIBOR plus 3.75%.

Lyondell may, at its option, renew the lease for four additional five-year terms or may purchase the facility at any time during the lease terms at the lessor’s cost of construction. If Lyondell does not exercise the purchase option before the end of the last renewal period, the facility will be sold. In the event the sales proceeds are less than the lessor’s cost of construction, Lyondell will pay the difference to the lessor, but not more than the guaranteed residual value. The guaranteed residual value, which is not included in future minimum lease payments above, is 155 million euros, or $162 million, using December 31, 2002 exchange rates. Under the transaction documents related to BDO-2, Lyondell is subject to certain financial and other covenants that are substantially the same as those contained in Lyondell’s credit facility. See Note 12.

14.    Financial Instruments and Derivatives

The effects of foreign currency derivative instruments were not significant during 2002, 2001 and 2000. Foreign exchange transactions were insignificant in 2002 and 2001, and a net gain of $13 million in 2000.

F-75

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The carrying value and the estimated fair value of Lyondell’s non-current, non-derivative financial instruments as of December 31, 2002 and 2001 are shown in the table below:

	2002				2001
	Carrying Value		Fair Value		Carrying Value		Fair Value
	Millions of dollars
Investments and long-term receivables	$	2,349	$	2,630	$	1,619	$	1,949
Long-term debt, including current maturities		3,927		3,367		3,853		3,816

The fair value of all nonderivative financial instruments included in current assets and current liabilities, including cash and cash equivalents, other short-term investments, accounts receivable, accounts payable and notes payable, approximated their carrying value due to their short maturity. Investments and long-term receivables, which consist primarily of equity investments in affiliated companies, were valued using current financial and other available information. Long-term debt, including amounts due within one year, was valued based upon the borrowing rates currently available to Lyondell for debt with terms and average maturities similar to Lyondell’s debt portfolio. Lyondell estimates the fair value of its residual value guarantee under an operating lease (see Note 13) and the fair value of its guarantee of certain Equistar debt (see Note 12) are not significant due to the low probability of future payments under the guarantee provisions.

Lyondell is exposed to credit risk related to its financial instruments in the event of nonperformance by the counterparties. Lyondell does not generally require collateral or other security to support these financial instruments. The counterparties to these transactions are major institutions deemed creditworthy by Lyondell. Lyondell does not anticipate nonperformance by the counterparties.

15.    Pension and Other Postretirement Benefits

Lyondell has defined benefit pension plans which cover employees in the United States and a number of other countries. Retirement benefits are based on years of service and the employee’s highest three consecutive years of compensation during the last ten years of service. Lyondell accrues pension costs based upon an actuarial valuation and funds the plans through periodic contributions to pension trust funds as required by applicable law. Lyondell also has unfunded supplemental nonqualified retirement plans, which provide pension benefits for certain employees in excess of the tax-qualified plans’ limits. In addition, Lyondell sponsors unfunded postretirement benefit plans other than pensions for U.S. employees, which provide medical and life insurance benefits. The postretirement medical plans are contributory, while the life insurance plans are, generally, noncontributory. The life insurance benefits will no longer be provided to employees retiring after July 1, 2002.

F-76

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table provides a reconciliation of benefit obligations, plan assets and the funded status of the plans:

	Pension Benefits						Other Postretirement Benefits
	2002			2001			2002			2001
	Millions of dollars
Change in benefit obligation:
Benefit obligation, January 1	$	554		$	431		$	91		$	69
Service cost		17			15			2			2
Interest cost		35			36			5			5
Plan amendments		(19	)		—			(9	)		19
Actuarial loss		35			108			4			—
Benefits paid		(33	)		(34	)		(5	)		(4	)
Other		1			1			—			—
Foreign exchange effects		19			(3	)		—			—
Benefit obligation, December 31		609			554			88			91
Change in plan assets:
Fair value of plan assets, January 1		364			412			—			—
Actual return on plan assets		(45	)		(26	)		—			—
Company contributions		4			17			5			4
Benefits paid		(33	)		(34	)		(5	)		(4	)
Foreign exchange effects		17			(5	)		—			—
Fair value of plan assets, December 31		307			364			—			—
Funded status		(302	)		(190	)		(88	)		(91	)
Contributions		2			—			—			—
Unrecognized actuarial and investment loss		326			224			11			7
Unrecognized prior service cost (benefit)		(12	)		5			(12	)		(4	)
Unrecognized transition obligation		3			3			—			—
Net amount recognized	$	17		$	42		$	(89	)	$	(88	)
Amounts recognized in the Consolidated Balance Sheet consist of:
Prepaid benefit cost	$	21		$	17		$	—		$	—
Accrued benefit liability		(213	)		(124	)		(89	)		(88	)
Intangible asset		3			3			—			—
Accumulated other comprehensive income – pretax		206			146			—			—
Net amount recognized	$	17		$	42		$	(89	)	$	(88	)

The above table for pension benefits includes non-U.S. pension plans of Lyondell. These plans constituted approximately 22% of the benefit obligation and 32% of the plan assets at December 31, 2002 and 18% of the benefit obligation and 26% of the plan assets at December 31, 2001.

The decrease in pension benefit obligations due to plan amendments in 2002 primarily resulted from changes limiting lump sum payouts of pension benefits in certain circumstances. The decrease in other postretirement benefit obligations due to plan amendments in 2002 primarily resulted from a change discontinuing life insurance benefits for employees retiring after July 1, 2002. The increase in other

F-77

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

postretirement benefit obligations due to plan amendments in 2001 resulted from a change in the medical plan that increased Lyondell’s minimum contribution level per employee.

Pension plans with projected benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

	2002		2001
	Millions of dollars
Projected benefit obligations	$	609	$	475
Fair value of assets		307		285

Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

	2002		2001
	Millions of dollars
Accumulated benefit obligations	$	430	$	399
Fair value of assets		221		285

Net periodic pension and other postretirement benefit costs included the following components:

	Pension Benefits									Other Postretirement Benefits
	2002			2001			2000			2002			2001			2000
	Millions of dollars
Components of net periodic benefit cost:
Service cost	$	17		$	15		$	14		$	2		$	2		$	2
Interest cost		35			36			31			5			5			5
Actual loss (gain) on plan assets		45			26			(5	)		—			—			—
Less-unrecognized loss		(77	)		(62	)		(45	)		—			—			—
Recognized gain on plan assets		(32	)		(36	)		(40	)		—			—			—
Prior service cost amortization		(2	)		—			1			(1	)		(2	)		(3	)
Actuarial and investment loss amortization		15			9			2			—			—			—
Net effect of curtailments, settlements and special termination benefits		—			9			(13	)		—			1			(4	)
Net periodic benefit cost	$	33		$	33		$	(5	)	$	6		$	6		$	—

The 2001 net effect of curtailments, settlements and special termination benefits was primarily due to lump-sum settlements taken by retiring employees, which resulted in a net charge, while the 2000 net effect primarily related to employees terminated as part of the asset sale to Bayer, which resulted in a net credit. Non-U.S. pension plans comprised $5 million, $1 million and $2 million of net periodic pension cost for 2002, 2001 and 2000, respectively.

F-78

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The assumptions used in determining the domestic net pension cost and net pension liability were as follows at December 31:

	Pension Benefits						Other Postretirement Benefits
	2002		2001		2000		2002		2001		2000
Weighted-average assumptions as of December 31:
Discount rate	6.50	%	7.00	%	7.50	%	6.50	%	7.00	%	7.50	%
Expected return on plan assets	9.50	%	9.50	%	9.50	%	—		—		—
Rate of compensation increase	4.50	%	4.50	%	4.50	%	—		4.50	%	4.50	%

The assupmptions used in determining the net periodic pension cost and pension obligation for non-U.S. pension plans were based on the economic environment of each applicable country.

The assumed annual rate of increase in the per capita cost of covered health care benefits as of December 31, 2002 was 10% for 2003 through 2004, 7% for 2005 through 2007, and 5% thereafter. The health care cost trend rate assumption does not have a significant effect on the amounts reported due to limits on Lyondell’s maximum contribution level to the medical plan. To illustrate, increasing or decreasing the assumed health care cost trend rates by one percentage point in each year would change the accumulated postretirement benefit liability as of December 31, 2002 by $1 million and would not have a material effect on the aggregate service and interest cost components of the net periodic postretirement benefit cost for the year then ended.

Lyondell also maintains voluntary defined contribution savings plans for eligible employees. Contributions to the plans by Lyondell were $10 million, $12 million and $11 million for the years ended December 31, 2002, 2001 and 2000, respectively.

F-79

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

16.    Income Taxes

The significant components of the provision for (benefit from) income taxes were as follows for the years ended December 31:

	2002			2001			2000
	Millions of dollars
Current:
Federal	$	(42	)	$	(94	)	$	137
Foreign		(3	)		15			8
State		3			(2	)		6
Total current		(42	)		(81	)		151
Deferred:
Federal		(52	)		(35	)		71
Foreign		26			52			(31	)
State		2			(14	)		15
Total deferred		(24	)		3			55
Income tax (benefit) provision before tax effects of other comprehensive income	$	(66	)	$	(78	)	$	206
Tax effects of elements of other comprehensive income:
Minimum pension liability		(34	)		(46	)		(5	)
Net unrealized losses on derivative instruments		—			(1	)		—
Total income tax (benefit) provision on comprehensive income	$	(100	)	$	(125	)	$	201

F-80

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes, and the amounts used for income tax purposes. Significant components of Lyondell’s deferred tax liabilities and assets were as follows as of December 31:

	2002			2001
	Millions of dollars
Deferred tax liabilities:
Accelerated tax depreciation	$	687		$	587
Investments in joint venture partnerships		846			505
Goodwill		61			53
Other		29			20
Total deferred tax liabilities		1,623			1,165
Deferred tax assets:
Net operating loss carryforwards		443			318
Employee benefit plans		187			145
Deferred charges and revenues		63			70
Federal benefit attributable to deferred foreign taxes		43			25
Alternative minimum tax credit carryforwards		—			42
Other		70			68
Total deferred tax assets		806			668
Deferred tax asset valuation allowance		(29	)		(16	)
Net deferred tax assets		777			652
Net deferred tax liabilities		846			513
Add current portion of deferred tax assets		35			277
Long-term deferred income taxes	$	881		$	790

Lyondell has federal, state and foreign tax loss carryforwards, the tax benefit of which would be $443 million at the current statutory rate. The federal loss carryforward benefits of $366 million would begin expiring in 2014 and the foreign tax loss carryforward benefits in excess of the valuation reserve have no expiration date. The state tax loss carryforward benefits are $2 million.

During 2002, Lyondell converted certain intercompany debt of a French partnership into equity, thereby creating French taxable income that absorbed approximately 41 million euros, or $42 million, of French five-year loss carryforwards. The new equity can be reconverted into debt over the next 10 years, assuming business results improve. Such reconversion will give rise to French tax losses equal to any equity reconverted to debt. Lyondell has recognized a deferred tax asset and a related valuation reserve of $15 million at December 31, 2002 in connection with this transaction.

Management believes that it is more likely than not that the $777 million of deferred tax assets in excess of the valuation reserve of $29 million at December 31, 2002 will be realized. This conclusion is supported by the significant excess of total deferred tax liabilities over net deferred tax assets. These deferred tax liabilities, primarily related to depreciation, will reverse over the next 15 to 20 years. In addition, as discussed above, certain carryforwards either have no expiration dates or have long carryforward periods prior to their expiration.

F-81

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The domestic and non-U.S. components of income (loss) before income taxes and a reconciliation of the income tax provision to theoretical income tax computed by applying the U.S. federal statutory tax rate are as follows:

	2002			2001			2000
	Millions of dollars
Income (loss) before income taxes:
Domestic	$	(277	)	$	(287	)	$	709
Non-U.S.		63			59			(66	)
Total	$	(214	)	$	(228	)	$	643
Theoretical income tax at U.S. statutory rate	$	(75	)	$	(79	)	$	226
Increase (reduction) resulting from:
Reorganization of non-U.S. operations		—			—			(37	)
Other effects of non-U.S. operations		11			17			(18	)
Changes in estimates for prior year items		(2	)		(23	)		—
Goodwill and other permanent differences		(3	)		3			11
State income taxes, net of federal		3			1			14
Other, net		—			3			10
Income tax (benefit) provision	$	(66	)	$	(78	)	$	206
Effective income tax rate		(31.0	)%		(34.0	)%		32.2	%

The change in estimate for prior year items in 2001 primarily represents certain tax effects related to the sale of assets to Bayer.

17.    Commitments and Contingencies

Commitments—Lyondell has various purchase commitments for materials, supplies and services incident to the ordinary conduct of business, generally for quantities required for Lyondell’s businesses and at prevailing market prices. Lyondell is party to various unconditional purchase obligation contracts as a purchaser for products and services, principally utilities and industrial gases. At December 31, 2002, future minimum payments under these contracts with noncancelable contract terms in excess of one year and fixed minimum payments were as follows:

	Millions of dollars
2003	$	155
2004		149
2005		120
2006		121
2007		121
Thereafter through 2018		674
Total minimum contract payments	$	1,340

Lyondell’s total purchases under these agreements were $200 million for the year ended December 31, 2002.

F-82

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

TDI Agreements—Under an agreement effective January 1, 2002, Lyondell is committed to purchase minimum annual quantities of TDI at plant cost from Rhodia through 2016. Such annual commitments, which are not included in the table above, are currently estimated at approximately 200 million pounds of TDI per year. Under the new agreement and a predecessor tolling agreement and resale agreement, both entered into in 1995, Lyondell’s purchases, including amounts in excess of its previous minimum of 212 million pounds of TDI per year, were $90 million, $120 million and $159 million in 2002, 2001 and 2000, respectively. The resale agreement expired December 31, 2001. The 2002 agreement superseded the 1995 tolling agreement. The decrease in 2002 purchases was due to maintenance activity at the Rhodia plant as well as the expiration of the resale agreement.

Capital Commitments—Lyondell has various commitments related to capital expenditures, all made in the normal course of business. At December 31, 2002, major capital commitments primarily consisted of Lyondell’s 50% share of those related to the construction of a world-scale PO/SM facility, known as PO-11, in The Netherlands. Lyondell’s share of the outstanding commitments, which are funded through contributions and advances to affiliates, totaled $76 million as of December 31, 2002.

Construction Lease—In June 2002, construction was completed on the BDO-2 production facility, and Lyondell leased the facility under an operating lease beginning in July 2002. See Note 13.

Bayer Claim—On April 30, 2002, Lyondell and Bayer settled the claims of Bayer in relation to its March 2000 purchase of Lyondell’s polyols business. The settlement included new or amended commercial agreements between the parties, generally relating to the existing propylene oxide (“PO”) partnership between Bayer and Lyondell. As a whole, the new or amended agreements provide new business opportunities and value for both parties over the next five to ten years. Concurrent with the settlement, Lyondell made a $5 million indemnification payment to Bayer. The settlement, including the indemnification payment, had no net effect on Lyondell’s financial position or results of operations.

Crude Supply Agreement—Under the Crude Supply Agreement, PDVSA Oil is required to sell, and LCR is required to purchase, 230,000 barrels per day of extra heavy crude oil, which constitutes approximately 86% of the Refinery’s refining capacity of 268,000 barrels per day of crude oil. Since April 1998, PDVSA Oil has, from time to time, declared itself in a force majeure situation and subsequently reduced deliveries of crude oil. Such reductions in deliveries were purportedly based on announced OPEC production cuts. PDVSA Oil informed LCR that the Venezuelan government, through the Ministry of Energy and Mines, had instructed that production of certain grades of crude oil be reduced. In certain circumstances, PDVSA Oil made payments under a different provision of the Crude Supply Agreement in partial compensation for such reductions.

In January 2002, PDVSA Oil again declared itself in a force majeure situation and stated that crude oil deliveries could be reduced by up to 20.3% beginning March 1, 2002. Beginning in March 2002, deliveries of crude oil to LCR were reduced to approximately 198,000 barrels per day, reaching a level of 190,000 barrels per day during the second quarter 2002. Crude oil deliveries to LCR under the Crude Supply Agreement increased to the contract level of 230,000 barrels per day during the third quarter 2002, averaging 212,000 barrels per day for the third quarter. Although deliveries increased to contract levels during the third quarter 2002, PDVSA Oil did not revoke its January 2002 force majeure declaration during 2002. A national strike in Venezuela began in early December 2002 and disrupted deliveries of crude oil to LCR under the Crude Supply Agreement, causing LCR to temporarily reduce operating rates. PDVSA Oil again declared a force majeure and reduced deliveries of crude oil to LCR. Recent media reports indicate that the force majeure has been lifted.

LCR has consistently contested the validity of PDVSA Oil’s and PDVSA’s reductions in deliveries under the Crude Supply Agreement. The parties have different interpretations of the provisions of the contracts

F-83

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

concerning the delivery of crude oil. The contracts do not contain dispute resolution procedures, and the parties have been unable to resolve their commercial dispute. As a result, on February 1, 2002, LCR filed a lawsuit against PDVSA and PDVSA Oil in connection with the force majeure declarations.

From time to time, Lyondell and PDVSA have had discussions covering both a restructuring of the Crude Supply Agreement and a broader restructuring of the LCR partnership. Lyondell is unable to predict whether changes in either arrangement will occur.

Subject to the consent of the other partner and rights of first offer and first refusal, the partners each have a right to transfer their interests in LCR to unaffiliated third parties in certain circumstances. In the event that CITGO were to transfer its interest in LCR to an unaffiliated third party, PDVSA Oil would have an option to terminate the Crude Supply Agreement.

Depending on then-current market conditions, any breach or termination of the Crude Supply Agreement, or reduction in supply thereunder, would require LCR to purchase all or a portion of its crude oil in the merchant market, could subject LCR to significant volatility and price fluctuations and could adversely affect LCR and, therefore, Lyondell. There can be no assurance that alternative crude oil supplies with similar margins would be available for purchase by LCR.

Indemnification Arrangements Relating to Equistar—Lyondell, Millennium Petrochemicals and Occidental and certain of its subsidiaries have each agreed to provide certain indemnifications to Equistar with respect to the petrochemicals and polymers businesses they each contributed. In addition, Equistar agreed to assume third party claims that are related to certain contingent liabilities arising prior to the contribution transactions that are asserted prior to December 1, 2004 as to Lyondell and Millennium Petrochemicals, and May 15, 2005 as to Occidental, to the extent the aggregate thereof does not exceed $7 million for each entity, subject to certain terms of the respective asset contribution agreements. As of December 31, 2002, Equistar had incurred approximately $7 million with respect to the indemnification basket for the business contributed by Lyondell. Lyondell, Millennium and Occidental each remain liable under these indemnification arrangements to the same extent following Lyondell’s acquisition of Occidental’s interest in Equistar as they were before. See Note 6.

Environmental Remediation—As of December 31, 2002, Lyondell’s environmental liability for future remediation costs at its plant sites and a limited number of Superfund sites totaled $19 million. The liabilities per site range from less than $1 million to $4 million per site and are expected to be incurred over the next two to seven years. In the opinion of management, there is currently no material estimable range of loss in excess of the amount recorded for these sites. However, it is possible that new information about the sites for which the accrual has been established, new technology or future developments such as involvement in investigations by regulatory agencies, could require Lyondell to reassess its potential exposure related to environmental matters.

Clean Air Act—The eight-county Houston/Galveston region has been designated a severe non-attainment area for ozone by the U.S. Environmental Protection Agency (“EPA”). Emission reduction controls for nitrogen oxides (“NOx”) must be installed at LCR’s refinery and each of Lyondell’s two facilities and Equistar’s six facilities in the Houston/Galveston region during the next several years. Recently adopted revisions by the regulatory agencies changed the required NOx reduction levels from 90% to 80%. Under the previous 90% reduction standard, Lyondell estimated that aggregate related capital expenditures could total between $400 million and $500 million for Lyondell, Equistar and LCR before the 2007 deadline. Under the revised 80% standard, Lyondell estimates that capital expenditures would decrease to between $250 million and $300 million for Lyondell, Equistar and LCR.

F-84

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes the range of projected capital expenditures for Lyondell and its joint ventures to comply with the 80% NOx emission reduction requirements:

	From		To
	Millions of dollars
NOx capital expenditures – 100% basis:
Lyondell	$	35	$	45
Equistar		165		200
LCR		50		55
Total NOx capital expenditures	$	250	$	300
NOx capital expenditures – Lyondell share:
Lyondell	$	35	$	45
Equistar		115		140
LCR		30		35
Total Lyondell share NOx capital expenditures	$	180	$	220

However, the savings from this revision could be offset by the costs of stricter proposed controls over highly reactive, volatile organic compounds, or HRVOCs. Lyondell, Equistar and LCR are still assessing the impact of the proposed HRVOC revisions and there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline. The timing and amount of these expenditures are also subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals.

In the United States, the Clean Air Act Amendments of 1990 set minimum levels for oxygenates, such as MTBE, in gasoline sold in areas not meeting specified air quality standards. However, the presence of MTBE in some water supplies in California and other states due to gasoline leaking from underground storage tanks and in surface water from recreational water craft has led to public concern about the use of MTBE. Certain federal and state governmental initiatives in the U.S. have sought either to rescind the oxygen requirement for reformulated gasoline or to restrict or ban the use of MTBE. Lyondell’s North American MTBE sales represented approximately 26% of its total 2002 revenues. The U.S. House of Representatives and the U.S. Senate each passed versions of an omnibus energy bill during 2001 and 2002, respectively. The Senate version of the energy bill would have resulted in a ban on the use of MTBE. The two energy bills were not reconciled during the conference process and an omnibus energy bill was not passed during 2002.

Both the U.S. House of Representatives and the U.S. Senate are expected to pursue an energy bill during the 2003/2004 legislative cycle. If this happens, it is likely that fuel content, including MTBE use, will be a subject of legislative debate. Factors which could be considered in this debate include the impact on gasoline price and supply and the potential for degradation of air quality.

At the state level, a number of states have legislated future MTBE bans. Of these, a number are mid-West states that use ethanol as the oxygenate of choice. Bans in these states should not have an impact on MTBE demand. However, Connecticut, California and New York have bans of MTBE in place effective October 1, 2003, January 1, 2004, and January 1, 2004, respectively. Lyondell estimates that California represents 34% of the U.S. MTBE industry demand and 20% of the worldwide MTBE industry demand, while Connecticut and New York combined represent 12% of the U.S. MTBE industry demand and 7% of the worldwide MTBE industry demand.

F-85

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

At this time, Lyondell cannot predict the impact that these initiatives will have on MTBE margins or volumes during 2003. However, several major oil companies have announced plans, beginning in 2003, to discontinue the use of MTBE in gasoline produced for California markets. Lyondell estimates that the California-market MTBE volumes of these companies account for an estimated 18% of U.S. MTBE industry demand and 10% of worldwide MTBE industry demand. Lyondell intends to continue marketing MTBE in the U.S. However, should it become necessary or desirable to significantly reduce MTBE production, Lyondell would need to make capital expenditures to add the flexibility to produce alternative gasoline blending components, such as iso-octane or ethyl tertiary butyl ether (“ETBE”), at its U.S.-based MTBE plants. The current cost estimates for converting Lyondell’s U.S.-based MTBE plant to iso-octane production range from $65 million to $75 million. The profit contribution for isooctane is likely to be lower than that historically realized on MTBE. Alternatively, Lyondell is pursuing ETBE viability through legislative efforts. One key hurdle is equal access to the federal subsidy provided for ethanol blended into gasoline for the ethanol component of ETBE. Lyondell’s U.S.-based MTBE plant is capable of ETBE production with minimal capital requirements.

The Clean Air Act also specified certain emissions standards for vehicles, and in 1998, the EPA concluded that additional controls on gasoline and diesel fuel were necessary. New standards for gasoline were finalized in 1999 and will require refiners to produce a low sulfur gasoline by 2004, with final compliance by 2006. A new “on-road” diesel standard was adopted in January 2001 and will require refiners to produce ultra low sulfur diesel by June 2006, with some allowance for a conditional phase-in period that could extend final compliance until 2009. Lyondell estimates that these standards will result in increased capital investment for LCR, totaling between $175 million to $225 million for the new gasoline standards and between $250 million to $300 million for the new diesel standard, between now and the implementation dates. Lyondell’s 58.75% share of LCR’s capital expenditures would be between $250 million and $300 million. In addition, these standards could result in higher operating costs for LCR. Equistar’s business may also be impacted if these standards increase the cost for processing fuel components.

General—Lyondell is involved in various lawsuits and proceedings. Subject to the uncertainty inherent in all litigation, management believes the resolution of these proceedings will not have a material adverse effect on the financial position, liquidity or results of operations of Lyondell.

In the opinion of management, any liability arising from the matters discussed in this note is not expected to have a material adverse effect on the financial position or liquidity of Lyondell. However, the adverse resolution in any reporting period of one or more of these matters discussed in this note could have a material impact on Lyondell’s results of operations for that period without giving effect to contribution or indemnification obligations of co-defendants or others, or to the effect of any insurance coverage that may be available to offset the effects of any such award.

18.    Stockholders’ Equity

Preferred Stock—Lyondell has authorized 80 million shares of $.01 par value preferred stock. As of December 31, 2002, none was outstanding.

Common Stock—In July 2002, Lyondell issued 8.28 million shares of common stock at $14 per share. The net proceeds of $110 million were credited to “Common stock” and “Additional paid in capital” in the Consolidated Balance Sheet. As a result of debt amendments (see Note 12), certain covenants restricting dividends were revised to allow an annual cash dividend of up to $0.90 per share on all common shares outstanding and any additional common shares that may be issued from time to time in the future.

F-86

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Series B Common Stock, Warrants and Right—On August 22, 2002, Lyondell completed certain transactions with Occidental. As a result of these transactions, Occidental received an equity interest in Lyondell, including:

• 34 million shares of newly issued Lyondell Series B common stock. These shares have the same rights as Lyondell’s original common stock with the exception of the dividend. The Series B common stock pays a dividend at the same rate as the original common stock but, at Lyondell’s option, the dividend may be paid in additional shares of Series B common stock or in cash. These new Series B shares also include provisions for conversion to original common stock three years after issuance or earlier in certain circumstances;

• five-year warrants to acquire five million shares of Lyondell original common stock at $25 per share; and

• a right to receive contingent payments equivalent in value to 7.38% of Equistar’s cash distributions related to 2002 and 2003, up to a total of $35 million, payable in cash, Series B common stock or original common stock, as determined by Lyondell.

The $439 million recognized fair value of the 34.0 million shares of Series B common stock issued was determined based on an average of the high and low per-share stock prices for original common stock for 10 consecutive business days, beginning 4 business days prior to and ending 5 business days after August 8, 2002, the first date that the number of shares of Series B common stock to be issued became fixed without subsequent revision. The warrants were valued at $1.60 per share, based upon a value estimated using the Black-Sholes option pricing model. The right to receive contingent payments was valued at $3 million, based on the estimated amount and likelihood of payment in light of Lyondell’s expectations for Equistar’s business results for 2002 and 2003. The total value of the Series B common stock, the warrants and the right as well as $2 million of transaction expenses was $452 million.

Lyondell elected to pay the dividend payable to Occidental on December 31, 2002 in additional shares of Series B common stock. As a result of these transactions, Occidental has an approximate 22% equity interest in Lyondell.

Accumulated Other Comprehensive Loss—The components of accumulated other comprehensive loss were as follows at December 31:

	2002			2001
	Millions of dollars
Foreign currency translation	$	(111	)	$	(300	)
Minimum pension liability		(160	)		(95	)
Unrealized loss on derivative instruments		—			(2	)
Total accumulated other comprehensive loss	$	(271	)	$	(397	)

Treasury Stock—From time to time Lyondell purchases its shares in the open market to issue under its employee compensation and benefits plans, including stock option and restricted stock plans.

Rights to Purchase Common Stock—On December 8, 1995, the Board of Directors of Lyondell declared a dividend of one right (“Right”) for each outstanding share Lyondell’s common stock to stockholders of record on December 20, 1995. The Rights become exercisable upon the earlier of: (i) ten days following a public announcement by another entity that it has acquired beneficial ownership of 15% or more of the outstanding

F-87

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

shares of common stock; or (ii) ten business days following the commencement of a tender offer or exchange offer to acquire beneficial ownership of 15% or more of the outstanding shares of common stock, except under certain circumstances. The Rights expire at the close of business on December 8, 2005 unless earlier redeemed at a price of $.0005 per Right or exchanged by Lyondell as described in the Rights Agreement dated as of December 8, 1995.

In connection with the sale of securities to Occidental described above under “Series B Common Stock, Warrants and Right” Lyondell’s Board of Director’s adopted resolutions exempting Occidental and its affiliates from certain definitions used in the agreement pertaining to these Rights. These resolutions authorize Occidental and its affiliates to acquire, without triggering the exercisability of the Rights, beneficial ownership of any securities contemplated by the transaction documents relating to the sale of securities described above under “Series B Common Stock, Warrants and Right” as long as their aggregate direct and indirect beneficial ownership does not exceed 40% of Lyondell’s issued and outstanding common stock.

1999 Incentive Plan—The 1999 Long-Term Incentive Plan (“1999 LTIP”) provides for the grant of awards to employees of Lyondell and its subsidiaries. Awards to employees may be in the form of (i) stock options, (ii) stock appreciation rights, payable in cash or common stock, (iii) restricted grants of common stock or units denominated in common stock, (iv) performance grants denominated in common stock or units denominated in common stock that are subject to the attainment of one or more goals, (v) grants of rights to receive the value of a specified number of shares of common stock (phantom stock), and (vi) a cash payment. Awards under the 1999 LTIP are generally limited to the lesser of 14 million shares or 12% of the number of shares of common stock outstanding at the time of granting of the award. During 2002, 2001 and 2000, Lyondell awarded stock option grants for 3,232,636 shares, 3,143,231 shares and 2,228,241 shares, respectively, under this plan.

Restricted Stock Plan—Under the 1995 Restricted Stock Plan, one million shares of common stock are authorized for grants and awards to officers and other key management employees. Lyondell grants fixed awards of common stock that are forfeitable and subject to restrictions on transfer. Vesting is contingent on the participant’s continuing employment with Lyondell for a period specified in the award. During 2002, 2001 and 2000 Lyondell granted and issued restricted stock of 2000 shares, 2,587 shares and 60,436 shares, respectively, to officers and employees, using treasury stock for this purpose. The shares vest on various dates through January 2004, depending upon the terms of the individual grants. Recipients are entitled to receive dividends on the restricted shares.

Stock Options—The following table summarizes activity, in thousands of shares and the weighted average exercise price per share, relating to stock options under the 1999 LTIP. As of December 31, 2002, options covering 9,624,097 shares were outstanding at prices ranging from $11.25 to $19.69 per share.

	2002				2001				2000
	Shares		Price		Shares		Price		Shares		Price
Outstanding at beginning of year	6,636		$	15.59	3,666		$	14.98	1,624		$	17.79
Granted	3,233			13.91	3,143			16.25	2,228			13.07
Exercised	(102	)		13.18	(50	)		12.91	—			—
Cancelled	(143	)		16.42	(123	)		15.06	(186	)		16.64
Outstanding at end of year	9,624			15.04	6,636			15.59	3,666			14.98
Exercisable at end of year	6,667			15.53	1,905			15.74	520			17.78

F-88

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table summarizes share data in thousands of shares and the weighted average exercise prices for options outstanding and options exercisable at December 31, 2002, and the weighted average remaining life of options outstanding:

	Options Outstanding				Options Exercisable
	Shares	Exercise Price		Remaining Life	Shares	Exercise Price
	Range of Exercise Prices per Share
$11.25 to $16.88	8,200	$	14.50	8	5,323	$	14.86
16.89 to   19.69	1,424	$	18.10	6	1,344	$	18.16
	9,624				6,667

Lyondell’s Executive Long-Term Incentive Plan (“LTI Plan”) became effective in November 1988. The last stock options granted under the LTI Plan were granted in March 1994. No additional stock option grants will be made under this plan, which has expired. As of December 31, 2002, options covering 390,242 shares were outstanding under the LTI Plan with a weighted average remaining life of less than 1 year, all of which were exercisable at prices ranging from $23.13 to $26.00 per share.

The following summarizes stock option activity for the LTI Plan in thousands of shares and the weighted average exercise price per share:

	2002				2001				2000
	Shares		Price		Shares		Price		Shares		Price
Outstanding at beginning of year	530		$	24.09	596		$	23.67	608		$	23.61
Exercised	—			—	—			—	(7	)		20.25
Cancelled	(140	)		23.00	(66	)		20.25	(5	)		21.30
Outstanding at end of year	390			24.49	530			24.09	596			23.67
Exercisable at end of year	390			24.49	530			24.09	596			23.67

19.    Earnings Per Share

Basic earnings per share for the periods presented are computed based upon the weighted average number of shares of original common stock and Series B common stock outstanding during the periods. Diluted earnings per share include the effect of stock options issued under the 1999 Long-Term Incentive Plan and the Executive Long-Term Incentive Plan and outstanding warrants. These stock options and warrants were antidilutive for all periods presented. Loss per share data is as follows:

Basic and Diluted EPS	2002			2001			2000
Weighted average shares, in thousands		133,943			117,563			117,557
Basic earnings (loss) per share	$	(1.10	)	$	(1.28	)	$	3.72
Diluted earnings (loss) per share	$	(1.10	)	$	(1.28	)	$	3.71

See Note 18 for discussion of common stock and warrants issued during 2002.

F-89

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

20.    Supplemental Cash Flow Information

Supplemental cash flow information is summarized as follows for the years ended December 31:

	2002			2001			2000
	Millions of dollars
Interest paid, net of interest capitalized	$	347		$	372		$	521
Net income taxes (received) paid	$	(103	)	$	(12	)	$	57

As described in Notes 7 and 19, during August 2002, Lyondell issued certain equity securities and a right to Occidental, and received Occidental’s 29.5% interest in Equistar. The transactions included concurrent payments between the parties of agreed amounts of approximately $440 million. The agreed amounts exchanged are included in cash used for investing activities and cash from financing activities. The securities issued, and the additional investment in Equistar, have been recorded at the estimated fair value of the consideration issued totaling $452 million plus the recognition of $352 million of deferred tax liabilities, for a total additional investment in Equistar of $804 million.

21.    Segment and Related Information

Lyondell operates in four reportable segments:

• Intermediate chemicals and derivatives (“IC&D”), which include propylene oxide, propylene glycol, propylene glycol ethers, butanediol, toluene diisocyanate, styrene monomer, and tertiary butyl alcohol and its derivative, MTBE;

• Petrochemicals, which include ethylene, propylene, butadiene, oxygenated products and aromatics;

• Polymers, which primarily include polyethylene and polypropylene; and

• Refining of crude oil.

The accounting policies of the segments are the same as those described in “Summary of Significant Accounting Policies” (see Note 2). No customer accounted for 10% or more of consolidated sales during any year in the three- year period ended December 31, 2002. However, under the terms of LCR’s Products Agreement (see Note 8), CITGO purchases substantially all of the refined products of the refining segment. Lyondell’s entire $1.1 billion balance of goodwill is allocated to the IC&D segment.

F-90

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

Summarized financial information concerning reportable segments is shown in the following table:

	IC&D		Petrochemicals		Polymers			Refining		Other			Total
	Millions of dollars
2002
Sales and other Operating revenues	$	3,262	$	—	$	—		$	—	$	—		$	3,262
Operating income		174		—		—			—		—			174
Income (loss) from equity investments		—		65		(37	)		135		(149	)		14
Total assets		5,967		799		337			297		48			7,448
Capital expenditures		22		—		—			—		—			22
Depreciation and Amortization expense		244		—		—			—		—			244
2001
Sales and other operating revenues	$	3,193	$	—	$	—		$	—	$	—		$	3,193
Operating income		112		—		—			—		—			112
Income (loss) from equity investments		—		113		(77	)		129		(125	)		40
Total assets		5,887		286		115			258		157			6,703
Capital expenditures		68		—		—			—		—			68
Depreciation and
Amortization expense		254		—		—			—		—			254
2000
Sales and other Operating revenues	$	4,003	$	—	$	—		$	—	$	—		$	4,003
Operating income		929		—		—			—		—			929
Income (loss) from equity investments		—		285		(76	)		86		(96	)		199
Total assets		6,150		336		142			249		170			7,047
Capital expenditures		104		—		—			—		—			104
Depreciation and Amortization expense		261		—		—			—		—			261

The following table presents the details of “Income (loss) from equity investments” as presented above in the “Other” column for the years ended December 31:

	2002			2001			2000
	Millions of dollars
Equistar items not allocated to segments:
Principally general and administrative expenses and interest expense, net	$	(145	)	$	(116	)	$	(108	)
Other income, net		—			3			—
Other		(4	)		(12	)		12
Income (loss) from equity investments	$	(149	)	$	(125	)	$	(96	)

Through April 30, 2002, the methanol operations of LMC were included in the “Other” column. Effective May 1, 2002, LMC was wholly owned by Lyondell and the methanol results were included in the IC&D segment from that date. The effects of consolidating the LMC operations, which previously had been accounted for using the equity method, and of including the methanol operations in the IC&D segment were not material.

F-91

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

The following table presents the details of “Total assets” as presented above in the “Other” column for the years ended December 31:

	2002		2001		2000
	Millions of dollars
Equistar items not allocated to segments:
Goodwill	$	—	$	87	$	99
Other assets		48		34		22
Equity investment in LMC		—		36		49
Total—Other	$	48	$	157	$	170

The following “Revenues” by country data are based upon the location of the delivery of the product. The “Long-lived assets” by country data is based upon the location of the assets.

	Revenues						Long-Lived Assets
	2002		2001		2000		2002		2001		2000
	Millions of dollars
United States	$	1,807	$	1,732	$	2,068	$	1,340	$	1,382	$	1,482
Non-U.S.		1,455		1,461		1,935		1,029		911		947
Total	$	3,262	$	3,193	$	4,003	$	2,369	$	2,293	$	2,429

Non-U.S. long-lived assets primarily consist of the net property, plant and equipment of two plants, located near Rotterdam, The Netherlands, and Fos-sur-Mer, France, both of which are part of the IC&D segment.

22.    Unaudited Quarterly Results

	For the quarter ended
	March 31			June 30		September 30			December 31
	Millions of dollars, except per share data
2002
Sales and other operating revenues	$	674		$	843	$	855		$	890
Operating income		38			65		59			12
Income (loss) from equity investments		(21	)		32		44			(41	)
Net income (loss)		(55	)		2		(2	)		(93	)
Basic and diluted earnings (loss) per share (a)		(.47	)		.02		(.02	)		(.58	)
2001
Sales and other operating revenues	$	849		$	893	$	742		$	709
Operating income (loss)		31			66		(26	)		41
Income (loss) from equity investments		2			42		17			(21	)
Net income (loss) (a)		(34	)		4		(67	)		(53	)
Basic and diluted earnings (loss) per share (a)		(.29	)		.04		(.57	)		(.46	)

(a) Earnings per common share calculations for each of the quarters are based upon the weighted average number of shares outstanding for each period (basic earnings per share). The sum of the quarters may not necessarily be equal to the full year earnings per share amount.

F-92

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

23.    Supplemental Guarantor Information

ARCO Chemical Technology Inc. (“ACTI”), ARCO Chemical Technology L.P. (“ACTLP”) and Lyondell Chemical Nederland, Ltd. (“LCNL”) are guarantors, jointly and severally, (collectively “Guarantors”) of the $337 million senior secured notes issued in December 2002, the $278 million senior secured notes issued in July 2002, the $393 million senior secured notes issued in December 2001 and the $500 million senior subordinated notes and $1.9 billion senior secured notes issued in May 1999 (see Note 12). LCNL, a Delaware corporation, is a wholly owned subsidiary of Lyondell that owns a Dutch subsidiary that operates a chemical production facility near Rotterdam, The Netherlands. ACTI is a Delaware corporation, which holds the investment in ACTLP. ACTLP is a Delaware limited partnership, which holds and licenses technology to other Lyondell affiliates and to third parties. Separate financial statements of the Guarantors are not considered to be material to the holders of the senior subordinated notes and senior secured notes. The following condensed consolidating financial information present supplemental information for the Guarantors as of December 31, 2002 and 2001 and for the three years ended December 31, 2002.

F-93

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED BALANCE SHEET (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of and for the year ended December 31, 2002

	Lyondell			Guarantors			Non-Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
BALANCE SHEET
Total current assets	$	674		$	173		$	324		$	—		$	1,171
Property, plant and equipment, net		872			581			916			—			2,369
Investments and long-term receivables		7,335			504			2,196			(7,686	)		2,349
Goodwill, net		453			437			240			—			1,130
Other assets		313			83			33			—			429
Total assets	$	9,647		$	1,778		$	3,709		$	(7,686	)	$	7,448
Current maturities of long-term debt	$	1		$	—		$	—		$	—		$	1
Other current liabilities		431			90			104			—			623
Long-term debt		3,924			—			2			—			3,926
Other liabilities		602			48			21			—			673
Deferred income taxes		637			172			72			—			881
Intercompany liabilities (assets)		2,873			(1,223	)		(1,650	)		—			—
Minority interest		—			—			165			—			165
Stockholders’ equity		1,179			2,691			4,995			(7,686	)		1,179
Total liabilities and stockholders’ equity	$	9,647		$	1,778		$	3,709		$	(7,686	)	$	7,448
STATEMENT OF INCOME
Sales and other operating revenues	$	2,216		$	807		$	1,814		$	(1,575	)	$	3,262
Cost of sales		2,259			745			1,469			(1,575	)		2,898
Selling, general and administrative expenses		95			17			48			—			160
Research and development expense		30			—			—			—			30
Operating income (loss)		(168	)		45			297			—			174
Interest income (expense), net		(390	)		11			6			—			(373	)
Other income (expense), net		(82	)		23			30			—			(29	)
Income (loss) from equity investments		474			(2	)		35			(493	)		14
Intercompany income (expense)		860			162			103			(1,125	)		—
Provision for (benefit from) income taxes		211			73			144			(494	)		(66	)
Net income (loss)	$	483		$	166		$	327		$	(1,124	)	$	(148	)

F-94

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED BALANCE SHEET (UNAUDITED)—(Continued)

For the year ended December 31, 2002

	Lyondell			Guarantors			Non-Guarantors			Elimination			Consolidated Lyondell
	Millions of dollars
STATEMENT OF CASH FLOWS
Net income (loss)	$	483		$	166		$	327		$	(1,124	)	$	(148	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		112			40			92			—			244
Net changes in working capital and other		(432	)		(4	)		629			—			193
Net cash provided by operating activities		163			202			1,048			(1,124	)		289
Purchase of equity investment in Equistar		(440	)		—			—			—			(440	)
Contributions and advances to affiliates		(3	)		(46	)		(68	)		—			(117	)
Expenditures for property, plant and equipment		(10	)		(4	)		(8	)		—			(22	)
Purchase of short-term investments		(44	)		—			—			—			(44	)
Net cash used in investing activities		(497	)		(50	)		(76	)		—			(623	)
Issuance of Series B common stock, warrants, and right		440			—			—			—			440
Issuance of common stock		110			—			—			—			110
Issuance of long-term debt		591			—			—			—			591
Repayment of long-term debt		(543	)		—			—			—			(543	)
Dividends paid		(109	)		(138	)		(986	)		1,124			(109	)
Other		(18	)		—			—			—			(18	)
Net cash provided by (used in) financing activities		471			(138	)		(986	)		1,124			471
Effect of exchange rate changes on cash		—			(7	)		10			—			3
Increase (decrease) in cash and cash equivalents	$	137		$	7		$	(4	)		—		$	140

F-95

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED BALANCE SHEET (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

As of and for the year ended December 31, 2001

	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
BALANCE SHEET
Total current assets	$	781		$	132		$	294		$	—		$	1,207
Property, plant and equipment, net		915			516			862			—			2,293
Investments and long-term receivables		7,007			461			1,537			(7,386	)		1,619
Goodwill, net		453			389			260			—			1,102
Other assets		344			88			50			—			482
Total assets	$	9,500		$	1,586		$	3,003		$	(7,386	)	$	6,703
Current maturities of long-term debt	$	7		$	—		$	-—		$	—		$	7
Other current liabilities		391			73			88			—			552
Long-term debt		3,844			—			2			—			3,846
Other liabilities		515			55			13			—			583
Deferred income taxes		611			133			46			—			790
Intercompany liabilities (assets)		3,383			(1,101	)		(2,282	)		—			—
Minority interest		—			—			176			—			176
Stockholders’ equity		749			2,426			4,960			(7,386	)		749
Total liabilities and stockholders’ equity	$	9,500		$	1,586		$	3,003		$	(7,386	)	$	6,703
STATEMENT OF INCOME
Sales and other operating revenues	$	2,178		$	786		$	1,605		$	(1,376	)	$	3,193
Cost of sales		2,237			566			1,435			(1,376	)		2,862
Selling, general and administrative expenses		86			16			55			—			157
Research and development expense		32			—			—			—			32
Amortization of goodwill		12			11			7			—			30
Operating income (loss)		(189	)		193			108			—			112
Interest income (expense), net		(384	)		3			12			—			(369	)
Other income (expense), net		(134	)		(83	)		206			—			(11	)
Income (loss) from equity investments		616			—			60			(636	)		40
Intercompany income (expense)		267			335			128			(730	)		—
Provision for (benefit from) income taxes		60			152			174			(464	)		(78	)
Net income (loss)	$	116		$	296		$	340		$	(902	)	$	(150	)

F-96

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED BALANCE SHEET (UNAUDITED)—(Continued)

For the year ended December 31, 2001

	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
STATEMENT OF CASH FLOWS
Net income (loss)	$	116		$	296		$	340		$	(902	)	$	(150	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation and amortization		123			47			84			—			254
Net changes in working capital and other		(642	)		119			(284	)		902			95
Net cash provided by (used in) operating activities		(403	)		462			140			—			199
Contributions and advances to affiliates		61			(115	)		(119	)		—			(173	)
Expenditures for property, plant and equipment		(17	)		(8	)		(43	)		—			(68	)
Distributions from affiliates in excess of earnings		(10	)		—			60			—			50
Other		470			—			—			(470	)		—
Net cash provided by (used in) investing activities		504			(123	)		(102	)		(470	)		(191	)
Issuance of long-term debt		385			—			—			—			385
Repayment of long-term debt		(394	)		—			—			—			(394	)
Dividends paid		(106	)		(426	)		(44	)		470			(106	)
Other		(7	)		—			—			—			(7	)
Net cash provided by (used in) financing activities		(122	)		(426	)		(44	)		470			(122	)
Effect of exchange rate changes on cash		—			67			(67	)		—			—
Decrease in cash and cash equivalents	$	(21	)	$	(20	)	$	(73	)	$	—		$	(114	)

F-97

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED BALANCE SHEET (UNAUDITED)—(Continued)

CONDENSED CONSOLIDATING FINANCIAL INFORMATION

For the year ended December 31, 2000

	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
STATEMENT OF INCOME
Sales and other operating revenues	$	2,761		$	936		$	1,585		$	(1,279	)	$	4,003
Cost of sales		2,459			682			1,541			(1,279	)		3,403
Selling, general and administrative expenses		145			5			44			—			194
Research and development expense		32			—			3			—			35
Amortization of goodwill		12			13			7			—			32
Gain on sale of assets		—			9			(599	)		—			(590	)
Operating income (loss)		113			227			589			—			929
Interest income (expense), net		(481	)		1			18			—			(462	)
Other income (expense), net		(205	)		(128	)		310			—			(23	)
Income (loss) from equity investments		1,048			—			215			(1,064	)		199
Intercompany income (expense)		(88	)		156			181			(249	)		—
Provision for (benefit from) income taxes		123			82			423			(422	)		206
Net income (loss)	$	264		$	174		$	890		$	(891	)	$	437

F-98

LYONDELL CHEMICAL COMPANY

NOTES TO THE CONSOLIDATED BALANCE SHEET (UNAUDITED)—(Continued)

For the year ended December 31, 2000

	Lyondell			Guarantors			Non- Guarantors			Eliminations			Consolidated Lyondell
	Millions of dollars
STATEMENT OF CASH FLOWS
Net income (loss)	$	264		$	174		$	890		$	(891	)	$	437
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:
Gain on sale of assets		—			9			(599	)		—			(590	)
Depreciation and amortization		130			57			74			—			261
Net changes in working capital and other		(50	)		(292	)		(596	)		891			(47	)
Net cash provided by (used in) operating activities		344			(52	)		(231	)		—			61
Proceeds from sales of assets, net of cash sold		1,903			216			378			—			2,497
Contributions and advances to affiliates		12			—			(52	)		—			(40	)
Expenditures for property, plant and equipment		(27	)		(36	)		(41	)		—			(104	)
Distributions from affiliates in excess of earnings		(19	)		—			104			—			85
Other		249			—			—			(249	)		—
Net cash provided by (used in) investing activities		2,118			180			389			(249	)		2,438
Repayment of long-term debt		(2,426	)		—			(1	)		—			(2,427	)
Dividends paid		(106	)		(91	)		(158	)		249			(106	)
Other		(10	)		—			—			—			(10	)
Net cash provided by (used in) financing activities		(2,542	)		(91	)		(159	)		249			(2,543	)
Effect of exchange rate changes on cash		—			(49	)		46			—			(3	)
Increase (decrease) in cash and cash equivalents	$	(80	)	$	(12	)	$	45		$	—		$	(47	)

F-99

MILLENNIUM CHEMICALS INC.

CONSOLIDATED BALANCE SHEETS

(Millions, except share data)

	September 30, 2003			December 31, 2002
	(Unaudited)			(Restated— See Note 2)
ASSETS
Current assets
Cash and cash equivalents	$	158		$	125
Trade receivables, net		238			210
Inventories		427			406
Other current assets		66			78
Total current assets		889			819
Property, plant and equipment, net		849			862
Investment in Equistar		494			563
Other assets		48			46
Goodwill		106			106
Total assets	$	2,386		$	2,396
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current liabilities
Notes payable	$	—		$	4
Other short-term borrowings		—			14
Current maturities of long-term debt		99			12
Trade accounts payable		200			274
Income taxes payable		21			44
Accrued expenses and other liabilities		154			127
Total current liabilities		474			475
Long-term debt		1,264			1,212
Deferred income taxes		290			337
Other liabilities		380			388
Total liabilities		2,408			2,412
Commitments and contingencies (Note 11)
Minority interest		28			19
Shareholders’ deficit
Preferred stock (par value $.01 per share, authorized 25,000,000 shares, none issued and outstanding)		—			—
Common stock (par value $.01 per share, authorized 225,000,000 shares; issued 77,896,586 shares at September 30, 2003 and December 31, 2002)		1			1
Paid in capital		1,295			1,297
Accumulated deficit		(857	)		(776	)
Cumulative other comprehensive loss		(235	)		(299	)
Treasury stock, at cost (14,240,999 and 14,766,279 shares at September 30, 2003 and December 31, 2002, respectively)		(266	)		(275	)
Deferred compensation		12			17
Total shareholders’ deficit		(50	)		(35	)
Total liabilities and shareholders’ deficit	$	2,386		$	2,396

See Notes to Consolidated Financial Statements.

F-100

MILLENNIUM CHEMICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(Millions, except per share data)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
				(Restated— See Note 2)						(Restated— See Note 2)
Net sales	$	431		$	411		$	1,262		$	1,167
Operating costs and expenses
Cost of products sold		362			317			1,019			945
Depreciation and amortization		28			26			83			76
Selling, development and administrative expense		31			38			98			89
Reorganization and office closure costs		15			—			16			—
Operating (loss) income		(5	)		30			46			57
Interest expense		(25	)		(23	)		(72	)		(67	)
Interest income		2			1			4			3
(Loss) earnings on Equistar investment		(12	)		6			(69	)		(39	)
Other income (expense), net		2			(1	)		1			(2	)
(Loss) income before income taxes, minority interest and cumulative effect of accounting change		(38	)		13			(90	)		(48	)
Benefit from (provision for) income taxes		11			(7	)		32			24
(Loss) income before minority interest and cumulative effect of accounting change		(27	)		6			(58	)		(24	)
Minority interest		(1	)		(1	)		(5	)		(2	)
(Loss) income before cumulative effect of accounting change		(28	)		5			(63	)		(26	)
Cumulative effect of accounting change		—			—			(1	)		(305	)
Net (loss) income	$	(28	)	$	5		$	(64	)	$	(331	)
Basic and diluted (loss) earnings per share:
Before cumulative effect of accounting change	$	(0.44	)	$	0.08		$	(0.98	)	$	(0.41	)
From cumulative effect of accounting change		—			—			(0.02	)		(4.80	)
After cumulative effect of accounting change	$	(0.44	)	$	0.08		$	(1.00	)	$	(5.21	)

See Notes to Consolidated Financial Statements.

F-101

MILLENNIUM CHEMICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Millions)

	Nine Months Ended September 30,
	2003			2002
				(Restated— See Note 2)
Cash flows from operating activities:
Net loss	$	(64	)	$	(331	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Cumulative effect of accounting change		1			305
Depreciation and amortization		83			76
Deferred income tax benefit		(43	)		(26	)
Loss on Equistar investment		69			39
Minority interest		5			2
Other, net		—			4
Changes in assets and liabilities:
Increase in trade receivables		(23	)		(17	)
Decrease in inventories		1			30
Decrease (increase) in other current assets		27			(9	)
Decrease (increase) in other assets		2			(13	)
Decrease in trade accounts payable		(82	)		(22	)
Increase in accrued expenses and other liabilities and income taxes payable		—			25
Decrease in other liabilities		(23	)		(11	)
Cash (used in) provided by operating activities		(47	)		52
Cash flows from investing activities:
Capital expenditures		(29	)		(43	)
Cash used in investing activities		(29	)		(43	)
Cash flows from financing activities:
Dividends to shareholders		(17	)		(26	)
Proceeds from long-term debt, net of financing costs		356			255
Repayment of long-term debt		(220	)		(234	)
(Decrease) increase in notes payable and other short-term borrowings		(19	)		3
Cash provided by (used in) financing activities		100			(2	)
Effect of exchange rate changes on cash		9			(2	)
Increase in cash and cash equivalents		33			5
Cash and cash equivalents at beginning of year		125			114
Cash and cash equivalents at end of period	$	158		$	119

See Notes to Consolidated Financial Statements.

F-102

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

(Dollars in millions, except share data)

Note 1—Basis of Presentation

Pursuant to the rules and regulations of the Securities and Exchange Commission, the accompanying unaudited interim consolidated financial statements do not include all of the disclosures normally required by accounting principles generally accepted in the United States of America for complete financial statements. The accompanying consolidated financial statements should be read in conjunction with the financial statements and disclosures included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2002, as amended by Amendment No. 1 on Form 10-K/A filed with the Securities and Exchange Commission on November 12, 2003. In the opinion of management, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial position and results of operations for the interim periods.

The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. Minority interest represents the minority ownership of the Company’s Brazilian subsidiary and the La Porte Methanol Company. All significant intercompany accounts and transactions have been eliminated. The Company’s 29.5% investment in Equistar Chemicals, LP (“Equistar”), a joint venture between the Company and Lyondell Chemical Company (“Lyondell”), is accounted for by the equity method; accordingly, the Company’s share of Equistar’s pre-tax net income or loss is included in net income or loss. Certain prior year balances have been reclassified to conform to the current year presentation, principally $2 and $6 of selling, development and administrative (“S,D&A”) costs allocated to the Company’s investment in Equistar and previously reported in Loss on Equistar investment for the three months and nine months ended September 30, 2002, respectively, have been reclassified to Selling, development and administrative expense in the Company’s Consolidated Statements of Operations, as no such S,D&A costs were allocated and reported in Loss on Equistar investment for the three months and nine months ended September 30, 2003.

Note 2—Restatement of Financial Statements

The Company restated its financial statements for the years 1998 through 2002 and for the first quarter of 2003, to correct errors in its accounting for deferred taxes relating to its Equistar investment, the calculation of its pension benefit obligations and its accounting for a multi-year precious metals agreement. The Company has filed with the Securities and Exchange Commission Amendment No. 1 to its Annual Report on Form 10-K for the year ended December 31, 2002, which is dated November 12, 2003 and Amendment No. 1 to its Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003, which is dated November 14, 2003, to reflect changes therein required as a consequence of the restatements described in this Note 2 and the reclassification described in Note 1 and adjustments to its prior financial statements for the timing of income and expense recognition associated with legal, environmental and other reserves established for certain of the Company’s predecessor businesses, as more fully described in the amendment to the Company’s Annual Report on Form 10-K. These adjustments for the timing of income and expense recognition did not change any of the financial information presented in this Quarterly Report of Form 10-Q and, accordingly, are not discussed in this Quarterly Report.

Deferred tax assets and liabilities and deferred tax expense for the years 1998 through 2002 and for the first quarter of 2003 were restated to appropriately account for the Company’s book and tax basis differences associated with its investment in Equistar in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). The accounting for deferred taxes associated with Equistar was previously based on the difference between book and tax basis of a subsidiary that holds the partnership investment. Deferred tax is now based on the difference between book and tax basis of the actual partnership interest held by the subsidiary. The effect of the adjustments to deferred tax assets and

F-103

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

liabilities was to increase net deferred tax liabilities by $425, increase Accumulated deficit by $440 and decrease Cumulative other comprehensive loss by $15 at December 31, 2002. The effect of the adjustments to Benefit from income taxes for the three months and nine months ended September 30, 2002 was less than $1. In addition, during the course of its review of its deferred taxes, the Company concluded that its realization of a deferred tax asset of $10 related to its French subsidiaries was unlikely. The elimination of this deferred tax asset as of December 31, 2002 resulted in an increase of $10 in net deferred tax liabilities and Accumulated deficit.

The Company’s accrued pension benefit costs, included in Other liabilities, and its net periodic pension benefit cost were restated for 2002 and for the first quarter of 2003. The restatement corrected errors in the calculation of the Company’s pension liability. The Company’s principal actuarial firm incorrectly utilized participant data in its 2002 actuarial valuation and underestimated the accumulated pension benefit obligation at December 31, 2002 for the Company’s largest domestic pension plan. The effect of these corrections was to increase accrued pension benefit cost by $53, decrease net deferred tax liabilities by $19, increase Accumulated deficit by $1 and increase Cumulative other comprehensive loss by $33 at December 31, 2002. Net periodic pension benefit cost changed by less than $1 for the three months ended September 30, 2002, and increased by $1 for the nine months ended September 30, 2002 due to this restatement. Net income (loss) for the three months and nine months ended September 30, 2002 changed by less than $1 as a result of these errors.

The Company also restated its financial statements for the years 1998 through 2002 and for the first quarter of 2003 due to a change in accounting treatment for a five-year agreement entered into in 1998 that provides the Company with the right to use gold owned by a third party, as more fully described in Note 8. The Company previously accounted for this agreement as an operating lease but changed the accounting for this agreement to a secured financing. As a result, Other assets were increased by $4, Current liabilities were increased by $13, net deferred tax liabilities were decreased by $4, and Accumulated deficit was increased by $5 at December 31, 2002. This restatement decreased Operating income for the three months and nine months ended September 30, 2002 by $1 and $3, respectively, decreased Net income by $1 for the three months ended September 30, 2002, and increased Net loss by $2 for the nine months ended September 30, 2002.

A summary of the aggregate effect of these restatements and the reclassification described in Note 1 on the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations for the periods presented herein is shown below.

	December 31, 2002
	As Reported			As Restated
Changes to Consolidated Balance Sheet:
Deferred income taxes—asset	$	75		$	—
Other assets		42			46
Total assets		2,467			2,396
Other short-term borrowings		—			14
Accrued expenses and other liabilities		128			127
Total current liabilities		462			475
Deferred income taxes—liability		—			337
Other liabilities		335			388
Total liabilities		2,009			2,412
Accumulated deficit		(320	)		(776	)
Cumulative other comprehensive loss		(281	)		(299	)
Total shareholders’ equity (deficit)		439			(35	)
Total liabilities and shareholders’ equity (deficit)		2,467			2,396

F-104

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

	Three Months Ended September 30, 2002						Nine Months Ended September 30, 2002
	As Reported			As Restated			As Reported			As Restated
Changes to Consolidated Statements of Operations:
Cost of products sold	$	316		$	317		$	944		$	945
Selling, development and administrative expense		36			38			80			89
Operating income		33			30			67			57
Income (loss) on Equistar investment		4			6			(45	)		(39	)
Income (loss) before income taxes, minority interest and cumulative effect of accounting change		14			13			(44	)		(48	)
(Provision for) benefit from income taxes		(7	)		(7	)		22			24
Income (loss) before minority interest and cumulative effect of accounting change		7			6			(22	)		(24	)
Income (loss) before cumulative effect of accounting change		6			5			(24	)		(26	)
Net income (loss)		6			5			(329	)		(331	)
Basic and diluted earnings (loss) per share:
Before cumulative effect of accounting change		0.10			0.08			(0.38	)		(0.41	)
After cumulative effect of accounting change		0.10			0.08			(5.18	)		(5.21	)

Note 3—(Loss) Earnings per Share and Stock-Based Compensation

The weighted-average number of equivalent shares of common stock outstanding used in computing (loss) earnings per share is as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2003	2002	2003	2002
Weighted-average common stock outstanding—basic	64,050,943	63,618,337	63,959,584	63,547,478
Restricted shares	—	91,282	—	—
Shares held by employee benefit plan trusts	—	227,970	—	—
Weighted-average common stock outstanding—diluted	64,050,943	63,937,589	63,959,584	63,547,478

The calculation of diluted loss per share for the three months ended September 30, 2003 does not include 60,014 restricted shares issued under a Company incentive plan and 225,982 shares held by certain of the Company’s employee benefit plan trusts. The calculation of diluted loss per share for the nine months ended September 30, 2003 does not include 60,218 restricted shares issued under a Company incentive plan and 223,723 shares held by certain of the Company’s employee benefit plan trusts. The calculation of diluted loss per share for the nine months ended September 30, 2002 does not include 63,998 options to purchase common stock, 91,929 restricted shares issued under a Company incentive plan, and 227,970 shares held by certain of the Company’s employee benefit plan trusts. The effect of including these options and shares would be antidilutive.

SFAS No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), encourages a fair-value based method of accounting for employee stock options and similar equity instruments, which generally would result in the recording of additional compensation expense in the Company’s financial statements. SFAS No. 123 also allows the Company to continue to account for stock-based compensation using the intrinsic value for equity

F-105

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

instruments under Accounting Principles Board Opinion No. 25 (“APB Opinion No. 25”). The Company has elected to account for such instruments using APB Opinion No. 25 and related interpretations, and thus has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the stock option plans in the accompanying financial statements as all options granted had an exercise price equal to the market value of the underlying Common Stock on the date of grant.

The following table illustrates the effect on net (loss) income and related (loss) earnings per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation:

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003			2002		2003			2002
				(Restated— See Note 2)					(Restated— See Note 2)
Net (loss) income before cumulative effect of accounting change	$	(28	)	$	5	$	(63	)	$	(26	)
Deduct: Total stock-based employee compensation expense determined under fair-value based method for all awards, net of related tax effects		—			—		(1	)		(1	)
Pro forma net (loss) income before cumulative effect of accounting change	$	(28	)	$	5	$	(64	)	$	(27	)
(Loss) earnings per share:
Basic and diluted—as reported	$	(0.44	)	$	0.08	$	(0.98	)	$	(0.41	)
Basic and diluted—pro forma	$	(0.44	)	$	0.08	$	(0.99	)	$	(0.43	)

Note 4—Recent Accounting Developments

On January 1, 2003, the Company adopted SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets. This standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. Accretion expense and depreciation expense related to the liability and capitalized asset retirement costs, respectively, are recorded in subsequent periods. The Company’s asset retirement obligations arise from activities associated with the eventual remediation of sites used for landfills and mining and include estimated liabilities for closure, restoration, and post-closure care. None of the Company’s assets are legally restricted for purposes of settling these obligations. The Company reported an after-tax transition charge of $1 in the first quarter of 2003 as the cumulative effect of this accounting change. The impact of adoption was insignificant to the Company’s reported assets and liabilities. The ongoing annual expense resulting from the initial adoption of SFAS No. 143 is expected to be approximately $1. Activity associated with the asset retirement obligations other than the effect of initial adoption of SFAS No. 143 was not significant for each of the three months and nine months ended September 30, 2003. Disclosure on a pro forma basis of net income and related per-share amounts as if SFAS No. 143 had been applied during all periods presented is omitted because the effect on pro forma net income is not significant. The pro forma amount of the aggregate asset retirement obligation at September 30, 2003, January 1, 2003, September 30, 2002, and January 1, 2002, as if SFAS No. 143 had been applied during all periods affected is $13, $12, $12, and $11, respectively.

On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under this new standard, all goodwill, including goodwill acquired before initial application of the

F-106

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

standard, is not amortized but must be tested for impairment at least annually at the reporting unit level, as defined in the standard. Accordingly, the Company reported a charge for the cumulative effect of this accounting change of $275 in the first quarter of 2002 to write off certain of its goodwill related to its Acetyls business based upon the Company’s estimate of fair value for this business considering expected future profitability and cash flows. Also in accordance with SFAS No. 142, Equistar reported an impairment of its goodwill in the first quarter of 2002. The write-off at Equistar required an adjustment of $30 to reduce the carrying value of the Company’s investment in Equistar to its approximate proportional share of Equistar’s Partners’ capital.

Note 5—Reorganization and Office Closure Costs

In July 2003, the Company announced the implementation of a program to reduce costs. This program included a reduction of approximately 5% in the number of the Company’s employees worldwide and, effective September 1, 2003, the closure of the Company’s executive offices in Red Bank, New Jersey and the relocation of its headquarters to the Company’s existing administrative offices in Hunt Valley, Maryland. In addition, the Company announced the suspension of payment of dividends on its Common Stock.

The Company expects to record charges totaling $19 to $21 associated with this program. The Company has recorded charges in the three months and nine months ended September 30, 2003 of $15 and $16, respectively, of which $14 and $15, respectively, are for severance-related costs and $1 is for contractual commitments for ongoing lease costs, net of expected sublease income, associated with the closure of the Red Bank, New Jersey office for the remaining term of the lease agreement. Substantially all of the remaining charges for this program, estimated at $3 to $5, are expected to be recorded during the next several quarters. All costs associated with this program are accounted for in accordance with SFAS No. 112, “Employer’s Accounting for Postemployment Benefits” (“SFAS No. 112”) or SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”, as appropriate. Severance-related cash payments of $7 for the implementation of this program were made in the three months ended September 30, 2003. Substantially all of the remainder of the cash payments relating to this program, which are estimated to be approximately $17, will be disbursed during the next several quarters. Accrued liabilities associated with this program and included in Accrued expenses and other liabilities were $7 at September 30, 2003.

Note 6—European Receivables Securitization Program

Since March 2002, the Company has been transferring its interest in certain European trade receivables to an unaffiliated third party as its basis for issuing commercial paper under a revolving securitization arrangement (annually renewable for a maximum of five years on April 30 of each year at the option of the third party), with maximum availability of 70 million euros, which is treated, in part, as a sale under accounting principles generally accepted in the United States of America. Accordingly, transferred trade receivables that qualify as a sale, $58 and $61 outstanding at September 30, 2003 and December 31, 2002, respectively, were removed from the Company’s Consolidated Balance Sheets. The Company continues to carry its retained interest in a portion of the transferred assets that do not qualify as a sale, $9 and $9 at September 30, 2003 and December 31, 2002, respectively, in Trade receivables, net in its Consolidated Balance Sheets at amounts that approximate net realizable value based upon the Company’s historical collection rate for these trade receivables. Unused availability under this arrangement at September 30, 2003 was 12 million euros. For the nine months ended September 30, 2003 and 2002, cumulative gross proceeds from this securitization arrangement were $253 and $159, respectively. Cash flows from this securitization arrangement are reflected as operating activities in the Consolidated Statements of Cash Flows. The cost of sale associated with this arrangement was $1 and $2 for the three months and nine months ended September 30, 2003, respectively, and $1 and $2 for the three months and

F-107

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

nine months ended September 30, 2002, respectively. Administration and servicing of the trade receivables under the arrangement remains with the Company. Servicing liabilities associated with the transaction are not significant. In the event the Company’s unsecured long-term debt is downgraded to a rating of either B2 by Moody’s Investor Services, Inc. (“Moody’s”) or B by Standard & Poor’s (“S&P”), the counterparty would have the right to terminate the securitization arrangement. As discussed in Note 8 below, the Company expects to raise additional funds in the capital markets on or before December 31, 2003, which would be used in part to terminate this program.

Note 7—Inventories

Inventories are stated at the lower of cost or market value.

	September 30, 2003		December 31, 2002
Finished products	$	255	$	210
In-process products		31		30
Raw materials		80		106
Maintenance parts and supplies		61		60
	$	427	$	406

Note 8—Long-Term Debt and Credit Arrangements

On April 25, 2003, the Company received approximately $107 in net proceeds ($109 in gross proceeds) from the issuance and sale by Millennium America Inc. (“Millennium America”), a wholly-owned indirect subsidiary of the Company, of $100 additional principal amount at maturity of its 9.25% Senior Notes due June 15, 2008 (the “9.25% Senior Notes”), which are guaranteed by the Company. The net proceeds were used to repay all of the $85 of outstanding borrowings at that time under the revolving loan portion (the “Revolving Loans”) of the Company’s credit agreement (the “Credit Agreement”), which expires on June 18, 2006, and for general corporate purposes. The Company and Millennium America guarantee the obligations under the Credit Agreement. Under the terms of this issuance and sale, Millennium America and the Company entered into an exchange and registration rights agreement with the initial purchasers of the $100 additional principal amount of these 9.25% Senior Notes. Pursuant to this agreement, each of Millennium America and the Company agreed to: (1) file with the Securities and Exchange Commission on or before July 24, 2003 a registration statement relating to a registered exchange offer for the notes, and (2) use its reasonable efforts to cause this exchange offer registration statement to be declared effective under the Securities Act on or before October 22, 2003. On June 13, 2003, the Company filed a registration statement with the Securities and Exchange Commission. However, as of November 14, 2003, the Company has not been able to cause this exchange offer registration statement to be declared effective. As a result, beginning October 22, 2003, Millennium America and the Company are obligated to pay additional interest at the annualized rate of approximately 1.00% to each holder of the $100 additional amount of notes. Such additional interest will be paid until such time as the registration statement becomes effective.

At September 30, 2003, the Company had $65 outstanding ($47 of outstanding borrowings and outstanding undrawn standby letters of credit of $18) of the maximum available credit line of $175 under the Revolving Loans and, accordingly, had $110 of unused availability under such facility, and had $47 outstanding under the term loan portion (the “Term Loans”) of the Credit Agreement. At that date, in addition to letters of credit

F-108

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

outstanding under the Credit Agreement, the Company also had outstanding undrawn standby letters of credit of $6 under other arrangements. The Company had unused availability under short-term uncommitted lines of credit, other than the Credit Agreement, of $31 at September 30, 2003.

The Revolving Loans are available in US dollars, British pounds and euros. The Revolving Loans may be borrowed, repaid and reborrowed from time to time. The Revolving Loans include a $50 letter of credit subfacility and a swingline facility in the amount of $25. As of September 30, 2003, $18 was outstanding under the letter of credit subfacility, and no amount under the swingline facility. The Term Loans may be prepaid in part or in total at the option of the Company at any time, but any such amounts prepaid may not be reborrowed. The interest rates on the Revolving Loans and the Term Loans are floating rates based upon margins over LIBOR, NIBOR, or the Administrative Agent’s prime lending rate, as the case may be. Such margins, as well as the facility fee, are based on the Company’s Leverage Ratio, as defined.

The Credit Agreement contains various restrictive covenants and requires that the Company meet certain financial performance criteria. Compliance with these covenants is monitored frequently in order to assess the likelihood of continued compliance. As of September 30, 2003, the Company was not in compliance with the Leverage Ratio and Interest Coverage Ratio covenants described below. Accordingly, the Company obtained a waiver on September 30, 2003, which was then extended on November 10, 2003, of the provisions of these financial covenants. This waiver, as so extended, expires on December 31, 2003. The Company is seeking an amendment to the Credit Agreement to revise these financial covenants, among other things. Based on its discussions with the agent banks and the lending banks under the Credit Agreement, the Company believes that it will be able to obtain this amendment prior to the expiration of the waiver. However, the amendment will not become effective unless the Company obtains at least $110 of long-term financing in the capital markets prior to the expiration of the current waiver. The funds so obtained would be used to repay secured Term Loans of approximately $47 and to enable the Company to terminate its European accounts receivable securitization program of approximately $60. The Company believes that it will be able to obtain the requisite financing on or before December 31, 2003, at which time the amendment to the Credit Agreement referred to above would become effective. If the Company is not able to obtain the requisite financing on or before December 31, 2003, the Company believes that it would be able to extend the current waiver to provide additional time to obtain such financing or otherwise amend or refinance the Credit Agreement. In addition, the Company had at October 31, 2003, approximately $125 of cash and cash equivalents held primarily by foreign subsidiaries, which the Company would be able to utilize to provide liquidity in the near-term until it is able to obtain the requisite financing, or amend or refinance the Credit Agreement. If the Credit Agreement is terminated and refinanced, the collateral currently securing the Credit Agreement would be released and available to secure other debt of the Company or its subsidiaries. The Company expects that it will incur additional costs in the form of fees and interest in connection with any such waiver, amendment or refinancing, and that additional restrictions will be imposed on the Company as a result thereof. The total amount of debt outstanding under the Credit Agreement at September 30, 2003 of $94, which includes $47 of Term Loans and $47 of Revolving Loans, is classified as a current liability at September 30, 2003 because the current waiver expires at December 31, 2003.

The financial covenants in the Credit Agreement include a Leverage Ratio and an Interest Coverage Ratio. The Leverage Ratio is the ratio of Total Indebtedness to cumulative EBITDA for the prior four fiscal quarters, each as defined. The Interest Coverage Ratio is the ratio of cumulative EBITDA for the prior four fiscal quarters to Net Interest Expense, for the same period, each as defined. To permit the Company to be in compliance, these covenants were amended in the fourth quarter of 2001, in the second quarter of 2002, and in the second quarter of 2003. The amendment in the second quarter of 2002 was conditioned upon consummation of the June 2002 offering of $100 additional principal amount of the 9.25% Senior Notes and repayment of the Credit Agreement

F-109

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

debt described above. The April 2003 amendment was not conditioned on the sale of 9.25% Senior Notes. Under the covenants, as amended in April of 2003, the Company is required to maintain a Leverage Ratio of no more than 5.25 to 1.00 for the fourth quarter of 2003; 5.00 to 1.00 for the first and second quarters of 2004; 4.75 to 1.00 for the third and fourth quarters of 2004; and 4.00 to 1.00 for the first quarter of 2005 and thereafter; and an Interest Coverage Ratio of no less than 2.25 to 1.00 for the fourth quarter of 2003; 2.50 to 1.00 for the first, second, third and fourth quarters of 2004; and 3.00 to 1.00 for the first quarter of 2005 and thereafter. The covenants in the Credit Agreement also limit, among other things, the ability of the Company and/or certain subsidiaries of the Company to: (i) incur debt and issue preferred stock; (ii) create liens; (iii) engage in sale/leaseback transactions; (iv) declare or pay dividends on, or purchase, the Company’s stock; (v) make restricted payments; (vi) engage in transactions with affiliates; (vii) sell assets; (viii) engage in mergers or acquisitions; (ix) engage in domestic accounts receivable securitization transactions; and (x) enter into restrictive agreements. In the event the Company sells certain assets as specified in the Credit Agreement, the Term Loans must be prepaid with a portion of the net cash proceeds of such sale. The obligations under the Credit Agreement are collateralized by: (1) a pledge of 100% of the stock of the Company’s existing and future domestic subsidiaries and 65% of the stock of certain of the Company’s existing and future foreign subsidiaries, in both cases other than subsidiaries that hold immaterial assets (as defined in the Credit Agreement); (2) all the equity interests held by the Company’s subsidiaries in Equistar and the La Porte Methanol Company (which pledges are limited to the right to receive distributions made by Equistar and the La Porte Methanol Company, respectively); and (3) all present and future accounts receivable, intercompany indebtedness and inventory of the Company’s domestic subsidiaries, other than subsidiaries that hold immaterial assets.

Millennium America also has outstanding $500 aggregate principal amount of 7.00% Senior Notes due November 15, 2006 (the “7.00% Senior Notes”) and $250 aggregate principal amount of 7.625% Senior Debentures due November 15, 2026 (the “7.625% Senior Debentures” and, together with the 7.00% Senior Notes and the 9.25% Senior Notes the “Senior Notes”) that are fully and unconditionally guaranteed by the Company. The indenture under which the 7.00% Senior Notes and 7.625% Senior Debentures were issued contains certain covenants that limit, among other things: (i) the ability of Millennium America and its Restricted Subsidiaries (as defined) to grant liens or enter into sale/leaseback transactions; (ii) the ability of the Restricted Subsidiaries to incur additional indebtedness; and (iii) the ability of Millennium America and the Company to merge, consolidate or transfer substantially all of their respective assets. This indenture allows the Company to grant security on loans of up to 15% of Consolidated Net Tangible Assets (“CNTA”), as defined, of Millennium America and its consolidated subsidiaries. Accordingly, based upon CNTA and secured borrowing levels at September 30, 2003, any reduction in CNTA below approximately $1,500 would decrease the Company’s availability under the Revolving Loans by 15% of any such reduction. The 7.00% Senior Notes and the 7.625% Senior Debentures can be accelerated by the holders thereof if any other debt in excess of $20 is in default and is accelerated.

The 9.25% Senior Notes were issued by Millennium America and are guaranteed by the Company. The indenture under which the 9.25% Senior Notes were issued contains certain covenants that limit, among other things, the ability of the Company and/or certain subsidiaries of the Company to: (i) incur additional debt; (ii) issue redeemable stock and preferred stock; (iii) create liens; (iv) redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v) sell or otherwise dispose of assets, including capital stock of subsidiaries; (vi) enter into arrangements that restrict dividends from subsidiaries; (vii) enter into mergers or consolidations; (viii) enter into transactions with affiliates; and (ix) enter into sale/leaseback transactions. In addition, this indenture contains a covenant that would prohibit the Company from (i) paying dividends or making distributions on its common stock; (ii) repurchasing its common stock; and (iii) making other types of restricted payments, including certain types of investments, if such restricted payments would exceed a “restricted payments basket.” Although

F-110

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

the Company has no intention at the present time to pay dividends or make distributions, repurchase its common stock or make other restricted payments, the Company would be prohibited by this covenant from making any such payments at the present time. The indenture also requires the calculation of a Consolidated Coverage Ratio, defined as the ratio of the aggregate amount of EBITDA, as defined, for the four most recent fiscal quarters to Consolidated Interest Expense, as defined, for the four most recent quarters. If this ratio were to cease to be greater than 2.25 to 1.00, there would be certain restrictions on the Company’s ability to incur additional indebtedness and pay dividends, repurchase capital stock or make certain other restricted payments. However, if the 9.25% Senior Notes were to receive investment grade credit ratings from both S&P and Moody’s and meet certain other requirements as specified in the indenture, certain of these covenants would no longer apply. The 9.25% Senior Notes can be accelerated by the holders thereof if any other debt in excess of $30 is in default and is accelerated.

At September 30, 2003, the Company was in compliance with all covenants in the indentures governing the 9.25% Senior Notes, 7.00% Senior Notes and 7.625% Senior Debentures.

The Company, as well as the Senior Notes, are rated BB- by S&P with a stable outlook. The Company has received a senior implied rating of Ba2 and the Senior Notes are rated Ba3 by Moody’s. Moody’s currently has the Company on CreditWatch for possible downgrade and has assigned a negative outlook. These ratings are non-investment grade ratings. On March 7, 2003, S&P lowered the Company’s credit rating from investment grade rating BBB- to non-investment grade rating BB+ with a negative outlook, reflecting S&P’s concern regarding the Company’s ability to generate the cash flow necessary to substantially improve its financial profile during a period of economic uncertainties and higher raw material costs. On July 22, 2003, S&P again lowered the Company’s credit rating from BB+ to BB, citing the Company’s July 2003 announcement regarding weak sales volume and competitive pricing pressures in the titanium dioxide business for the second quarter of 2003, as well as lingering economic uncertainties and the potential for additional raw material pressures in the petrochemical industry as factors that are likely to further delay the Company’s efforts to restore its financial profile. On August 6, 2003, S&P announced that it had placed the Company’s credit ratings on CreditWatch with negative implications, citing the Company’s August 6, 2003 announcement regarding restatements of financial statements. On September 22, 2003, S&P, lowered the Company’s credit rating to BB- from BB citing the Company’s subpar financial profile and weaker-than-expected prospects for reducing its substantial debt burden over the next couple of years. At that time, S&P also removed the Company’s credit ratings from CreditWatch and revised its current outlook from negative to stable. Moody’s affirmed the Company’s non-investment grade rating on June 19, 2002, but revised its ratings outlook to negative from stable, reflecting Moody’s concern over the Company’s cash flow performance in the fourth quarter of 2001 and the first quarter of 2002. On July 23, 2003, Moody’s announced that it had placed the Company’s credit ratings under review for possible downgrade due to Moody’s concern that weaker North American demand for titanium dioxide combined with pricing pressure could translate into weaker credit metrics and less free cash flow for the near term. On August 13, 2003, Moody’s announced that it had lowered the Company’s senior implied rating to Ba2, and the Senior Notes’ rating to Ba3, citing the Company’s high leverage, modest coverage of interest expense, weaker than anticipated TiO₂ demand and potential covenant compliance issues. The ratings remain under review by Moody’s for possible downgrade pending Moody’s analysis of announced accounting errors and related financial statement restatements, and the Company’s current outlook for its business. As a result of the non-investment grade ratings by both S&P and Moody’s, the Company was required to provide, in April 2003, a $2.5 letter of credit, which remains outstanding, to secure its obligations under a real estate lease, resulting in an equal reduction of availability under the Revolving Loans. Furthermore, the Company could be required to cash collateralize the mark-to-market positions of certain derivative instruments which expire in January 2004, dependent upon the market value of these instruments. Based on the current market value of the instruments, the Company is not

F-111

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

required to place any funds on deposit with the counterparty to these transactions. In addition, these actions by Moody’s and S&P could heighten concerns of the Company’s creditors and suppliers which could result in these creditors and suppliers placing limitations on credit extended to the Company and demands from creditors for additional credit restrictions or security.

The Company uses gold as a component in a catalyst at its La Porte, Texas facility. In April 1998, the Company entered into an agreement that provided the Company with the right to use gold owned by a third party for a five-year term. In April 2003, the Company renewed this agreement for a one-year term and simultaneously entered into a forward purchase agreement in order to mitigate the risk of change in the market price of gold. The renewed agreement required the Company to either deliver the gold to the counterparty at the end of the term or pay to the counterparty an amount equal to its then-current value. The renewed agreement provided that if the Company was downgraded below BB by S&P or Ba2 by Moody’s, the third party could require the Company to purchase the gold at its then-current value. After discussions with the counterparty to the agreement as to whether the counterparty had the right to require the Company to purchase the gold due to Moody’s August 13, 2003 announcement referenced above, the Company determined to terminate the renewed agreement and purchase the gold for its then-current market value. On August 28, 2003, the Company paid the counterparty $14, net of $1 of proceeds from the termination of its forward purchase contract. The Company’s obligation under this agreement was $14 at December 31, 2002, and was included in Other short-term borrowings. The change in value of the gold and the Company’s obligation under this agreement, which is included in Selling, development and administrative expense, was a loss of $1 for each of the three months and nine months ended September 30, 2003, a loss of $2 for the nine months ended September 30, 2002, and for the three months ended September 30, 2002 was not significant. The change in value of the forward purchase agreement was a gain of $1 for each of the three months and nine months ended September 30, 2003, which is included in Selling, development and administrative expense.

The maturities of the Company’s Long-term debt through 2008 and thereafter are as follows:

	October 1- December 31, 2003		2004		2005		2006		2007		2008		Thereafter		Total
Revolving Loans	$	—	$	47	$	—	$	—	$	—	$	—	$	—	$	47
Term Loans		—		47		—		—		—		—		—		47
7.00% Senior Notes		—		—		—		500		—		—		—		500
7.625% Senior Debentures		—		—		—		—		—		—		250		250
9.25% Senior Notes		—		—		—		—		—		475		—		475
Other Long-term debt		2		5		5		5		2		1		4		24
Maturities of Long-term debt	$	2	$	99	$	5	$	505	$	2	$	476	$	254		1,343
Non-cash components of Long-term debt																20
Total debt																1,363
Less: Current maturities of long-term debt																(99	)
Total Long-term debt															$	1,264

F-112

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

Note 9—Derivative Instruments and Hedging Activities

The Company is exposed to market risk, such as changes in currency exchange rates, interest rates and commodity pricing. To manage the volatility relating to these exposures, the Company selectively enters into derivative transactions pursuant to the Company’s policies for hedging practices. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for speculative or trading purposes.

Foreign Currency Exposure Management: The Company manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. The primary purpose of the Company’s foreign currency hedging activities is to manage the volatility associated with foreign currency purchases and foreign currency sales. The Company utilizes forward exchange contracts with various terms. As of September 30, 2003, these contracts had expiration dates no later than September 2004.

The Company utilizes forward exchange contracts with contract terms normally lasting less than three months to protect against the adverse effect that exchange rate fluctuations may have on foreign currency denominated trade receivables and trade payables. These derivatives have not been designated as hedges for accounting purposes. The gains and losses on both the derivatives and the foreign currency denominated trade receivables and payables are recorded in current earnings. Net amounts included in earnings, which offset similar amounts from foreign currency denominated trade receivables and payables, were gains of $3 and $6 in the three months and nine months ended September 30, 2003, respectively, and a loss of $2 and a gain of $2 in the three months and nine months ended September 30, 2002, respectively.

In addition, the Company utilizes forward exchange contracts that qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales and inventory purchases. Gains and losses on these instruments are deferred in other comprehensive income (“OCI”) until the underlying transaction is recognized in earnings. The earnings impact is reported either in Net sales or Cost of products sold to match the underlying transaction being hedged. Net amounts on forward exchange contracts designated as cash flow hedges reclassified to earnings to match the gain or loss on the underlying transaction being hedged were a net loss of $1 and $5 for the three months and nine months ended September 30, 2003, respectively, and a net gain of $1 and $4 for the three months and nine months ended September 30, 2002, respectively. Hedge ineffectiveness had no significant impact on earnings for each of the three months and nine months ended September 30, 2003 and 2002. No forward exchange contract cash flow hedges were discontinued during the three months and nine months ended September 30, 2003 and 2002. The Company currently estimates that net losses of approximately $3 ($2 net of tax) on foreign currency cash flow hedges included in OCI at September 30, 2003 will be reclassified to earnings during the next twelve months.

Commodity Price Risk Management: Raw materials used by the Company are subject to price volatility caused by demand and supply conditions and other unpredictable factors. The Company selectively uses commodity swap arrangements and commodity options with various terms to manage the volatility related to anticipated purchases of natural gas and certain commodities, a portion of which exposes the Company to natural gas price risk. As of September 30, 2003, these instruments had expiration dates no later than March 2004. Certain of these instruments are designated as cash flow hedges. The mark-to-market gains or losses on qualifying hedges are included in OCI to the extent effective, and reclassified into Cost of products sold in the period during which the hedged transaction affects earnings. The mark-to-market gains or losses on ineffective

F-113

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

portions of hedges are recognized immediately in Cost of products sold. During the three months ended September 30, 2003, net losses on commodity swaps designated as cash flow hedges reclassified to Cost of products sold were $1, and for the nine months ended September 30, 2003, were not significant. During the three months and nine months ended September 30, 2002, net losses of $1 and $4, respectively, on commodity swaps designated as cash flow hedges were reclassified to Cost of products sold to match the gain or loss on the underlying transaction being hedged. Hedge ineffectiveness had no significant impact on results of operations for the three months and nine months ended September 30, 2003 and 2002. No commodity swap cash flow hedges were discontinued in the three months ended September 30, 2003 or the three months and nine months ended September 30, 2002. Net losses on commodity swap cash flow hedges that were discontinued in the nine months ended September 30, 2003 were not significant. The Company currently estimates that net losses on commodity swaps included in OCI at September 30, 2003 that will be reclassified to earnings during the next twelve months will not be significant.

In addition, the Company utilizes commodity swap and option arrangements to manage price volatility related to anticipated purchases of certain commodities, a portion of which exposes the Company to natural gas price risk. These derivatives have not been designated as hedges for accounting purposes. The gains and losses on these instruments are recorded in current earnings. Net losses included in earnings were $1 and $2 in the three months and nine months ended September 30, 2003, respectively. The Company held no such instruments during the nine months ended September 30, 2002.

In April 2003, the Company entered into a forward purchase agreement in order to mitigate the risk of change in the market price of gold. This forward purchase contract was terminated in August 2003 when the Company discontinued its arrangement for the right to use gold owned by a third party, as more fully described in Note 8. This derivative was not designated as a hedge for accounting purposes. The gain on this instrument, which is included in Selling, development and administrative expense, and offsets a similar amount of loss on the Company’s obligation under the gold agreement, while the agreement was in effect, was $1 for each of the three months and nine months ended September 30, 2003.

Interest Rate Risk Management: The Company selectively uses derivative instruments to manage its ratio of debt bearing fixed interest rates to debt bearing variable interest rates. At September 30, 2003, the Company had outstanding interest rate swap agreements with a notional amount of $225, which are designated as fair value hedges of underlying fixed-rate obligations. The fair value of these interest rate swap agreements was approximately $5 at September 30, 2003 resulting in an increase in the carrying value of long-term debt and the recognition of a corresponding swap asset. The gains and losses on both the interest rate swaps and the hedged portion of the underlying debt are recorded in Interest expense. In addition, at September 30, 2003, the Company had outstanding an interest forward rate agreement with a notional amount of $50, which is designated as a cash flow hedge of outstanding variable rate debt. The fair value of this interest rate swap agreement was not significant at September 30, 2003. The Company also had an interest forward rate agreement with a notional amount of $50, which has not been designated as a hedge for accounting purposes. The gains and losses on this derivative are recorded in the current period in Interest expense. The fair value of this interest rate swap agreement was not significant at September 30, 2003. Hedge ineffectiveness had no significant impact on earnings for the three months and nine months ended September 30, 2003 and 2002.

F-114

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

Note 10—Comprehensive Income (Loss)

The following table sets forth the components of other comprehensive income (loss) and total comprehensive (loss) income:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
				(Restated— See Note 2)						(Restated— See Note 2)
Net (loss) income	$	(28	)	$	5		$	(64	)	$	(331	)
Other comprehensive income (loss):
Net gains (losses) on derivative financial instruments		1			4			(2	)		6
Minimum pension liability adjustment		—			—			—			1
Currency translation adjustment		7			(14	)		66			10
Total comprehensive (loss) income	$	(20	)	$	(5	)	$	—		$	(314	)

Note 11—Commitments and Contingencies

Legal and Environmental: The Company and various Company subsidiaries are defendants in a number of pending legal proceedings relating to present and former operations. The Company believes that it has valid defenses to these proceedings and is defending them vigorously. However, litigation is subject to uncertainties and the Company is unable to guarantee the outcome of these proceedings. In addition, the Company may be subject to potential unknown liabilities associated with its present and former operations for which it may be responsible.

Together with other alleged past manufacturers of lead-based paint and lead pigments for use in paint, the Company, a current subsidiary, as well as alleged predecessor companies, have been named as defendants in various legal proceedings alleging that they and other manufacturers are responsible for personal injury, property damage, and remediation costs allegedly associated with the use of these products. The plaintiffs in these legal proceedings include municipalities, counties, school districts, individuals and the State of Rhode Island, seek recovery under a variety of theories, including negligence, failure to warn, breach of warranty, conspiracy, market share liability, fraud, misrepresentation and public nuisance. Legal proceedings relating to lead pigment or paint are in various procedural stages or pre-trial, post-trial and post-dismissal settings.

One proceeding relating to lead pigment or paint was tried in 2002. On October 29, 2002, after a trial in which the jury deadlocked, the court in the State of Rhode Island v. Lead Industry Association, Inc., et al, commenced in the Superior Court of Providence, Rhode Island, on October 13, 1999, declared a mistrial. The sole issue before the jury in this phase of the proceeding was whether lead pigment in paint in and on public and private Rhode Island buildings constitutes a “public nuisance.” On March 20, 2003, the court denied the motions for the judgment as a matter of law filed by both sides during and after the trial. The case is set for retrial in April 2004.

There are eleven pending legal proceedings relating to lead pigment or paint in various pre-trial stages. There are three pending legal proceedings relating to lead pigment or paint that were dismissed after motions to dismiss or for summary judgment were granted by courts in favor of the defendants, but are now pending appeal. There are two legal proceedings in which the court granted summary judgment in favor of the defendants and for

F-115

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

which notices of appeal have been filed. There are four legal proceedings relating to lead pigment or paint which have been voluntarily dismissed by the plaintiffs. There is also one legal proceeding relating to lead pigment or paint that was dismissed after summary judgment was granted by the court in favor of the defendants, but which has not been appealed. There are four legal proceedings relating to lead pigment or paint that were abated under the laws of the State of Texas pending the resolution of an appeal in another legal proceeding involving lead pigment or paint where summary judgment was granted by the court in favor of one defendant. During the abatement period, expected to last one to two years, no defense costs will be incurred for the abated legal proceedings. Finally, there are five legal proceedings relating to lead pigment or paint that have been filed with a court, are pending, but have yet to be formally served on the Company, any of its subsidiaries, or alleged predecessor companies. One additional legal proceeding was similarly filed, never served on the Company or any defendant, and was withdrawn. The case will be automatically dismissed for failure to prosecute after one year.

The Company’s defense costs to date for lead-based paint and lead pigment litigation largely have been covered by insurance. The Company has insurance policies that potentially provide approximately one billion dollars in indemnity coverage for lead-based paint and lead pigment litigation. As a result of insurance coverage litigation initiated by the Company, an Ohio trial court issued a decision in 2002 effectively requiring certain insurance carriers to resume paying defense costs in the lead-based paint and lead pigment cases. Indemnity coverage was not at issue in the Ohio court’s decision. The insurance carriers may appeal the Ohio decision regarding defense costs, and they have in the past and may in the future attempt to deny indemnity coverage if there is ever a settlement or an adverse judgment in any lead-based paint or lead pigment case.

In 1986, a predecessor of a company that is now a subsidiary of the Company sold its recently acquired Glidden Paints business. As part of that sale, the seller agreed to indemnify the purchaser against certain claims made during the first eight years after the sale; the purchaser agreed to indemnify the seller against such claims made after the eight-year period. With the exception of the two cases discussed below, all pending lead-based paint and lead pigment litigation involving the Company and its subsidiaries, including the Rhode Island case, was filed after the eight-year period. Accordingly, the Company believes that it is entitled to full indemnification from the purchaser against lead-based paint and lead pigment cases filed after the eight-year period. The purchaser disputes that it has such an indemnification obligation, and claims that the seller must indemnify it. Since the Company’s defense costs to date largely have been covered by insurance and there never has been a settlement paid by, nor any judgment rendered against, the Company (or any other company sued in any lead-based paint or lead pigment litigation), the parties’ indemnification claims have not been ruled on by a court.

A current subsidiary and an alleged predecessor company are parties to the only two remaining cases originally filed within the eight-year period following the 1986 sale of the Glidden Paints business referred to above. In the first of these cases, The City of New York, et al. v. Lead Industries Association, Inc., et al., commenced in the Supreme Court of the State of New York on June 8, 1989, the New York City Housing Authority brought an action relating to tens of thousands of public housing units. All claims in that case have been dropped except for those relating to two housing projects. The other remaining case, Jackson, et al. v. The Glidden Co., et al., commenced in the Court of Common Pleas, Cuyahoga County, Ohio, on August 12, 1992, includes five minors as plaintiffs. Dispositive motions were filed in that case in late 2002 and have yet to be ruled on by the court.

The Company believes that it has valid defenses to the pending lead-based paint and lead pigment proceedings and is vigorously defending them. However, litigation is inherently subject to many uncertainties. There can be no assurance that additional lead-based paint and lead pigment litigation will not be filed against the Company or its subsidiaries in the future asserting similar or different legal theories and seeking similar or

F-116

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

different types of damages and relief. While an outcome such as that reached in the Rhode Island proceeding may have a positive effect on the lead-based paint and lead pigment litigation against the Company, its subsidiaries and other defendants by reducing the number and nature of future claims and proceedings, other adverse court rulings or determinations of liability, among other factors, could encourage an increase in the number of future claims and proceedings. In addition, from time to time, legislation and administrative regulations have been enacted or proposed to impose obligations on present and former manufacturers of lead-based paint and lead pigment respecting asserted health concerns associated with such products or to overturn successful court decisions. Due to the uncertainties involved, the Company is unable to predict the outcome of lead-based paint and lead pigment litigation, the number or nature of possible future claims and proceedings, or the effect that any legislation and/or administrative regulations may have on the Company or its subsidiaries. In addition, management cannot reasonably estimate the scope or amount of the costs and potential liabilities related to such litigation, or any such legislation and regulations. Based upon, among other things, the outcome of such litigation to date, including the dismissal of most of the over 50 lawsuits brought in recent years, management does not currently believe, but can not assure, that the costs or potential liabilities ultimately determined to be attributable to the Company arising out of such litigation will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. The Company has not accrued any potential liabilities for judgments or settlements resulting from lead-based paint and lead pigment litigation.

The Company and various Company subsidiaries are defendants in a number of pending legal proceedings relating to present and former operations alleging injurious exposure of plaintiffs to various chemicals and other materials on the premises of, or manufactured by, the Company’s current and former subsidiaries. Typically, such proceedings involve claims made by many plaintiffs against many defendants in the chemical industry. Millennium Petrochemicals, a wholly-owned indirect subsidiary of the Company, is one of a number of defendants in 90 active premises-based asbestos cases (i.e., where the alleged exposure to asbestos-containing materials was to employees of third-party contractors or subcontractors on the premises of certain facilities, and did not relate to any products manufactured or sold by the Company or any of its predecessors). Millennium Petrochemicals is responsible for these premises-based cases as a result of its indemnification obligations under the Company’s agreements with Equistar; however, Equistar will be required to indemnify Millennium Petrochemicals for any such claims filed on or after December 1, 2004 related to the assets or businesses contributed by Millennium Petrochemicals to Equistar. In addition, various other Company subsidiaries and alleged former subsidiaries are among a number of defendants in 60 active premises-based asbestos cases. The Company believes that it has valid defenses to these proceedings and is defending them vigorously. However, litigation is subject to uncertainties and the Company is unable to guarantee the outcome of these proceedings.

On January 16, 2002, Slidell Inc. (“Slidell”) filed a lawsuit against Millennium Inorganic Chemicals Inc., a wholly-owned operating subsidiary of the Company, alleging breach of contract and other related causes of action arising out of a contract between the two parties for the supply of packaging equipment. In the suit, Slidell seeks unspecified monetary damages. The Company believes it has substantial defenses to these allegations and has filed a counterclaim against Slidell.

The Company’s businesses are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances concerning, among other things, emissions to the air, discharges and releases to land and water, the generation, handling, storage, transportation, treatment and disposal of wastes and other materials and the remediation of environmental pollution caused by releases of wastes and other materials (collectively, “Environmental Laws”). The operation of any chemical manufacturing plant and the distribution of chemical products entail risks under Environmental Laws, many of which provide for substantial fines and criminal sanctions for violations. There can be no assurance that significant costs or liabilities will not be incurred with

F-117

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

respect to the Company’s operations and activities. In particular, the production of TiO₂, TiCl₄, VAM, acetic acid, methanol and certain other chemicals involves the handling, manufacture or use of substances or compounds that may be considered to be toxic or hazardous within the meaning of certain Environmental Laws, and certain operations have the potential to cause environmental or other damage. Significant expenditures including facility-related expenditures could be required in connection with any investigation and remediation of threatened or actual pollution, triggers under existing Environmental Laws tied to production or new requirements under Environmental Laws.

The Company cannot predict whether future developments or changes in laws and regulations concerning environmental protection will affect its earnings or cash flows in a materially adverse manner or whether its operating units, Equistar or La Porte Methanol Company, will be successful in meeting future demands of regulatory agencies in a manner that will not materially adversely affect the consolidated financial position, results of operations or cash flows of the Company. For example, the Texas Commission on Environmental Quality (the “TCEQ”) submitted a plan to the United States Environmental Protection Agency (“EPA”) requiring the eight-county Houston/Galveston, Texas area to come into compliance with the National Ambient Air Quality Standard for ozone by 2007. These requirements would have mandated significant reductions of nitrogen oxide (“NOx”) emissions requiring increased capital investment by Equistar of between $200 and $260 before the 2007 regulatory deadline, as well as create higher annual operating costs. In December 2002, the TCEQ adopted revised rules, which changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of highly reactive volatile organic compounds (“HRVOCs”), such as ethylene, propylene, butadiene and butanes. Based on the 80% NOx reduction requirement, Equistar estimates that its aggregate related capital expenditures could total between $165 and $200 before the 2007 deadline, of which $45 has been incurred as of September 30, 2003, and could result in higher annual operating costs. This result could potentially affect cash distributions from Equistar to the Company. Equistar is still assessing the impact of the new HRVOC control requirements. Additionally, the TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by May 2004. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. At this time, there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

From time to time, various agencies may serve cease and desist orders or notices of violation on an operating unit or deny its applications for certain licenses or permits, in each case alleging that the practices of the operating unit are not consistent with regulations or ordinances. In some cases, the relevant operating unit may seek to meet with the agency to determine mutually acceptable methods of modifying or eliminating the practice in question. On April 14, 2003, a subsidiary of the Company received a Proposed Director’s Final Findings and Orders from the Ohio Environmental Protection Agency (the “Ohio EPA”), for alleged violations of Ohio environmental regulations. On August 7, 2003, the Company settled the matter by agreeing to pay a penalty of $0.106. The Company believes that its operating units generally operate in compliance with applicable regulations and ordinances in a manner that should not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

Certain Company subsidiaries have been named as defendants, potentially responsible parties (“PRPs”), or both, in a number of environmental proceedings associated with waste disposal sites or facilities currently or previously owned, operated or used by the Company’s current or former subsidiaries or their predecessors, some of which are on the Superfund National Priorities List of the EPA or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage, or both. Based upon third-party technical reports, the projections of outside consultants or outside counsel, or both, the Company has estimated its individual

F-118

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

exposure at these sites to be between $0.01 and $23. In the most significant of these proceedings, a subsidiary is named as one of four PRPs at the Kalamazoo River Superfund Site in Michigan. The site involves contamination of river sediments and floodplain soils with polychlorinated biphenyls. Originally commenced on December 2, 1987 in the United States District Court for the Western District of Michigan as Kelly v. Allied Paper, Inc., et al., the matter was stayed and is being addressed under the Comprehensive Environmental Response, Compensation and Liability Act. In October 2000, the Kalamazoo River Study Group (the “KRSG”), of which one of the Company’s subsidiaries is a member, submitted to the State of Michigan a Draft Remedial Investigation and Draft Feasibility Study (the “Draft Study”), which evaluated a number of remedial options and recommended a remedy involving the stabilization of several miles of river bank and the long-term monitoring of river sediments at a total collective cost of approximately $73. The five remedial options considered in the Draft Study range from no action to total dredging of the river and off-site disposal of the dredged materials. In February 2001, the PRPs, at the request of the State of Michigan, also evaluated nine additional potential remedies. The cost for these remedial options ranged from $0 to $2.5 billion, however, the Company strongly believes that both the $0 figure and the $2.5 billion figure are remote. During 2001, additional sampling activities were performed in discrete parts of the river. At the end of 2001, the EPA assumed responsibility for the site at the request of the State. While the State submitted negative comments to the EPA on the Draft Study, the EPA has yet to comment. The Company is paying 35% of the costs for the river portion of the investigation based on an interim allocation. The Company has estimated its liability at this site based upon its share of the KRSG Draft Study’s recommended remedy. However, guidance as to how the EPA will likely proceed at the Kalamazoo site with respect to further evaluation and remediation is not expected until early 2004. At that time, the Company’s estimate of its liability and its accrual will be reevaluated. Recently, the EPA identified 14 private entities and 7 municipalities and sent them formal requests for information regarding their possible connection with the Kalamazoo site. The Company’s ultimate liability for the Kalamazoo site will depend on many factors that have not yet been determined, including the ultimate remedy selected by the EPA, the number and financial viability of the other members of the KRSG as well as of other PRPs outside the KRSG, and the determination of the final allocation among the members of the KRSG and other PRPs.

The Company believes that the reasonably probable and estimable range of potential liability for environmental and other legal contingencies, collectively, but which primarily relates to environmental remediation activities and other environmental proceedings, is between $59 and $80 and has accrued $66 as of September 30, 2003. The Company expects that cash expenditures related to these potential liabilities will be made over a number of years, and will not be concentrated in any single year. This accrual also reflects the fact that certain Company subsidiaries have contractual obligations to indemnify other parties against certain environmental and other liabilities. For example, the Company agreed as part of its demerger (i.e., spin-off) from Hanson plc (“Hanson”), a company incorporated in the United Kingdom, on October 1, 1996 to indemnify Hanson and certain of its subsidiaries against certain of such contractual indemnification obligations, and Millennium Petrochemicals agreed as part of the December 1, 1997 formation of Equistar to indemnify Equistar for certain liabilities related to the assets contributed by Millennium Petrochemicals to Equistar in excess of $7, which threshold was exceeded in 2001. The terms of these indemnification agreements do not limit the maximum potential future payments to the indemnified parties. The maximum amount of future indemnification payments is dependent upon many factors and is not practicable to estimate.

No assurance can be given that actual costs for known legal and environmental matters will not exceed accrued amounts, or that estimates made with respect to indemnification obligations will be accurate. In addition, it is possible that costs will be incurred with respect to legal and environmental matters that currently are unknown or as to which it is currently not possible to make an estimate. Based upon information currently available, the Company believes, but can not assure, that the resolution of these legal and environmental matters

F-119

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

will not, either individually or in the aggregate, have a material adverse effect on its consolidated financial position, results of operations or cash flows.

Note 12—Operations by Business Segment

The Company’s principal operations are managed and grouped as three separate business segments: Titanium Dioxide and Related Products, Acetyls, and Specialty Chemicals. Operating income and expense not identified with the three separate business segments, including certain of the Company’s S,D&A costs not allocated to its three business segments, employee-related costs from predecessor businesses and certain other expenses, including costs associated with the Company’s reorganization and cost reduction program announced in July 2003, are reflected as Other. The following is a summary of the Company’s operations by business segment:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002
				(Restated— See Note 2)						(Restated— See Note 2)
Net sales
Titanium Dioxide and Related Products	$	293		$	296		$	874		$	858
Acetyls		115			91			316			239
Specialty Chemicals		23			24			72			70
Total	$	431		$	411		$	1,262		$	1,167
Operating (loss) income (1)
Titanium Dioxide and Related Products	$	7		$	21		$	51		$	46
Acetyls		6			8			18			3
Specialty Chemicals		(1	)		2			3			8
Other		(17	)		(1	)		(26	)		—
Total	$	(5	)	$	30		$	46		$	57
Depreciation and amortization
Titanium Dioxide and Related Products	$	24		$	21		$	69		$	61
Acetyls		2			3			8			9
Specialty Chemicals		2			2			6			6
Total	$	28		$	26		$	83		$	76
Capital expenditures
Titanium Dioxide and Related Products	$	9		$	14		$	26		$	37
Acetyls		1			1			1			1
Specialty Chemicals		—			3			2			5
Total	$	10		$	18		$	29		$	43

(1) The Other segment includes $15 and $16 of costs for the three months and nine months ended September 30, 2003, respectively, as a result of the Company’s cost-reduction program (see Note 5), and a benefit of $5 from a reduction of reserves due to favorable resolution of environmental claims related to predecessor businesses reserved for in prior years in the nine months ended September 30, 2002.

F-120

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

	September 30, 2003		December 31, 2002
Goodwill
Titanium Dioxide and Related Products	$	58	$	58
Acetyls		48		48
Total	$	106	$	106

Note 13—Information on Equistar

The following is summarized financial information for Equistar:

	September 30, 2003		December 31, 2002
Current assets	$	1,196	$	1,126
Noncurrent assets		3,749		3,926
Total assets	$	4,945	$	5,052
Current liabilities	$	625	$	714
Noncurrent liabilities		2,634		2,417
Partners’ capital		1,686		1,921
Total liabilities and partners’ capital	$	4,945	$	5,052

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003			2002		2003			2002
Net sales	$	1,642		$	1,508	$	4,880		$	4,106
Operating income (loss)		12			71		(60	)		18
(Loss) income before cumulative effect of accounting change		(40	)		22		(235	)		(132	)
Cumulative effect of accounting change		—			—		—			(1,053	)
Net (loss) income		(40	)		22		(235	)		(1,185	)

The Company recorded $30 related to its share of Equistar’s write-down of goodwill during the three months ended March 31, 2002. Even though the Company’s share (i.e., 29.5%) of Equistar’s write-down is higher than the amount recorded by the Company, most of the write-down was previously taken by the Company in 1999 when it wrote down its investment in Equistar by $639.

On March 31, 2003, Equistar completed transactions involving a 15-year propylene supply arrangement and the sale of its Bayport polypropylene production facility in Pasadena, Texas. Equistar received total cash proceeds of approximately $194, including the value of the polypropylene inventory sold. Approximately $159 of the total cash proceeds represented a partial prepayment under the propylene supply arrangement. Equistar’s results for the nine months ended September 30, 2003, include a $12 loss on the sale of the polypropylene production facility.

In April 2003, Equistar issued $450 of 10.625% senior notes due in 2011. The proceeds, net of associated fees, were used to prepay $300 of 8.5% notes due in the first quarter of 2004, approximately $122 of the $296 of

F-121

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

outstanding term loans under Equistar’s credit facility and prepayment premiums of approximately $17. Equistar’s results for the nine months ended September 30, 2003, include $19 of debt prepayment costs, consisting of the $17 prepayment premium and the write-off of $2 of unamortized debt issuance costs related to the prepaid term loan.

Note 14—Supplemental Financial Information

Millennium America, a wholly-owned indirect subsidiary of the Company, is a holding company for all of the Company’s operating subsidiaries other than its operations in the United Kingdom, France, Brazil and Australia. Millennium America is the issuer of the 7% Senior Notes, the 7.625% Senior Debentures, and the 9.25% Senior Notes, and is the principal borrower under the Credit Agreement. Millennium America guarantees all obligations under the Credit Agreement. The 7% Senior Notes, the 7.625% Senior Debentures and the 9.25% Senior Notes, as well as outstanding amounts under the Credit Agreement, are guaranteed by the Company. Accordingly, the following Condensed Consolidating Balance Sheets at September 30, 2003 and December 31, 2002, the Condensed Consolidating Statements of Operations for the three months and nine months ended September 30, 2003 and 2002, and the Condensed Consolidating Statements of Cash Flows for the nine months ended September 30, 2003 and 2002 are provided for the Company as supplemental financial information to the Company’s consolidated financial statements to disclose the financial position, results of operations and cash flows of (i) the Company, (ii) Millennium America, and (iii) all subsidiaries of the Company other than Millennium America (the “Non-Guarantor Subsidiaries”). The investment in subsidiaries of Millennium America and the Company are accounted for by the equity method; accordingly, the shareholders’ (deficit) equity of Millennium America and the Company are presented as if each of those companies and their respective subsidiaries were reported on a consolidated basis.

F-122

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

CONDENSED CONSOLIDATING BALANCE SHEETS

	Millennium America Inc. (Issuer)			Millennium Chemicals Inc. (Guarantor)			Non-Guarantor Subsidiaries		Eliminations			Millennium Chemicals Inc. and Subsidiaries
September 30, 2003
ASSETS
Inventories	$	—		$	—		$	427	$	—		$	427
Other current assets		15			—			447		—			462
Property, plant and equipment, net		—			—			849		—			849
Investment in Equistar		—			—			494		—			494
Investment in subsidiaries		344			100			—		(444	)		—
Other assets		16			—			32		—			48
Goodwill		—			—			106		—			106
Due from parent and affiliates, net		807			—			—		(807	)		—
Total assets	$	1,182		$	100		$	2,355	$	(1,251	)	$	2,386
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current maturities of long-term debt	$	94		$	—		$	5	$	—		$	99
Other current liabilities		33			—			342		—			375
Long-term debt		1,247			—			17		—			1,264
Deferred income taxes		—			—			290		—			290
Other liabilities		—			—			380		—			380
Due to parent and affiliates, net		—			150			657		(807	)		—
Total liabilities		1,374			150			1,691		(807	)		2,408
Minority interest		—			—			28		—			28
Shareholders’ (deficit) equity		(192	)		(50	)		636		(444	)		(50	)
Total liabilities and shareholders’ (deficit) equity	$	1,182		$	100		$	2,355	$	(1,251	)	$	2,386
December 31, 2002 (Restated—See Note 2)
ASSETS
Inventories	$	—		$	—		$	406	$	—		$	406
Other current assets		10			—			403		—			413
Property, plant and equipment, net		—			—			862		—			862
Investment in Equistar		—			—			563		—			563
Investment in subsidiaries		349			95			—		(444	)		—
Other assets		15			—			31		—			46
Goodwill		—			—			106		—			106
Due from parent and affiliates, net		638			—			—		(638	)		—
Total assets	$	1,012		$	95		$	2,371	$	(1,082	)	$	2,396
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current maturities of long-term debt	$	3		$	—		$	9	$	—		$	12
Other current liabilities		8			—			455		—			463
Long-term debt		1,196			—			16		—			1,212
Deferred income taxes		—			—			337		—			337
Other liabilities		—			—			388		—			388
Due to parent and affiliates, net		—			130			508		(638	)		—
Total liabilities		1,207			130			1,713		(638	)		2,412
Minority interest		—			—			19		—			19
Shareholders’ (deficit) equity		(195	)		(35	)		639		(444	)		(35	)
Total liabilities and shareholders’ (deficit) equity	$	1,012		$	95		$	2,371	$	(1,082	)	$	2,396

F-123

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Millennium America Inc. (Issuer)			Millennium Chemicals Inc. (Guarantor)			Non-Guarantor Subsidiaries			Eliminations			Millennium Chemicals Inc. and Subsidiaries
Three Months Ended September 30, 2003
Net sales	$	—		$	—		$	431		$	—		$	431
Cost of products sold		—			—			362			—			362
Depreciation and amortization		—			—			28			—			28
Selling, development and administrative expense		—			1			30			—			31
Reorganization and office closure costs		—			—			15			—			15
Operating loss		—			(1	)		(4	)		—			(5	)
Interest expense, net		(24	)		—			1			—			(23	)
Intercompany interest income (expense), net		25			—			(25	)		—			—
Loss on Equistar investment		—			—			(12	)		—			(12	)
Equity in (loss) earnings of subsidiaries		(10	)		(28	)		—			38			—
Other income, net		—			—			1			—			1
Benefit from income taxes		—			1			10			—			11
Net (loss) income	$	(9	)	$	(28	)	$	(29	)	$	38		$	(28	)
Three Months Ended September 30, 2002 (Restated—See Note 2)
Net sales	$	—		$	—		$	411		$	—		$	411
Cost of products sold		—			—			317			—			317
Depreciation and amortization		—			—			26			—			26
Selling, development and administrative expense		1			—			37			—			38
Operating (loss) income		(1	)		—			31			—			30
Interest expense, net		(22	)		—			—			—			(22	)
Intercompany interest income (expense), net		26			(1	)		(25	)		—			—
Earnings on Equistar investment		—			—			6			—			6
Equity in (loss) earnings of subsidiaries		(4	)		6			—			(2	)		—
Other expense, net		—			—			(2	)		—			(2	)
Provision for income taxes		(1	)		—			(6	)		—			(7	)
Net (loss) income	$	(2	)	$	5		$	4		$	(2	)	$	5

F-124

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

	Millennium America Inc. (Issuer)			Millennium Chemicals Inc. (Guarantor)			Non-Guarantor Subsidiaries			Eliminations		Millennium Chemicals Inc. and Subsidiaries
Nine Months Ended September 30, 2003
Net sales	$	—		$	—		$	1,262		$	—	$	1,262
Cost of products sold		—			—			1,019			—		1,019
Depreciation and amortization		—			—			83			—		83
Selling, development and administrative expense		—			1			97			—		98
Reorganization and office closure costs		—			—			16			—		16
Operating (loss) income		—			(1	)		47			—		46
Interest expense, net		(69	)		—			1			—		(68	)
Intercompany interest income (expense), net		73			(2	)		(71	)		—		—
Loss on Equistar investment		—			—			(69	)		—		(69	)
Equity in (loss) earnings of subsidiaries		(69	)		(62	)		—			131		—
Other expense, net		—			—			(4	)		—		(4	)
(Provision for ) benefit from income taxes		(1	)		1			32			—		32
Cumulative effect of accounting change		—			—			(1	)		—		(1	)
Net (loss) income	$	(66	)	$	(64	)	$	(65	)	$	131	$	(64	)
Nine Months Ended September 30, 2002 (Restated—See Note 2)
Net sales	$	—		$	—		$	1,167		$	—	$	1,167
Cost of products sold		—			—			945			—		945
Depreciation and amortization		—			—			76			—		76
Selling, development and administrative expense		1			—			88			—		89
Operating (loss) income		(1	)		—			58			—		57
Interest expense, net		(64	)		—			—			—		(64	)
Intercompany interest income (expense), net		79			(4	)		(75	)		—		—
Loss on Equistar investment		—			—			(39	)		—		(39	)
Equity in (loss) earnings of subsidiaries		(364	)		(328	)		—			692		—
Other expense, net		—			—			(4	)		—		(4	)
(Provision for) benefit from income taxes		(5	)		1			28			—		24
Cumulative effect of accounting change		—			—			(305	)		—		(305	)
Net (loss) income	$	(355	)	$	(331	)	$	(337	)	$	692	$	(331	)

F-125

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)—(Continued)

(Dollars in millions, except share data)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

	Millennium America Inc. (Issuer)			Millennium Chemicals Inc. (Guarantor)			Non-Guarantor Subsidiaries			Eliminations		Millennium Chemicals Inc. and Subsidiaries
Nine Months Ended September 30, 2003
Cash flows from operating activities	$	21		$	(2	)	$	(66	)	$	—	$	(47	)
Cash flows from investing activities:
Capital expenditures		—			—			(29	)		—		(29	)
Cash used in investing activities		—			—			(29	)		—		(29	)
Cash flows from financing activities:
Dividends to shareholders		—			(17	)		—			—		(17	)
Proceeds from long-term debt		354			—			2			—		356
Repayment of long-term debt		(212	)		—			(8	)		—		(220	)
Intercompany		(163	)		19			144			—		—
Decrease in notes payable and other short-term borrowings		—			—			(19	)		—		(19	)
Cash (used in) provided by financing activities		(21	)		2			119			—		100
Effect of exchange rate changes on cash		—			—			9			—		9
Increase in cash and cash equivalents		—			—			33			—		33
Cash and cash equivalents at beginning of year		6			—			119			—		125
Cash and cash equivalents at end of period	$	6		$	—		$	152		$	—	$	158
Nine Months Ended September 30, 2002
Cash flows from operating activities	$	(6	)	$	(4	)	$	62		$	—	$	52
Cash flows from investing activities:
Capital expenditures		—			—			(43	)		—		(43	)
Cash used in investing activities		—			—			(43	)		—		(43	)
Cash flows from financing activities:
Dividends to shareholders		—			(26	)		—			—		(26	)
Proceeds from long-term debt		245			—			10			—		255
Repayment of long-term debt		(228	)		—			(6	)		—		(234	)
Intercompany		(3	)		30			(27	)		—		—
Increase in notes payable		—			—			3			—		3
Cash provided by (used in) financing activities		14			4			(20	)		—		(2	)
Effect of exchange rate changes on cash		—			—			(2	)		—		(2	)
Increase (decrease) in cash and cash equivalents		8			—			(3	)		—		5
Cash and cash equivalents at beginning of year		5			—			109			—		114
Cash and cash equivalents at end of period	$	13		$	—		$	106		$	—	$	119

F-126

REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders of

MILLENNIUM CHEMICALS INC.:

In our opinion, the consolidated balance sheets and the related consolidated statements of operations, cash flows, and changes in shareholders’ equity present fairly, in all material respects, the financial position of Millennium Chemicals Inc. and its subsidiaries (the “Company”) at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) on page 102 presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for certain domestic inventories in 2002.

As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Accounting for Goodwill and Other Intangible Assets”.

As discussed in Note 2 to the consolidated financial statements, the Company has restated its financial statements for the years ending December 31, 2002, 2001 and 2000.

PricewaterhouseCoopers LLP

Florham Park, NJ

January 30, 2003, except for the impact of the restatement in Notes 1, 2, 8, 9, 12, 14, 17, 18 and 19, as to which date is November 12, 2003

F-127

MILLENNIUM CHEMICALS INC.

CONSOLIDATED BALANCE SHEETS

(Millions, except share data)

	As of December 31,
	2002			2001
ASSETS	(Restated– See Note 2)			(Restated– See Note 2)
Current assets
Cash and cash equivalents	$	125		$	114
Trade receivables, net		210			215
Inventories		406			399
Other current assets		78			61
Total current assets		819			789
Property, plant and equipment, net		862			880
Investment in Equistar		563			677
Other assets		46			238
Goodwill		106			381
Total assets	$	2,396		$	2,965
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current liabilities
Notes payable	$	4		$	4
Other short-term borrowings		14			—
Current maturities of long-term debt		12			11
Trade accounts payable		274			256
Income taxes payable		44			7
Accrued expenses and other liabilities		127			104
Total current liabilities		475			382
Long-term debt		1,212			1,172
Other long-term borrowings		—			11
Deferred income taxes		337			373
Other liabilities		388			516
Total liabilities		2,412			2,454
Commitments and contingencies (Note 16)
Minority interest		19			21
Shareholders’ (deficit) equity
Preferred stock (par value $.01 per share, authorized 25,000,000 shares, none issued and outstanding)		—			—
Common stock (par value $.01 per share, authorized 225,000,000 shares; issued 77,896,586 shares in 2002 and 2001, respectively)		1			1
Paid in capital		1,297			1,299
Accumulated deficit		(776	)		(408	)
Cumulative other comprehensive loss		(299	)		(136	)
Treasury stock, at cost (14,766,279 and 14,594,614 shares in 2002 and 2001, respectively)		(275	)		(283	)
Deferred compensation		17			17
Total shareholders’ (deficit) equity		(35	)		490
Total liabilities and shareholders’ (deficit) equity	$	2,396		$	2,965

See Notes to Consolidated Financial Statements.

F-128

MILLENNIUM CHEMICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Millions, except per share data)

	Year Ended December 31,
	2002			2001			2000
	(Restated– See Note 2)			(Restated– See Note 2)			(Restated– See Note 2)
Net sales	$	1,554		$	1,590		$	1,793
Operating costs and expenses
Cost of products sold		1,234			1,261			1,264
Depreciation and amortization		102			110			113
Selling, development and administrative expense		138			169			215
Reorganization and plant closure costs		—			36			—
Operating income		80			14			201
Interest expense		(90	)		(85	)		(80	)
Interest income		4			3			3
(Loss) earnings on Equistar investment		(73	)		(83	)		45
Other (expense) income, net		(1	)		1			14
(Loss) income before income taxes and minority interest		(80	)		(150	)		183
Benefit from (provision for) income taxes		58			100			(65	)
(Loss) income before minority interest and cumulative effect of accounting change		(22	)		(50	)		118
Minority interest		(6	)		(4	)		(7	)
(Loss) income before cumulative effect of accounting change		(28	)		(54	)		111
Cumulative effect of accounting change		(305	)		—			—
Net (loss) income	$	(333	)	$	(54	)	$	111
Basic (loss) earnings per share:
Before cumulative effect of accounting change	$	(0.44	)	$	(0.85	)	$	1.73
From cumulative effect of accounting change		(4.80	)		—			—
After cumulative effect of accounting change	$	(5.24	)	$	(0.85	)	$	1.73
Diluted (loss) earnings per share:
Before cumulative effect of accounting change	$	(0.44	)	$	(0.85	)	$	1.72
From cumulative effect of accounting change		(4.80	)		—			—
After cumulative effect of accounting change	$	(5.24	)	$	(0.85	)	$	1.72

See Notes to Consolidated Financial Statements.

F-129

MILLENNIUM CHEMICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions)

	Year Ended December 31,
	2002			2001			2000
	(Restated– See Note 2)			(Restated– See Note 2)			(Restated– See Note 2)
Cash flows from operating activities:
Net (loss) income	$	(333	)	$	(54	)	$	111
Adjustments to reconcile net (loss) income to net cash provided by operating activities:
Cumulative effect of accounting change		305			—			—
Write-off of assets related to plant closure		—			10			—
Depreciation and amortization		102			110			113
Deferred income tax (benefit) provision		(35	)		(68	)		41
Non-cash income tax benefit		(22	)		(42	)		—
Restricted stock amortization and adjustments, net		—			1			(6	)
Loss (earnings) on Equistar investment		73			83			(45	)
Minority interest		6			4			7
Other, net		5			—			—
Changes in assets and liabilities:
Decrease (increase) in trade receivables		7			83			(52	)
Decrease (increase) in inventories		4			(3	)		(34	)
(Increase) decrease in other current assets		(23	)		30			24
Increase in other assets		(16	)		(19	)		(18	)
Increase in trade accounts payable		12			64			19
Increase (decrease) in accrued expenses and other liabilities and income taxes payable		15			(35	)		(93	)
Decrease in other liabilities		(16	)		(52	)		(47	)
Cash provided by operating activities		84			112			20
Cash flows from investing activities:
Capital expenditures		(71	)		(97	)		(110	)
Distributions from Equistar		—			—			83
Proceeds from sales of property, plant & equipment		1			19			4
Cash used in investing activities		(70	)		(78	)		(23	)
Cash flows from financing activities:
Dividends to shareholders		(35	)		(35	)		(35	)
Repurchases of common stock		—			—			(65	)
Proceeds from long-term debt		302			783			311
Repayment of long-term debt		(272	)		(736	)		(187	)
Increase (decrease) in notes payable		3			(34	)		(17	)
Cash (used in) provided by financing activities		(2	)		(22	)		7
Effect of exchange rate changes on cash		(1	)		(5	)		(7	)
Increase (decrease) in cash and cash equivalents		11			7			(3	)
Cash and cash equivalents at beginning of year		114			107			110
Cash and cash equivalents at end of year	$	125		$	114		$	107

See Notes to Consolidated Financial Statements.

F-130

MILLENNIUM CHEMICALS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

	Common Stock				Treasury Stock			Deferred Compensation			Paid In Capital			Accumulated Deficit			Unearned Restricted Shares			Cumulative Other Comprehensive Loss			Total
	Outstanding Shares		Amount
	(Millions)
Balance at December 31, 1999 (Restated—See Note 2)	68		$	1	$	(210	)	$	10		$	1,335		$	(398	)	$	(28	)	$	(61	)	$	649
Comprehensive income (loss)
Net income	—			—		—			—			—			111			—			—			111
Other comprehensive loss
Currency translation adjustment	—			—		—			—			—			—			—			(46	)		(46	)
Total comprehensive income (loss)	—			—		—			—			—			111			—			(46	)		65
Amortization and adjustment of unearned restricted shares	—			—		—			—			(9	)		—			3			—			(6	)
Shares repurchased	(3	)		—		(65	)		—			—			—			—			—			(65	)
Shares purchased by employee benefit plan trusts	(1	)		—		(7	)		5			—			—			—			—			(2	)
Dividend to shareholders	—			—		—			—			—			(35	)		—			—			(35	)
Balance at December 31, 2000 (Restated—See Note 2)	64			1		(282	)		15			1,326			(322	)		(25	)		(107	)		606
Comprehensive loss
Net loss	—			—		—			—			—			(54	)		—			—			(54	)
Other comprehensive loss
Net losses on derivative financial instruments:
Losses arising during the year, net of tax of $5	—			—		—			—			—			—			—			(12	)		(12	)
Less: reclassification adjustment, net of tax of $3	—			—		—			—			—			—			—			6			6
Net losses	—			—		—			—			—			—			—			(6	)		(6	)
Minimum pension liability adjustment, net of tax of $3	—			—		—			—			—			—			—			(4	)		(4	)
Currency translation adjustment	—			—		—			—			—			—			—			(19	)		(19	)
Total comprehensive loss	—			—		—			—			—			(54	)		—			(29	)		(83	)
Amortization and adjustment of unearned restricted shares	—			—		—			—			(27	)		—			25			—			(2	)
Dividends related to forfeiture of restricted shares	—			—		—			—			—			3			—			—			3
Shares purchased by employee benefit plan trusts	(1	)		—		(1	)		2			—			—			—			—			1
Dividend to shareholders	—			—		—			—			—			(35	)		—			—			(35	)
Balance at December 31, 2001 (Restated—See Note 2)	63			1		(283	)		17			1,299			(408	)		—			(136	)		490
Comprehensive loss
Net loss	—			—		—			—			—			(333	)		—			—			(333	)
Other comprehensive loss
Net gains on derivative financial instruments:
Gains arising during the year, net of tax of $2	—			—		—			—			—			—			—			6			6
Less: reclassification adjustment	—			—		—			—			—			—			—			(1	)		(1	)
Net gains	—			—		—			—			—			—			—			5			5
Minimum pension liability adjustment, net of tax of $98	—			—		—			—			—			—			—			(188	)		(188	)
Equity in other comprehensive loss of Equistar:
Minimum pension liability, net of tax of $4	—			—		—			—			—			—			—			(7	)		(7	)
Currency translation adjustment	—			—		—			—			—			—			—			27			27
Total comprehensive loss	—			—		—			—			—			(333	)		—			(163	)		(496	)
Shares issued to fund 401(k) plan	—			—		6			—			(2	)		—			—			—			4
Shares purchased by employee benefit plan trusts	—			—		2			(2	)		—			—			—			—			—
Current year compensation deferred	—			—		—			2			—			—			—			—			2
Dividend to shareholders	—			—		—			—			—			(35	)		—			—			(35	)
Balance at December 31, 2002 (Restated—See Note 2)	63		$	1	$	(275	)	$	17		$	1,297		$	(776	)	$	—		$	(299	)	$	(35	)

See Notes to Consolidated Financial Statements.

F-131

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in millions, except share data)

Note 1—Significant Accounting Policies

Principles of Consolidation: The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated. Minority interest represents the minority ownership of the Company’s Brazilian subsidiary and the La Porte Methanol Company. The Company’s investment in Equistar Chemicals, LP (“Equistar”) is accounted for by the equity method; accordingly, the Company’s share of Equistar’s pre-tax net income or loss is included in net income.

Estimates and Assumptions: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates include the evaluation of and judgments about environmental obligations, legal matters and tax claims brought against the Company, pension and other postretirement benefits, the ability to recover the full carrying value of accounts receivable and inventories owned by the Company, and the carrying value of goodwill and other long-term assets such as the Company’s investment in Equistar and the Company’s deferred tax assets. Actual results could differ from those estimates.

Reclassification: Certain prior year balances have been reclassified to conform with the current year presentation, principally $7, $7 and $6 of selling, development and administrative (“S,D&A”) costs allocated to the Company’s investment in Equistar and previously reported in (Loss) earnings on Equistar investment for 2002, 2001, and 2000, respectively, have been reclassified to Selling, development and administrative expense in the Company’s Consolidated Statements of Operations.

Revenue Recognition: Revenue is recognized upon transfer of title and risk of loss to the customer, which is generally upon shipment of product to the customer or upon usage of the product by the customer in the case of consignment inventories.

Costs incurred related to shipping and handling are included in cost of products sold. Amounts billed to the customer for shipping and handling are included in sales revenue.

Cash Equivalents: Cash equivalents represent investments in short-term deposits and commercial paper with banks that have original maturities of 90 days or less. In addition, Other assets include approximately $3 and $4 in restricted cash at December 31, 2002 and 2001, respectively, which is on deposit to satisfy insurance claims.

F-132

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Inventories: Product inventories are stated at the lower of cost or market value. Raw materials and maintenance parts and supplies are carried at average cost. During the fourth quarter of 2002, the Company changed from the last-in first-out (“LIFO”) method to the first-in first-out (“FIFO”) method to account for certain of its United States (“US”) product inventories. These financial statements have been restated for all periods presented to reflect the change to the FIFO method. The method was changed in part to achieve a better matching of revenues and expenses due to decreasing inventory quantities and costs. The FIFO method, or methods that approximate FIFO, are now used to determine cost for all product inventories of the Company. The change positively impacted net loss in 2002 by $1 or $0.02 per share and increased retained earnings for periods prior to 2000 by $21. The effect of the change on reported net (loss) income for 2002, 2001 and 2000 is as follows:

	Year Ended December 31, 2002 (Restated—See Note 2)
	1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.			Full Year
	(Quarterly amounts unaudited)
Net (loss) income before change to FIFO	$	(337	)	$	1		$	5		$	(2	)	$	(333	)
Change in inventory costing method		(1	)		1			—			—			—
Income tax effect of change		—			—			—			—			—
Net (loss) income after change to FIFO	$	(338	)	$	2		$	5		$	(2	)	$	(333	)
Basic (loss) income per share:
Before change to FIFO	$	(5.31	)	$	0.01		$	0.08		$	(0.03	)	$	(5.24	)
Change in inventory costing method, net of tax		(0.01	)		0.01			—			—			—
After change to FIFO	$	(5.32	)	$	0.02		$	0.08		$	(0.03	)	$	(5.24	)
Diluted (loss) income per share:
Before change to FIFO	$	(5.31	)	$	0.01		$	0.08		$	(0.03	)	$	(5.24	)
Change in inventory costing method		(0.01	)		0.01			—			—			—
After change to FIFO	$	(5.32	)	$	0.02		$	0.08		$	(0.03	)	$	(5.24	)
	Year Ended December 31, 2001 (Restated—See Note 2)
	1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.			Full Year
	(Quarterly amounts unaudited)
Net (loss) income before change to FIFO	$	(17	)	$	(26	)	$	(14	)	$	7		$	(50	)
Change in inventory costing method		—			—			(4	)		(3	)		(7	)
Income tax effect of change		—			—			2			1			3
Net (loss) income after change to FIFO	$	(17	)	$	(26	)	$	(16	)	$	5		$	(54	)
Basic (loss) income per share:
Before change to FIFO	$	(0.27	)	$	(0.41	)	$	(0.21	)	$	0.11		$	(0.78	)
Change in inventory costing method, net of tax		—			—			(0.04	)		(0.03	)		(0.07	)
After change to FIFO	$	(0.27	)	$	(0.41	)	$	(0.25	)	$	0.08		$	(0.85	)
Diluted (loss) income per share:
Before change to FIFO	$	(0.27	)	$	(0.41	)	$	(0.21	)	$	0.11		$	(0.78	)
Change in inventory costing method, net of tax		—			—			(0.04	)		(0.03	)		(0.07	)
After change to FIFO	$	(0.27	)	$	(0.41	)	$	(0.25	)	$	0.08		$	(0.85	)

F-133

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

	2000
	(Restated— See Note 2)
Net income before change to FIFO	$	109
Change in inventory costing method		4
Income tax effect of change		(2	)
Net income after change to FIFO	$	111
Basic income per share:
Before change to FIFO	$	1.69
Change in inventory costing method, net of tax		0.04
After change to FIFO	$	1.73
Diluted income per share:
Before change to FIFO	$	1.68
Change in inventory costing method, net of tax		0.04
After change to FIFO	$	1.72

Property, Plant and Equipment: Property, plant and equipment is stated on the basis of cost. Depreciation is provided by the straight-line method over the estimated useful lives of the assets, generally 20 to 40 years for buildings and 5 to 25 years for machinery and equipment. Environmental costs are capitalized if the costs increase the value of the property and/or mitigate or prevent contamination from future operations. Major repairs and improvements incurred in connection with substantial overhauls or maintenance turnarounds are capitalized and amortized on a straight-line basis until the next planned turnaround (generally 18 months to 3 years). Other less substantial maintenance and repair costs are expensed as incurred. Unamortized capitalized turnaround costs were $19 and $21 at December 31, 2002 and 2001, respectively.

Capitalized Software Costs: The Company capitalizes costs incurred in the acquisition and modification of computer software used internally, including consulting fees and costs of employees dedicated solely to a specific project. Such costs are amortized over periods not exceeding 7 years and are subject to impairment evaluation under Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”). Unamortized capitalized software costs of $43 and $53 at December 31, 2002 and 2001, respectively, are included in Property, plant and equipment.

Goodwill: Goodwill represents the excess of the purchase price over the fair value of the net assets of acquired companies. Through December 31, 2001, goodwill was amortized using the straight-line method over 40 years in accordance with generally accepted accounting principles, and management evaluated goodwill for impairment based on the anticipated future cash flows attributable to its operations in accordance with SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of” (“SFAS No. 121”). Such expected cash flows, on an undiscounted basis, were compared to the carrying value of the tangible and intangible assets, and if impairment was indicated, the carrying value of goodwill was adjusted. In the opinion of management, no impairment of goodwill existed at December 31, 2001 under SFAS No. 121.

On January 1, 2002, the Company adopted SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Under this new standard, all goodwill, including goodwill acquired before initial application of the standard, is not amortized but must be tested for impairment at least annually at the reporting unit level, as defined in the standard. Accordingly, the Company reported a charge for the cumulative effect of this accounting

F-134

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

change of $275 in the first quarter of 2002 to write off certain of its goodwill related to its Acetyls business based upon the Company’s estimate of fair value for this business considering expected future profitability and cash flows. Also in accordance with SFAS No. 142, Equistar reported an impairment of its goodwill in the first quarter of 2002. The write-off at Equistar required an adjustment of $30 to reduce the carrying value of the Company’s investment in Equistar to its approximate proportional share of Equistar’s Partners’ capital. The Company reported this adjustment as a charge for the cumulative effect of this accounting change. In the opinion of management, no further adjustment to the carrying value of goodwill of $106 is required at December 31, 2002 under SFAS No. 142. Amortization expense was $13 for each of the years ended December 31, 2001 and 2000 for the Company’s goodwill. Additionally, the Company’s share of amortization expense reported by Equistar for each of the years ended December 31, 2001 and 2000 for its goodwill, included in (Loss) earnings on Equistar investment, was $10. Following is a reconciliation of the reported net (loss) income to net income (loss) adjusted for goodwill amortization and the cumulative effect of the accounting change, and related per share amounts:

	Year Ended December 31,
	2002			2001			2000
	(Restated— See Note 2)			(Restated— See Note 2)			(Restated— See Note 2)
Reported net (loss) income	$	(333	)	$	(54	)	$	111
Goodwill amortization		—			13			13
Equistar goodwill amortization included in (Loss) earnings on Equistar investment		—			10			10
Adjusted net (loss) income		(333	)		(31	)		134
Cumulative effect of accounting change.		305			—			—
Adjusted net (loss) income before cumulative effect of accounting change	$	(28	)	$	(31	)	$	134

Per share amounts:

	Year Ended December 31,
	2002			2001			2000
	Basic & Diluted			Basic & Diluted			Basic		Diluted
	(Restated— See Note 2)			(Restated— See Note 2)			(Restated— See Note 2)		(Restated— See Note 2)
Reported net (loss) income	$	(5.24	)	$	(0.85	)	$	1.73	$	1.72
Goodwill amortization		—			0.20			0.20		0.20
Equistar goodwill amortization included in (Loss) earnings on Equistar investment		—			0.16			0.16		0.15
Adjusted net (loss) income		(5.24	)		(0.49	)		2.09		2.07
Cumulative effect of accounting change		4.80			—			—		—
Adjusted net (loss) income before cumulative effect of accounting change	$	(0.44	)	$	(0.49	)	$	2.09	$	2.07

Environmental Liabilities and Legal Matters—The Company periodically reviews matters associated with potential environmental obligations and legal matters brought against the Company and evaluates, accounts, reports and discloses these matters in accordance with SFAS No. 5 “Accounting for Contingencies” (“SFAS No. 5”). In order to make estimates of liabilities, the Company’s evaluation of and judgments about

F-135

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

environmental obligations and legal matters are based upon the individual facts and circumstances relevant to the individual matters and include advice from legal counsel, if applicable. The Company establishes reserves by recording charges to its results of operations for loss contingencies that are considered probable (the future event or events are likely to occur) and for which the amount of loss can be reasonably estimated. When a loss contingency is considered probable but the amount of loss can only be reasonably estimated within a range, the Company records a reserve for the loss contingency at the low end of the range but also applies judgment to specific matters as to whether any particular amount within the range is a better estimate than any other amount. If an amount within the range is considered to be a better estimate of the loss, the Company records this amount as its reserve for the loss contingency. Reserves are exclusive of claims against third parties, except where the amount of liability or contribution by such other parties, including insurance companies, has been agreed, and are not discounted. Loss contingencies that are not considered probable or that cannot be reasonably estimated are disclosed in the Notes to the Consolidated Financial Statements, either individually or in the aggregate, if there is a reasonable possibility that a loss may be incurred and if the amount of possible loss could have a significant impact on the Company’s consolidated financial position or results of operations. Loss contingencies that are considered remote (the chance of the future event or events occurring is slight) are not typically disclosed unless the Company believes the potential loss to be extremely significant to its consolidated financial position and results of operations.

Foreign Currency: Assets and liabilities of the Company’s foreign subsidiaries are translated at the exchange rates in effect at the balance sheet dates, while revenue, expenses and cash flows are translated at average exchange rates for the reporting period or, where practicable, at the exchange rates in effect at the dates on which transactions are recognized. Resulting translation adjustments are recorded as a component of Cumulative other comprehensive loss in Shareholders’ (deficit) equity. Gains and losses resulting from changes in foreign currency on transactions denominated in currencies other than the functional currency of the respective subsidiary are recognized in income as they occur.

Derivative Instruments and Hedging Activities: Effective January 1, 2001, all derivatives are recognized on the balance sheet at their fair value. If a derivative is designated as a hedging instrument for accounting purposes, the Company designates the derivative, on the date the derivative contract is entered into, as (1) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment (“fair value” hedge), (2) a hedge of a forecasted transaction (“cash flow” hedge), (3) a foreign-currency fair value or cash flow hedge (“foreign currency” hedge) or (4) a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments for accounting purposes, changes in fair values are recognized in earnings in the period in which they occur. Prior to January 2001, gains or losses on instruments that hedged foreign currency denominated receivables and payables were recognized in income as they occurred. Gains or losses on instruments that hedged firm commitments were deferred and reported as part of the underlying transaction when settled.

Changes in the fair value of derivatives that are highly effective as, and that are designated and qualify as, fair value hedges, along with the losses or gains on the hedged assets or liabilities that are attributable to the hedged risks (including losses or gains on firm commitments), are recorded in current-period earnings. Changes in the fair value of derivatives that are highly effective as, and that are designated and qualify as, cash flow hedges are recorded in Other comprehensive income (loss) (“OCI”), until earnings are affected by the variability of cash flows. Changes in the fair value of derivatives that are highly effective as, and that are designated and qualify as, foreign-currency hedges are recorded in either current-period earnings or OCI, depending on whether the hedge transactions are fair value hedges or cash flow hedges. If, however, a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded as translation adjustments in OCI.

F-136

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

The Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. This process includes linking all derivatives that are designated as fair value, cash flow, or foreign-currency hedges to specific assets and liabilities on the balance sheet or to specific firm commitments or forecasted transactions. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. When it is determined that a derivative is not highly effective as a hedge, or that it has ceased to be a highly effective hedge, the Company discontinues hedge accounting prospectively.

Income Taxes: The Company accounts for income taxes using the liability method under SFAS No. 109, “Accounting for Income Taxes” (“SFAS No. 109”). This method generally provides that deferred tax assets and liabilities, computed using enacted marginal tax rates of the respective tax jurisdictions, be recognized for temporary differences between the financial reporting basis and the tax basis of the Company’s assets and liabilities and expected benefits of utilizing net operating loss carryforwards. The Company periodically assesses the likelihood of realization of deferred tax assets and with respect to net operating loss carryforwards, prior to expiration, by considering the availability of taxable income in prior carryback periods, the scheduled reversal of deferred tax liabilities, certain distinct tax planning strategies, and projected future taxable income. If it is considered to be more likely than not that the deferred tax assets will not be realized, a valuation allowance is established against some or all of the deferred tax assets.

The Company periodically assesses tax exposures and establishes or adjusts estimated reserves for probable assessments by the Internal Revenue Service (“IRS”) or other taxing authorities. Such reserves represent an estimated provision for taxes ultimately expected to be paid.

Research and Development: The cost of research and development efforts is expensed as incurred. Such costs aggregated $20, $20 and $26 for the years ended December 31, 2002, 2001 and 2000, respectively.

Retirement-Related Benefits—The Company determines its benefit obligations and net periodic benefit costs for its defined benefit pension plans and its other postretirement benefit plans using actuarial models required by SFAS No. 87, “Employers’ Accounting for Pensions” (“SFAS No. 87”) and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” respectively. These models use an approach that generally recognizes individual events like plan amendments and changes in actuarial assumptions such as discount rates, rate of compensation increases, inflation, medical costs and mortality over the service lives of the employees in the plan. The market-related value of plan assets, a calculated value that recognizes changes in the fair value of plan assets over a five-year period, is utilized to determine the Company’s benefit obligations and net periodic benefit cost.

The Company evaluates the appropriateness of retirement-related benefit plan assumptions annually. Some of the more significant assumptions used to determine the Company’s benefit obligations and net periodic benefit costs are the expected rate of return on plan assets, the discount rate, the rate of compensation increases, and healthcare cost trend rates.

To develop its expected return on plan assets, the Company uses long-term historical actual return information, the mix of investments that comprise plan assets, and future estimates of long-term investment returns by reference to external sources. The discount rate assumptions reflect the rates available on high-quality fixed-income debt instruments on December 31 of each year. The rate of compensation increase is determined by the Company based upon its long-term plans for such increases. The Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rates.

F-137

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

At December 31 of each year, if any of the Company’s retirement-related plans is underfunded and requires adjustment to establish an additional minimum liability in accordance with SFAS No. 87, an adjustment is first made to establish an intangible asset to the extent of any unrecognized amount of prior service cost for the given plan and then an equity adjustment is included in Other comprehensive loss for the remaining amount of the required minimum liability. This additional minimum liability is calculated and adjusted annually through the Company’s Consolidated Balance Sheet and has no immediate impact on the Company’s Consolidated Statement of Operations.

Stock-Based Compensation: SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”) encourages a fair value based method of accounting for employee stock options and similar equity instruments, which generally would result in the recording of additional compensation expense in the Company’s financial statements. SFAS No. 123 also allows the Company to continue to account for stock-based employee compensation using the intrinsic value for equity instruments under Accounting Principles Board Opinion No. 25 (“APB Opinion No. 25”). The Company has elected to account for such instruments using APB Opinion No. 25 and related interpretations, and thus has adopted the disclosure-only provisions of SFAS No. 123. Accordingly, no compensation cost has been recognized for the stock option plans in the accompanying financial statements as all options granted had an exercise price equal to the market value of the underlying Common Stock on the date of grant.

The following table illustrates the effect on net income (loss) and earnings per share before cumulative effect of accounting change if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee recognition:

	Year Ended December 31,
	2002			2001			2000
	(Restated— See Note 2)			(Restated— See Note 2)			(Restated— See Note 2)
Net (loss) income before cumulative effect of accounting change	$	(28	)	$	(54	)	$	111
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects		(2	)		(1	)		(1	)
Pro forma net (loss) income before cumulative effect of accounting change	$	(30	)	$	(55	)	$	110
(Loss) earnings per share:
Basic—as reported	$	(0.44	)	$	(0.85	)	$	1.73
Basic—pro forma	$	(0.48	)	$	(0.87	)	$	1.72
Diluted—as reported	$	(0.44	)	$	(0.85	)	$	1.72
Diluted—pro forma	$	(0.48	)	$	(0.87	)	$	1.71

Earnings Per Share: The weighted average number of equivalent shares of Common Stock outstanding used in computing (loss) earnings per share for 2002, 2001 and 2000 was as follows:

	2002	2001	2000
Basic	63,587,561	63,564,497	64,304,594
Options	—	—	3,314
Restricted and other shares	—	—	281,729
Diluted	63,587,561	63,564,497	64,589,637

F-138

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

The computation of diluted (loss) earnings per share for 2002 does not include 290,160 restricted and other shares and 4,727 options, and for 2001 does not include 318,606 restricted and other shares issued under the Company’s stock-based compensation plans as their effect would be antidilutive.

Concentration of Credit Risk: Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of temporary cash investments, foreign currency, interest rate and natural gas derivative contracts and accounts receivable. The Company maintains its investments and enters contracts with high-credit-quality institutions, generally financial institutions that provide the Company with debt financing.

The Company sells a broad range of commodity, industrial, performance and specialty chemicals to a diverse group of customers operating throughout the world. During 2002, revenue generated outside the United States accounted for 59%, 54% and 51% of total revenues in 2002, 2001 and 2000, respectively, from sales to customers in over 90 countries. Accordingly, there is no significant concentration of risk in any one particular country. In addition, 58%, 60% and 57% of the revenues of the Titanium Dioxide and Related Products business segment in 2002, 2001 and 2000, respectively (which accounts for approximately 73%, 72% and 76% of consolidated revenues in 2002, 2001 and 2000, respectively) are from customers in the global paint and coatings industry. The leading United States economic indicator for this industry is new and existing home sales, which has remained relatively strong through 2002 despite the slow United States economic conditions. In addition, some seasonality in sales exists because sales of paint and coatings are greatest in the spring and summer months. Credit limits, ongoing credit evaluation, and account-monitoring procedures are utilized to minimize credit risk. Collateral is generally not required, but may be used under certain circumstances or in certain markets, particularly in lesser-developed countries of the world. Credit losses to customers operating in this industry have not been material.

Recent Accounting Developments: In July 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations” (“SFAS No. 143”). SFAS No. 143 applies to legal obligations associated with the retirement of long-lived assets. This standard requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred and the associated asset retirement costs be capitalized as part of the carrying amount of the long-lived asset. Accretion expense and depreciation expense related to the liability and capitalized asset retirement costs, respectively, would be recorded in subsequent periods. Although earlier application is permitted, the Company must adopt this standard on January 1, 2003. Upon adoption, the Company will recognize transition amounts for existing asset retirement obligations, associated capitalizable costs, and accumulated depreciation. The after-tax transition charge of $2 will be recorded as a cumulative effect of an accounting change. The ongoing annual expense resulting from the initial adoption of SFAS No. 143 is not expected to be significant.

In January 2003, the FASB issued Financial Interpretation (“FIN”) No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46”). FIN No. 46 provides guidance on the identification of and financial reporting for entities over which control is achieved through means other than voting rights. The Company must adopt FIN No. 46 for previously existing arrangements on June 15, 2003 and is currently evaluating the potential impact on its consolidated financial position and results of operations. Immediate adoption is required for arrangements newly created after January 31, 2003 to which FIN No. 46 applies.

F-139

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Note 2—Restatement of Financial Statements

The Company restated its financial statements for the years 1998 through 2002, to correct errors in its accounting for deferred taxes relating to its Equistar investment, the calculation of its pension benefit obligations, its accounting for a multi-year precious metals agreement, and the timing of its recognition of income and expense associated with previously established reserves for legal, environmental and other contingencies for certain of the Company’s predecessor businesses.

Deferred tax assets and liabilities and deferred tax expense for the years 1998 through 2002 were restated to appropriately account for the Company’s book and tax basis differences associated with its investment in Equistar in accordance with SFAS No. 109. The accounting for deferred taxes associated with Equistar was previously based on the difference between book and tax basis of a subsidiary that holds the partnership investment. Deferred tax is now based on the difference between book and tax basis of the actual partnership interest held by the subsidiary. The effect of the adjustments to deferred tax assets and liabilities was to increase net deferred tax liabilities and Accumulated deficit by $402 at December 31, 1999. The effect of the adjustments to Benefit from income taxes for 2002 and 2001 was a decrease of $36 and an increase of $4, respectively, and the effect to Provision for income taxes for 2000 was an increase of $6. Other comprehensive loss was reduced by $15 in 2002 due to these adjustments. In addition, during the course of its review of its deferred tax assets, the Company concluded that its realization of a deferred tax asset of $10 related to its French subsidiaries was unlikely. The elimination of this deferred tax asset as of December 31, 2002, resulted in an increase of $10 in net deferred tax liabilities and a decrease in Benefit from income taxes for 2002 of $10.

The Company also restated its accrued pension benefit costs, included in Other liabilities, and its net periodic pension benefit cost for 2002 to correct errors in the calculation of its pension liability. The Company’s principal actuarial firm incorrectly utilized participant data in its 2002 actuarial valuation and underestimated the accumulated pension benefit obligation at December 31, 2002 for the Company’s largest domestic pension plan. The effect of these corrections was to increase accrued pension benefit cost by $53 and to decrease net deferred tax liabilities by $19 at December 31, 2002, and to increase net periodic pension benefit cost by $2, to decrease Operating income by $2, to increase Net loss by $1, and to increase Other comprehensive loss by $33 for the year ended December 31, 2002.

The financial statements for the years 1998 through 2002 also were restated to reflect a retroactive change in accounting treatment for a five-year agreement entered into in 1998 that provides the Company with the right to use gold owned by a third party, as more fully described in Note 9. The Company previously accounted for this agreement as an operating lease but is now accounting for this agreement as a secured financing. As a result, at December 31, 1999, Other assets increased by $4, Accrued expenses and other liabilities decreased by $1, Other long-term borrowings increased by $11, net deferred tax liabilities decreased by $1, Other liabilities decreased by $4, and Accumulated deficit increased by $1; Operating income for 2002, 2001 and 2000 decreased by $4, $2 and $1, respectively; Net loss for 2002 and 2001 increased by $2 and $1, respectively; and Net income for 2000 decreased by $1.

The restatement of the financial statements for the years 1998 through 2001 also includes changes to correct the timing of income and expense recognition associated with previously established reserves for legal, environmental and other contingencies for certain of the Company’s predecessor businesses. The effect of this restatement was to decrease Accrued expenses and other liabilities and Other liabilities by $1 and $24, respectively, and to increase net deferred tax liabilities and Accumulated deficit by $9 and $16, respectively, at December 31, 1999; to decrease Operating income by $16 and $9 for the years 2001 and 2000, respectively; to increase Net loss by $10 in 2001; and to decrease Net income by $6 in 2000.

F-140

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

A summary of the aggregate effect of these restatements and the reclassification, described in Note 1, on the Company’s Consolidated Balance Sheets and Consolidated Statements of Operations for the periods presented herein is shown below.

	As of December 31, 2002						As of December 31, 2001
	As Reported			As Restated			As Reported			As Restated
Changes to Consolidated Balance Sheets:
Deferred income taxes—asset	$	75		$	—		$	29		$	—
Other assets		42			46			234			238
Total assets		2,467			2,396			2,990			2,965
Other short-term borrowings		—			14			—			—
Accrued expenses and other liabilities		128			127			105			104
Total current liabilities		462			475			383			382
Other long-term borrowings		—			—			—			11
Deferred income taxes—liability		—			337			—			373
Other liabilities		335			388			517			516
Total liabilities		2,009			2,412			2,072			2,454
Accumulated deficit		(320	)		(776	)		(1	)		(408	)
Cumulative other comprehensive loss		(281	)		(299	)		(136	)		(136	)
Total shareholders’ equity (deficit)		439			(35	)		897			490
Total liabilities and shareholders’ equity (deficit)		2,467			2,396			2,990			2,965

	Year Ended December 31, 2002						Year Ended December 31, 2001						Year Ended December 31, 2000
	As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
Changes to Consolidated Statements of Operations:
Cost of products sold	$	1,233		$	1,234		$	1,259		$	1,261		$	1,263		$	1,264
Selling, development and administrative expense		126			138			146			169			200			215
Operating income		93			80			39			14			217			201
(Loss) earnings on Equistar investment		(80	)		(73	)		(90	)		(83	)		39			45
(Loss) income before income taxes, minority interest and cumulative effect of accounting change		(74	)		(80	)		(132	)		(150	)		193			183
Benefit from (provision for) income taxes		101			58			89			100			(62	)		(65	)
Income (loss) before minority interest and cumulative effect of accounting change		27			(22	)		(43	)		(50	)		131			118
Income (loss) before cumulative effect of accounting change		21			(28	)		(47	)		(54	)		124			111
Net (loss) income		(284	)		(333	)		(47	)		(54	)		124			111
Basic earnings (loss) per share:
Before cumulative effect of accounting change		0.33			(0.44	)		(0.75	)		(0.85	)		1.94			1.73
After cumulative effect of accounting change		(4.47	)		(5.24	)		(0.75	)		(0.85	)		1.94			1.73
Diluted earnings (loss) per share:
Before cumulative effect of accounting change		0.33			(0.44	)		(0.75	)		(0.85	)		1.93			1.72
After cumulative effect of accounting change		(4.44	)		(5.24	)		(0.75	)		(0.85	)		1.93			1.72

F-141

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

A summary of the aggregate effect of these restatements and the reclassification, described in Note 1, is shown below for the Company’s Quarterly Financial Data for the periods presented in Note 18.

	Quarterly Financial Data (Unaudited)
	1st Qtr						2nd Qtr						3rd Qtr						4th Qtr
	As Reported			As Restated			As Reported			As Restated			As Reported			As Restated			As Reported			As Restated
2002
Operating income	$	10		$	7		$	24		$	20		$	33		$	30		$	26		$	23
(Loss) earnings on Equistar investment		(39	)		(37	)		(10	)		(8	)		4			6			(35	)		(34	)
Net (loss) income before cumulative effect of accounting change		(32	)		(33	)		2			2			6			5			45			(2	)
Net (loss) income after cumulative effect of accounting change		(337	)		(338	)		2			2			6			5			45			(2	)
Basic (loss) earnings per share before cumulative effect of accounting change		(0.50	)		(0.52	)		0.02			0.02			0.10			0.08			0.71			(0.03	)
Basic (loss) earnings per share after cumulative effect of accounting change		(5.30	)		(5.32	)		0.02			0.02			0.10			0.08			0.71			(0.03	)
Diluted (loss) earnings per share before cumulative effect of accounting change		(0.50	)		(0.52	)		0.02			0.02			0.10			0.08			0.70			(0.03	)
Diluted (loss) earnings per share after cumulative effect of accounting change		(5.27	)		(5.32	)		0.02			0.02			0.10			0.08			0.70			(0.03	)
2001
Operating income (loss)		25			20			(2	)		(9	)		19			11			(3	)		(8	)
Net (loss) income		(16	)		(17	)		(23	)		(26	)		(14	)		(16	)		6			5
Basic (loss) earnings per share		(0.24	)		(0.27	)		(0.37	)		(0.41	)		(0.24	)		(0.25	)		0.10			0.08
Diluted (loss) earnings per share		(0.24	)		(0.27	)		(0.37	)		(0.41	)		(0.24	)		(0.25	)		0.10			0.08

Note 3—Reorganization and Plant Closure Charges

A provision for reorganization and plant closure costs of $36 before tax ($24 after-tax or $0.38 per share) was recorded in 2001 related to reorganization activities within each of the Company’s business segments.

During the second quarter of 2001, $31 was recorded in connection with the Company’s announced decision to reduce its worldwide workforce and indefinitely idle its sulfate-process TiO₂ plant in Hawkins Point, Maryland. The $31 charge included severance and other employee-related costs of $19 for the termination of approximately 400 employees involved in manufacturing, technical, sales and marketing, finance and administrative support, a $10 write-down of assets and $2 in other costs associated with the idling of the plant.

During the first quarter of 2001, the Company announced the closure of its facilities in Cincinnati, Ohio and recorded reorganization and other charges of $5 in the Acetyls segment. These charges included $3 of severance and other termination benefits related to the termination of about 35 employees involved in technical, marketing and administrative activities, as well as $2 related to the write-down of assets, lease termination costs and other charges associated with the Cincinnati facility. The office in Cincinnati was closed during the second quarter of 2001.

F-142

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

All payments for severance and related costs and for other costs related to the reorganization and plant closure have been made as of December 31, 2002.

Note 4—Sale/Leaseback Transaction

On December 27, 2001, the Company sold its research facility in Baltimore, Maryland to an unrelated party in a sale/leaseback transaction. Cash proceeds from the sale were $17. The pre-tax gain on the sale of $3 will be amortized to income over the term of the related leaseback. In conjunction with the sale, the Company entered into an operating lease with the buyer to lease the research facility for a 20-year term at an annual fee of approximately $2, which escalates at a rate of 2.5% per annum. Certain renewal options exist to extend the term in five-year intervals.

Note 5—Investment in Equistar

On December 1, 1997, the Company and Lyondell Chemical Company (“Lyondell”) completed the formation of Equistar, a joint venture partnership created to own and operate the petrochemical and polymer businesses of the Company and Lyondell. The Company contributed to Equistar substantially all of the net assets of its former ethylene, polyethylene, ethanol and related products business. The Company retained $250 from the proceeds of accounts receivable collections and substantially all the accounts payable and accrued expenses of its contributed businesses existing on December 1, 1997, and received proceeds of $750 from borrowings under a new credit facility entered into by Equistar. The Company used the $750 received from Equistar to repay debt. Equistar was owned 57% by Lyondell and 43% by the Company until May 15, 1998, when the Company and Lyondell expanded Equistar with the addition of the ethylene, propylene, ethylene oxide and derivatives businesses of the chemical subsidiary of Occidental Petroleum Corporation (“Occidental”). Occidental contributed the net assets of those businesses (including approximately $205 of related debt) to Equistar. In exchange, Equistar borrowed an additional $500, $420 of which was distributed to Occidental and $75 to the Company. Equistar was then owned 41% by Lyondell, 29.5% by Occidental and 29.5% by the Company. No gain or loss resulted from these transactions. On August 22, 2002, Occidental sold its 29.5% equity interest in Equistar to Lyondell. Equistar is now owned 70.5% by Lyondell and 29.5% by the Company.

The Company has evaluated the carrying value of its investment in Equistar at December 31, 2002 using assumptions that anticipate a long-term holding value for the Equistar investment based upon anticipated future cash flows. Valuation of the Equistar investment under a current sale scenario could result in a different value. As described in “Equity Interest in Equistar” in Item 1 in this Annual Report, Occidental sold its 29.5% interest in Equistar to Lyondell. The value of this transaction was based on facts and circumstances significantly different from those surrounding the Company’s interest in Equistar and therefore such value cannot be viewed to represent similar value for the Company’s investment in Equistar. The carrying value of the Company’s investment in Equistar at December 31, 2002 and 2001 was $563 and $677, respectively.

Equistar is managed by a Partnership Governance Committee consisting of representatives of both partners. Approval of Equistar’s strategic plans and other major decisions requires the consent of the representatives of both partners. All decisions of Equistar’s Governance Committee that do not require unanimity among the partners may be made by Lyondell’s representatives alone.

Because of the significance of the Company’s interest in Equistar to the Company’s total results of operations, the separate financial statements of Equistar are included in this Annual Report.

F-143

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Note 6—European Receivables Securitization Program

Since March 2002, the Company has been transferring its interest in certain European trade receivables to an unaffiliated third party as its basis for issuing commercial paper under a revolving securitization arrangement (annually renewable up to five years) with maximum availability of 70 million euro, which is treated, in part, as a sale under accounting principles generally accepted in the United States of America. Accordingly, transferred trade receivables that qualify as a sale, $61 outstanding at December 31, 2002, are removed from the Company’s Consolidated Balance Sheet. The Company continues to carry its retained interest in a portion of the transferred assets that do not qualify as a sale, $9 at December 31, 2002, in Trade receivables, net in its Consolidated Balance Sheet at amounts that approximate net realizable value based upon the Company’s historical collection rate for these trade receivables. Unused availability under this arrangement at December 31, 2002 was 3 million euro. For the year ended December 31, 2002, cumulative gross proceeds from this securitization arrangement were $213. Cash flows from this securitization arrangement are reflected as operating activities in the Consolidated Statements of Cash Flows. For the year ended December 31, 2002, the aggregate loss on sale associated with this arrangement was $2. Administration and servicing of the trade receivables under the arrangement remains with the Company. Servicing liabilities associated with the transaction are not significant.

Note 7—Supplemental Financial Information

	2002			2001
Trade receivables
Trade receivables	$	217		$	222
Allowance for doubtful accounts		(7	)		(7	)
	$	210		$	215
Inventories
Finished products	$	210		$	219
In-process products		30			23
Raw materials		106			100
Maintenance parts and supplies		60			57
	$	406		$	399
Property, plant and equipment
Land and buildings	$	222		$	218
Machinery and equipment		1,401			1,291
Construction-in-progress		111			121
		1,734			1,630
Accumulated depreciation and amortization		(872	)		(750	)
	$	862		$	880
Goodwill	$	487		$	487
Accumulated amortization		(106	)		(106	)
Cumulative effect of accounting change		(275	)		—
	$	106		$	381

F-144

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

	2002		2001		2000
Amortization expense	$	—	$	13	$	13

Rental expense on operating leases is as follows:

	2002		2001		2000
Rental expense	$	22	$	19	$	14

Cash paid for interest and taxes:

	2002			2001		2000
Interest (net of interest received)	$	86		$	81	$	77
Taxes (net of refunds)		(1	)		1		169

Note 8—Income Taxes

	2002			2001			2000
	(Restated— See Note 2)			(Restated— See Note 2)			(Restated— See Note 2)
Pretax (loss) income is generated from:
United States	$	(161	)	$	(221	)	$	90
Foreign		81			71			93
		(80	)		(150	)		183
Income tax (benefit) provision is comprised of:
Federal
Current	$	(19	)	$	(12	)	$	—
Deferred		(35	)		(68	)		41
Tax benefit from previous years		(22	)		(42	)		—
Foreign		16			21			21
State and local		2			1			3
		(58	)		(100	)		65

The Company’s effective income tax rate differs from the amount computed by applying the statutory federal income tax rate as follows:

	2002		2001		2000
	(Restated— See Note 2)		(Restated— See Note 2)		(Restated— See Note 2)
Statutory federal income tax rate	(35.0	)%	(35.0	)%	35.0	%
State and local income taxes, net of federal benefit	1.9		(0.3	)	1.1
Provision for nondeductible expenses, primarily goodwill amortization	—		7.5		4.6
Foreign rate differential	(20.1	)	(12.0	)	(6.9	)
Tax benefit from previous years	(27.5	)	(31.3	)	—
Establish valuation allowance for French subsidiaries	12.5		—		—
Other	(4.3	)	4.4		1.7
Effective income tax rate	(72.5	)%	(66.7	)%	35.5	%

F-145

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

The Company recorded a tax benefit of $22 in 2002 and $42 in 2001 unrelated to transactions for those years. In 2002, the tax benefit primarily relates to an $18 refund of tax and interest originating from refund claims filed with the Internal Revenue Service (“IRS”) in 2002 which carried back expenses incurred in 1993 and 1994 to earlier tax years. In 2001, the tax benefit relates to the reversal of tax accruals recorded in 1996. During 2001, through ongoing discussions and negotiations with the IRS, it was determined that the Company’s original 1996 position would not be challenged and the accruals recorded in 1996 were no longer necessary. The reversal of those accruals was offset to an extent by certain new tax provisions the Company determined probable of assessment based on the evolution of various domestic and foreign tax examinations and changes in relevant tax regulations.

Significant components of deferred taxes are as follows:

	2002			2001
	(Restated— See Note 2)			(Restated— See Note 2)
Deferred tax assets
Environmental and legal obligations	$	27		$	35
Other postretirement benefits and pension		82			—
Net operating loss carryforwards		174			143
Capital loss carryforwards		9			9
AMT credits		97			105
Other accruals		14			14
		403			306
Valuation allowance		(19	)		(9	)
Total deferred tax assets		384			297
Deferred tax liabilities
Excess of book over tax basis in property, plant and equipment		106			126
Other postretirement benefits and pension		—			10
Excess of book over tax basis in investment in Equistar		456			478
Reserve for income taxes		116			33
Other		43			23
Total deferred tax liabilities		721			670
Net deferred tax liabilities	$	337		$	373

As a result of the Company’s assessment of its net deferred tax assets at December 31, 2002, a valuation allowance of $10 was required for the net deferred tax assets of its French subsidiaries at December 31, 2002. The Company currently expects that if its French subsidiaries continue to report net operating losses in future periods, income tax benefits associated with those losses would not be recognized, and the Company’s results in those periods would be adversely affected.

At December 31, 2002 and 2001, certain subsidiaries of the Company had available US net operating loss carryforwards aggregating $288 and $223, respectively, and foreign net operating loss carryforwards aggregating $244 and $215, respectively, including $203 and $174, respectively, that were generated in the United Kingdom (“UK”) and $41 and $41, respectively, that were generated in France. The net operating loss carryforwards generated in the UK do not expire but are subject to certain limitations on their use. The net operating loss carryforwards generated in France begin to expire at December 31, 2003 through December 31, 2007. The US

F-146

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

net operating loss carryforwards begin to expire at December 31, 2021 through December 31, 2022. The majority of the capital loss carryforwards expired at December 31, 2001, with the remaining capital loss carryforward expiring at December 31, 2002 and 2006. The AMT credits have no expiration and can be carried forward indefinitely.

The undistributed earnings of Millennium Chemicals Inc.’s foreign subsidiaries are considered to be indefinitely reinvested. Accordingly, no provision for US federal and state income taxes or foreign withholding taxes has been provided on approximately $155 of such undistributed earnings. Determination of the potential amount of unrecognized deferred US income tax liability and foreign withholding taxes is not practicable because of the complexities associated with its hypothetical calculation.

The Company and certain of its subsidiaries have entered into tax-sharing and indemnification agreements with Hanson or its subsidiaries in which the Company and/or its subsidiaries generally agreed to indemnify Hanson or its subsidiaries for income tax liabilities attributable to periods when certain operations of Hanson were included in the consolidated United States tax returns of the Company’s subsidiaries. The terms of these indemnification agreements do not limit the maximum potential future payments to the indemnified parties. The maximum amount of future indemnification payments is dependent upon the results of future audits by various tax authorities and is not practicable to estimate.

Certain of the income tax returns of the Company’s domestic and foreign subsidiaries are currently under examination by the IRS, Inland Revenue and various foreign and state tax authorities. In many cases, these audits result in the examining tax authority issuing proposed assessments. In the United States, IRS audits for tax years prior to 1989 have been settled. The Company made payment of $151 of tax and interest to the IRS in 2000 to settle certain issues relating to the tax years 1986 through 1988. Additionally, the IRS has concluded its examinations of the Company’s Federal income tax returns for 1989 through 1996 and during 2002, the Company negotiated a settlement with the IRS with respect to the audit issues relating to the Company’s Federal income tax returns for the years 1989 through 1992. The Company has estimated the payment of tax and interest to be made to the IRS in 2003 under this settlement and has included such estimate in Income taxes payable. In connection with the 1993 through 1996 examination, the IRS has issued proposed assessments that challenge certain of the Company’s tax positions. The Company believes that its tax positions comply with applicable tax law and it intends to defend its positions through the IRS appeals process. The Company believes it has adequately provided for any probable outcome related to these matters, and does not anticipate any material earnings impact from their ultimate settlement or resolution. However, if the IRS positions on certain issues are upheld after all the Company’s administrative and legal options are exhausted, a material impact on the Company’s earnings and cash flows could result. The IRS examination for the years subsequent to 1996 will commence in early 2003.

Reserves for the resolution of probable tax assessments that are expected to result in the reduction of tax attributes recognized in deferred tax assets, rather than a cash payment to the taxing authorities, are included as a component of deferred tax liabilities. Other reserves for the resolution of probable tax assessments where cash payment is expected, but not within the next year, are included in Other liabilities.

F-147

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Note 9—Long-Term Debt and Credit Arrangements

	2002			2001
Revolving Loans due 2006 bearing interest at the option of the Company at the higher of the federal funds rate plus .50% and the bank’s prime lending rate plus 1.0%; or at LIBOR or NIBOR plus 2.0%, plus, in each case, a facility fee of .50%, to be paid quarterly	$	10		$	10
Term Loans due 2006 bearing interest at the option of the Company at the higher of the federal funds rate plus .50% and the bank’s prime lending rate plus 2.0%; or at LIBOR or NIBOR plus 3.0%, to be paid quarterly		49			125
7% Senior Notes due 2006		500			500
7.625% Senior Debentures due 2026		249			249
9.25% Senior Notes due 2008		377			275
Debt payable through 2011 at interest rates ranging from 0% to 9.5%		26			24
Other		13			—
Less current maturities of long-term debt		(12	)		(11	)
	$	1,212		$	1,172

In June 2002, the Company received approximately $100 in net proceeds ($102.5 in gross proceeds) from the completion of an offering by Millennium America Inc. (“Millennium America”), a wholly owned indirect subsidiary of the Company, of $100 additional principal amount at maturity of 9.25% Senior Notes due June 15, 2008 (the “9.25% Senior Notes”). The gross proceeds of the offering were used to repay all outstanding borrowings at that time under the Company’s revolving loan portion, which has a maximum availability of $175 (the “Revolving Loans”), of its five-year credit agreement (the “Credit Agreement”) and to repay $65 outstanding under the term loan portion (the “Term Loans”) of the Credit Agreement. During 2001, the Company refinanced $425 of borrowings and paid refinancing expenses of $11 with the combined proceeds of the Credit Agreement, which provided the Revolving Loans and $125 in Term Loans, and the issuance of $275 aggregate principal amount of 9.25% Senior Notes by Millennium America. The Company and Millennium America guarantee the obligations under the Credit Agreement.

The Revolving Loans are available in US dollars, British pounds and euros. The Revolving Loans may be borrowed, repaid and reborrowed from time to time. The Revolving Loans include a $50 letter of credit subfacility and a swingline facility in the amount of $25. As of December 31, 2002, $11 was outstanding under the letter of credit subfacility, and no amount under the swingline facility. The Term Loans may be prepaid in part or in total at the option of the Company at any time, but any such amounts prepaid may not be reborrowed. The interest rates on the Revolving Loans and the Term Loans are floating rates based upon margins over LIBOR, NIBOR, or the Administrative Agent’s prime lending rate, as the case may be. Such margins, as well as the facility fee, are based on the Company’s Leverage Ratio, as defined. The margins set forth in the table above are the margins at the end of the fourth quarter and through the date hereof. The weighted-average interest rate for borrowings under the Company’s Revolving Loans, excluding facility fees, was 3.9%, 5.4% and 6.7% for 2002, 2001 and 2000, respectively. The weighted average interest rate for borrowings under the Term Loans was 4.9% for 2002 and 6.4% for 2001.

The Credit Agreement contains various restrictive covenants and requires that the Company meet certain financial performance criteria. The financial covenants in the Credit Agreement include a Leverage Ratio and an Interest Coverage Ratio. The Leverage Ratio is the ratio of Total Indebtedness to cumulative EBITDA for the prior four fiscal quarters, each as defined. The Interest Coverage Ratio is the ratio of cumulative EBITDA for the prior four fiscal quarters to Net Interest Expense, for the same period, each as defined. To permit the Company to

F-148

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

be in compliance, these covenants were amended in the fourth quarter of 2001 and again in the second quarter of 2002. This second amendment was conditioned upon consummation of the offering of $100 additional principal amount of the 9.25% Senior Notes and retirement of the Credit Agreement debt described above. Under the covenants now in effect, the Company is required to maintain a Leverage Ratio of no more than 7.25 to 1.00 for the fourth quarter of 2002; 5.75 to 1.00 for the first quarter of 2003; 4.75 to 1.00 for the second quarter of 2003; 4.50 to 1.00 for the third and fourth quarters of 2003; and 4.00 to 1.00 for January 1, 2004 and thereafter; and an Interest Coverage Ratio of no less than 1.90 to 1.00 for the fourth quarter of 2002; 2.25 to 1.00 for the first quarter of 2003; 2.50 to 1.00 for the second, third and fourth quarters of 2003; and 3.00 to 1.00 for January 1, 2004 and thereafter. The covenants in the Credit Agreement also limit, among other things, the ability of the Company and/or certain subsidiaries of the Company to: (i) incur debt and issue preferred stock; (ii) create liens; (iii) engage in sale/leaseback transactions; (iv) declare or pay dividends on, or purchase, the Company’s stock; (v) make restricted payments; (vi) engage in transactions with affiliates; (vii) sell assets; (viii) engage in mergers or acquisitions; (ix) engage in domestic accounts receivable securitization transactions; and (x) enter into restrictive agreements. In the event the Company sells certain assets as specified in the Credit Agreement, the Term Loans must be prepaid with a portion of the net cash proceeds of such sale. The obligations under the Credit Agreement are collateralized by: (1) a pledge of 100% of the stock of the Company’s existing and future domestic subsidiaries and 65% of the stock of certain of the Company’s existing and future foreign subsidiaries, in both cases other than subsidiaries that hold immaterial assets (as defined in the Credit Agreement); (2) all the equity interests held by the Company’s subsidiaries in Equistar and the La Porte Methanol Company (which pledges are limited to the right to receive distributions made by Equistar and the La Porte Methanol Company, respectively); and (3) all present and future accounts receivable, intercompany indebtedness and inventory of the Company’s domestic subsidiaries, other than subsidiaries that hold immaterial assets.

The Company was in compliance with all covenants under the Credit Agreement at December 31, 2002. Compliance with these covenants is monitored frequently in order to assess the likelihood of continued compliance. The Company currently expects that it will be in compliance with these covenants at March 31, 2003. However, the Company believes that it will not be in compliance with certain of these financial covenants at June 30, 2003, unless economic and business conditions improve significantly in the second quarter of 2003. Accordingly, the Company is seeking a waiver or amendment to the Credit Agreement, which it expects to obtain by June 30, 2003.

The Company had $21 outstanding ($10 of outstanding borrowings and outstanding letters of credit of $11) under the Revolving Loans and, accordingly, had $154 of unused availability under such facility at December 31, 2002. In addition, the Company had $49 outstanding under the Term Loans at December 31, 2002. In addition to letters of credit outstanding under the Credit Agreement, the Company had outstanding letters of credit under other arrangements of $12 at December 31, 2002. The Company had unused availability under short-term uncommitted lines of credit, other than the Credit Agreement, of $44 at December 31, 2002.

Millennium America also has outstanding $500 aggregate principal amount of 7.00% Senior Notes due November 15, 2006 (the “7.00% Senior Notes”) and $250 aggregate principal amount of 7.625% Senior Debentures due November 15, 2026 (the “7.625% Senior Debentures”) that are fully and unconditionally guaranteed by the Company. The indenture under which the 7.00% Senior Notes and 7.625% Senior Debentures were issued contains certain covenants that limit, among other things: (i) the ability of Millennium America and its Restricted Subsidiaries (as defined) to grant liens or enter into sale/leaseback transactions; (ii) the ability of the Restricted Subsidiaries to incur additional indebtedness; and, (iii) the ability of Millennium America and the Company to merge, consolidate or transfer substantially all of their respective assets. This indenture allows the Company to grant security on loans of up to 15% of Consolidated Net Tangible Assets (“CNTA”), as defined, of

F-149

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Millennium America. Accordingly, based upon CNTA and secured borrowing levels at December 31, 2002, any reduction in CNTA below approximately $1,600 would decrease the Company’s availability under the Revolving Loans by 15% of any such reduction. CNTA was approximately $2,000 at December 31, 2002.

The 9.25% Senior Notes were issued by Millennium America and are guaranteed by the Company. The indenture under which the 9.25% Senior Notes were issued contains certain covenants that limit, among other things, the ability of the Company and/or certain subsidiaries of the Company to: (i) incur additional debt; (ii) issue redeemable stock and preferred stock; (iii) create liens; (iv) redeem debt that is junior in right of payment to the 9.25% Senior Notes; (v) sell or otherwise dispose of assets, including capital stock of subsidiaries; (vi) enter into arrangements that restrict dividends from subsidiaries; (vii) enter into mergers or consolidations; (viii) enter into transactions with affiliates; and, (ix) enter into sale/leaseback transactions. In addition, this indenture contains a covenant that would prohibit the Company from (i) paying dividends or making distributions on its common stock; (ii) repurchasing its common stock; and (iii) making other types of restricted payments, including certain types of investments, if such restricted payments would exceed a “restricted payments basket.” The basket is reduced by the amount of each such restricted payment and is increased by: (i) 50% of the Company’s Cumulative Net Income (as defined in such indenture) since July 1, 2001 (or is reduced by 100% of its Cumulative Net Income if such amount is negative); (ii) the net cash proceeds from the sale by the Company of its common stock to third parties; and (iii) 50% of any cash distributions received from Equistar. As of March 25, 2003, the date of filing of the original Annual Report on Form 10-K, and after taking into consideration the $9 dividend declared in the first quarter of 2003 and the restatements and reclassification reflected in this Form 10-K/A, the amount of the restricted payments basket was $11. The indenture also requires the calculation of a Consolidated Coverage Ratio, defined as the ratio of the aggregate amount of EBITDA, as defined, for the four most recent fiscal quarters to Consolidated Interest Expense, as defined, for the four most recent quarters. If this ratio were to cease to be greater than 2.00 to 1.00 (2.25 to 1.00 after June 15, 2003), there would be certain restrictions on the Company’s ability to incur additional indebtedness and pay dividends, repurchase capital stock or make certain other restricted payments. However, if the 9.25% Senior Notes were to receive investment grade credit ratings from both Standard & Poor’s (“S&P”) and Moody’s Investor Services, Inc. (“Moody’s”) and meet certain other requirements as specified in the indenture, certain of these covenants would no longer apply. At December 31, 2002, the Company was in compliance with all covenants in the indentures governing the 9.25% Senior Notes, 7.00% Senior Notes and 7.625% Senior Debentures.

The Company is currently rated BB+ by S&P and Ba1 by Moody’s. On March 7, 2003, S&P lowered the Company’s credit rating from investment grade rating BBB- to non-investment grade rating BB+ with a negative outlook, reflecting S&P’s concern regarding the Company’s ability to generate the cash flow necessary to substantially improve its financial profile during a period of economic uncertainties and higher raw material costs. Moody’s affirmed the Company’s non-investment grade rating on June 19, 2002, but revised its ratings outlook to negative from stable, reflecting Moody’s concern over the Company’s cash flow performance in the fourth quarter of 2001 and the first quarter of 2002. The Company could be required to cash collateralize the mark-to-market positions of certain derivative instruments dependent upon the market value of these instruments. Based on the current market value of these instruments, the Company would not be required to place any funds on deposit with the counterparty to these transactions. Furthermore, the Company will also provide a $2.5 letter of credit in accordance with a real estate lease. Obtaining this letter of credit will result in an equal reduction of availability under the revolving credit portion of the Credit Agreement.

Millennium America, a wholly owned indirect subsidiary of the Company, had an indemnity agreement with Equistar pursuant to which Millennium America could have been required under certain circumstances to contribute to Equistar up to $750. This indemnity terminated upon the closing of the purchase by Lyondell of Occidental’s interest in Equistar.

F-150

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

The Company had outstanding Notes payable of $4 as of each of December 31, 2002 and 2001, bearing interest at an average rate of approximately 19.1% and 17.3% in 2002 and 2001, respectively, with maturity of 30 days or less. At December 31, 2002, the Company had outstanding standby letters of credit amounting to $23 and had unused availability under short-term uncommitted lines of credit and the Credit Agreement of $198.

The Company uses gold as a component in a catalyst in the Company’s La Porte, Texas facility. In April 1998, the Company entered into an agreement that provides the Company with the right to use gold owned by a third party for a five-year term. The agreement requires the Company to either deliver the gold to the third party at the end of the term or pay for it at its then-current value. As a result of a change in accounting for this agreement, the Company’s financial statements were restated as more fully described in Note 2. The value of the gold and the Company’s obligation under this agreement was $14 and $11 at December 31, 2002 and 2001, respectively. Such obligation at December 31, 2002 and 2001 is included in Other short-term borrowings and Other long-term borrowings, respectively. The change in value of the gold and the Company’s obligation under this agreement, which is included in Selling, development and administrative expense, was a loss of $3 for the year ended December 31, 2002, and was not significant for each of the years ended December 31, 2001 and 2000.

The maturities of Long-term debt during the next five years and thereafter are as follows:

2003	$	12
2004		6
2005		26
2006		534
2007		4
Thereafter		629
Non-cash components of long-term debt		13
	$	1,224

Note 10—Derivative Instruments and Hedging Activities

Effective January 1, 2001, the Company adopted SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended (“SFAS No. 133”), which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. The cumulative effect of adopting SFAS No. 133 as of January 1, 2001 was not material to the Company’s financial statements.

The Company is exposed to market risk, such as changes in currency exchange rates, interest rates and commodity pricing. To manage the volatility relating to these exposures, the Company selectively enters into derivative transactions pursuant to the Company’s policies for hedging practices. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the fair value or cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for speculative or trading purposes.

Foreign Currency Exposure Management: The Company manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. The primary purpose of the Company’s foreign currency hedging activities is to manage the volatility associated with

F-151

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

foreign currency purchases and foreign currency sales. The Company utilizes forward exchange contracts with various terms. As of December 31, 2002 these contracts had expiration dates within the next twelve months. The Company utilizes forward exchange contracts with contract terms normally lasting less than three months to protect against the adverse effect that exchange rate fluctuations may have on foreign currency denominated trade receivables and trade payables. These derivatives have not been designated as hedges for accounting purposes. The gains and losses on both the derivatives and the foreign currency denominated trade receivables and payables are recorded in current earnings. Net amounts included in S,D&A expense, which offset similar amounts from foreign currency denominated trade receivables and payables, also included in S,D&A expense, were a gain of $2 in 2002 and were not significant in 2001.

In addition, the Company utilizes forward exchange contracts that qualify as cash flow hedges. These are intended to offset the effect of exchange rate fluctuations on forecasted sales and inventory purchases. Gains and losses on these instruments are deferred in OCI until the underlying transaction is recognized in earnings. The earnings impact is reported either in Net sales or Cost of products sold to match the underlying transaction being hedged. During 2002 and 2001, net gains of $4 and net losses of $4, respectively, on forward exchange contracts designated as cash flow hedges were reclassified to earnings to match the gain or loss on the underlying transaction being hedged. Hedge ineffectiveness had no significant impact on earnings for 2002 and 2001. No forward exchange contract cash flow hedges were discontinued during 2002 and 2001. The Company estimates that approximately $1 (less than $1 after-tax) of net derivative losses on foreign currency cash flow hedges included in OCI at December 31, 2002 will be reclassified to earnings during the next twelve months.

Commodity Price Risk Management: Raw materials used by the Company are subject to price volatility caused by demand and supply conditions and other unpredictable factors. The Company selectively uses commodity swap arrangements to manage the volatility related to anticipated purchases of natural gas with various terms. As of December 31, 2002, these swaps had expiration dates no later than January 2004. These market instruments are designated as cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in OCI to the extent effective, and reclassified into Cost of products sold in the period during which the hedged transaction affects earnings. The mark-to-market gains or losses on ineffective portions of hedges are recognized in Cost of products sold immediately. During 2002 and 2001, net losses on commodity swaps designated as cash flow hedges of $6 and $5, respectively, were reclassified to Cost of products sold to match the gain on the underlying transaction being hedged. Hedge ineffectiveness had no significant impact on earnings for 2002 and 2001. No commodity swap cash flow hedges were discontinued in 2002 and 2001. The Company estimates that approximately $1 ($1 after-tax) of net losses on commodity swaps included in OCI at December 31, 2002 will be reclassified to earnings during the next twelve months. In addition, the Company uses commodity swap agreements to manage the volatility related to anticipated purchases of certain commodities, a portion of which exposes the Company to natural gas price risk. These derivatives have not been designated as hedges for accounting purposes. Net gains of $1 were included in Cost of products sold in 2002. As of December 31, 2002, these swaps had expiration dates no later than January 2003.

Interest Rate Risk Management: The Company selectively uses derivative instruments to manage its ratio of debt bearing fixed interest rates to debt bearing variable interest rates. At December 31, 2002, the Company had outstanding interest rate swap agreements with a notional amount of $200, which are designated as fair value hedges of underlying fixed-rate obligations. The fair value of these interest rate swap agreements was approximately $4 at December 31, 2002 resulting in an increase to long-term debt carrying value and the recognition of a corresponding swap asset. The gains and losses on both the interest rate swaps and the hedged portion of the underlying debt are recorded in Interest expense. In addition, at December 31, 2002, the Company had outstanding an interest rate swap agreement with a notional amount of $50, which is designated as a cash

F-152

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

flow hedge of outstanding variable rate debt. The fair value of this interest rate swap agreement was not significant at December 31, 2002. Hedge ineffectiveness had no significant impact on earnings for 2002 and 2001. In July 2002, the Company terminated all of the interest rate swap agreements that were in effect at that time. Proceeds received upon termination were approximately $12. Gains deferred on these interest rate swaps of approximately $10 result in an increase to long-term debt carrying value and will be recognized as a reduction in Interest expense ratably over approximately four years, the remaining term of the underlying fixed-rate obligations previously hedged. The amount of these deferred gains recognized as a reduction of Interest expense during the year ended December 31, 2002 was approximately $1.

During the year 2001, the Company had entered into interest-rate swap agreements to convert $200 of its fixed-rate debt into variable-rate debt. These derivatives did not qualify for hedge accounting because the maturity of the swaps was less than the maturity of the hedged debt. Accordingly, changes in the fair value of such agreements was recognized as a reduction or increase in Interest expense. The swap agreements were terminated in 2001 and realized gains of $5 were recorded as a reduction of Interest expense for 2001.

Note 11—Fair Value of Non-Derivative Financial Instruments

The fair value of all short-term financial instruments (i.e., trade receivables, notes payable, etc.) and restricted cash approximates their carrying value, due to their short maturity or ready availability. The fair value of the Company’s other financial instruments is based upon estimates received from independent financial advisors as follows:

	2002				2001
	(Restated— See Note 2)				(Restated— See Note 2)
	Carrying Value		Fair Value		Carrying Value		Fair Value
Amount outstanding under Revolving Loans	$	10	$	10	$	10	$	10
Term Loans		49		49		125		125
7.00% Senior Notes		500		480		500		469
7.625% Senior Debentures		249		208		249		194
9.25% Senior Notes		377		392		275		283
Other short-term and long-term borrowings		14		14		11		11

In addition, the Company has various contractual obligations to purchase raw materials, utilities and services used in the production and distribution of its products, including but not limited to: titanium ores for TiO₂, CST for fragrance chemicals, syngas for methanol, carbon monoxide for acetic acid and ethylene for VAM. Such commitments are generally at market prices, formula prices based primarily on costs of raw materials, or at fixed prices but subject to escalation for inflation. Accordingly, the fair value of such obligations approximates their contractual value.

Note 12—Pension and Other Postretirement Benefits

Domestic Benefit Plans: The Company has non-contributory defined benefit pension plans and other postretirement benefit plans that cover substantially all of its United States employees. The benefits for the pension plans are based primarily on years of credited service and average compensation as defined under the respective plan provisions. The Company’s funding policy is to contribute amounts to the pension plans sufficient to meet the minimum funding requirements set forth in the Employee Retirement Income Security Act of 1974, plus such additional amounts as the Company may determine to be appropriate from time to time. The

F-153

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

pension plans’ assets are held in a master asset trust and are managed by independent portfolio managers. Such assets include the Company’s Common Stock, which account for less than 1% of master trust assets at December 31, 2002 and 2001.

The Company also sponsors defined contribution plans for its salaried and certain union employees. Contributions relating to defined contribution plans are made based upon the respective plan provisions.

Foreign Benefit Arrangements: Certain of the Company’s foreign subsidiaries have defined benefit plans. The assets of these plans are held separately from the Company in independent funds.

The following table provides a reconciliation of the changes in the benefit obligations and the fair value of the plan assets over the two-year period ending December 31, 2002, and a statement of the funded status as of December 31 for both years:

	Pension Benefits						Other Postretirement Benefits
	2002			2001			2002			2001
	(Restated— See Note 2)
Reconciliation of benefit obligation
Projected benefit obligation at beginning of year	$	758		$	760		$	80		$	97
Service cost, including interest		12			12			—			—
Interest in PBO		52			53			6			6
Benefit payments		(78	)		(84	)		(12	)		(12	)
Curtailments		—			1			—			—
Net experience loss (gain)		74			15			15			(7	)
Amendments		11			4			(13	)		(4	)
Translation and other adjustments		22			(3	)		—			—
Projected benefit obligation at end of year	$	851		$	758		$	76		$	80
Reconciliation of fair value of plan assets
Fair value of plan assets at beginning of year	$	778		$	895		$	—		$	—
Return on plan assets		(91	)		(36	)		—			—
Employer contributions		9			8			12			12
Benefit payments		(78	)		(84	)		(12	)		(12	)
Translation and other adjustments		11			(5	)		—			—
Fair value of plan assets at end of year.	$	629		$	778		$	—		$	—
Funded status
Funded status at December 31	$	(222	)	$	20		$	(76	)	$	(80	)
Unrecognized net asset		(3	)		(4	)		—			—
Unrecognized prior service cost		19			8			(23	)		(14	)
Unrecognized loss (gain)		384			146			(17	)		(32	)
Net prepaid (accrued) benefit cost		178			170			(116	)		(126	)
Additional minimum liabilities		(309	)		(11	)		—			—
Intangible asset		16			3			—			—
Net (accrued) prepaid benefit cost	$	(115	)	$	162		$	(116	)	$	(126	)

F-154

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

As of December 31, 2002, the net accrued benefit cost for pension benefits is comprised of the following:

	2002
	(Restated— See Note 2)
Prepaid benefit cost	$	20
Intangible asset		16
Accrued benefit cost		(151	)
Net accrued benefit cost	$	(115	)

The net accrued benefit cost of $115 at December 31, 2002 is included in Other liabilities in the Consolidated Balance Sheet. An equity charge of $188 ($286 pre-tax) was required at December 31, 2002 to record additional minimum liabilities associated with certain of the Company’s defined benefit pension plans and is included in Cumulative other comprehensive loss at December 31, 2002.

At December 31, 2001, Other assets includes an intangible asset of $3 and Cumulative other comprehensive loss includes $4 to record additional minimum liabilities associated with certain of the Company’s defined benefit pension plans.

Pension plans with projected benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

	2002		2001
	(Restated— See Note 2)
Projected benefit obligation	$	838	$	143
Fair value of assets		604		109

Pension plans with accumulated benefit obligations in excess of the fair value of assets are summarized as follows at December 31:

	2002		2001
	(Restated— See Note 2)
Accumulated benefit obligation	$	751	$	45
Fair value of assets		604		29

F-155

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

The following table provides the components of net periodic benefit cost:

	Pension Benefits									Other Postretirement Benefits
	2002			2001			2000			2002			2001			2000
	(Restated— See Note 2)
Net periodic benefit cost
Service cost, including interest	$	12		$	12		$	12		$	—		$	—		$	—
Interest on PBO		52			53			54			6			6			8
Return on plan assets		(75	)		(76	)		(78	)		—			—			—
Amortization of unrecognized net loss		1			—			2			(2	)		(2	)		(2	)
Amortization of prior service cost		1			1			1			(2	)		(1	)		(1	)
Net effect of curtailments and settlements		2			2			—			—			(1	)		—
Net periodic benefit cost		(7	)		(8	)		(9	)		2			2			5
Defined contribution plans		4			4			4			—			—			—
Net periodic benefit cost	$	(3	)	$	(4	)	$	(5	)	$	2		$	2		$	5

The assumptions used in the measurement of the Company’s benefit obligations are shown in the following table:

	Pension Benefits						Other Postretirement Benefits
	2002		2001		2000		2002		2001		2000
Weighted average assumptions as of December 31
Discount rate	6.35	%	7.27	%	7.38	%	6.50	%	7.50	%	7.50	%
Expected return on plan assets	8.34	%	8.87	%	8.86	%	—		—		—
Rate of compensation increase	3.52	%	4.23	%	4.30	%	—		—		—

Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The assumed healthcare cost trend rate used in measuring the healthcare portion of the postretirement benefit obligation at December 31, 2002 was 9.0% for 2003, declining gradually to 5.5% for 2010 and thereafter. A 1% increase or decrease in assumed health care cost trend rates would affect service and interest components of postretirement health care benefit costs by less than $1 in each of the years ended December 31, 2002 and 2001. The effect on the accumulated postretirement benefit obligation would be $4 at each of December 31, 2002 and 2001.

Note 13—Stock-Based Compensation Plans

Omnibus Incentive Compensation Plan: The Company’s 2001 Omnibus Incentive Compensation Plan (the “Omnibus Incentive Plan”) was designed to optimize the profitability and growth of the Company through annual and long-term incentives that are consistent with the Company’s goals and to link the personal interests of the participants to those of the Company’s shareholders and was ratified by the Company’s shareholders in 2001. Since January 1, 2001, awards under the Company’s Long Term Incentive Plan and Executive Long Term Incentive Plan described below have been granted under the Omnibus Incentive Plan.

The Omnibus Incentive Plan provides for the following types of awards: (i) stock options, including incentive stock options and non-qualified stock options; (ii) stock appreciation rights; (iii) restricted shares; (iv)

F-156

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

performance units; (v) performance shares; (vi) stock awards; and (vii) cash-based awards. Awards can be granted to employees and non-employee directors. At December 31, 2002, 1,588,000 of the maximum 3,200,000 shares of Common Stock originally reserved for delivery to participants under the Omnibus Incentive Plan were available to be granted as awards under the plan.

Stock Options Awards Under the Omnibus Incentive Plan: The Compensation Committee of the Board of Directors determines the vesting schedule and expiration date of all options granted under the Omnibus Incentive Plan, except that options expire no later than ten years from the date of grant. Stock options are to be granted at exercise prices no less than the market price of the Company’s Common Stock on the date of grant. All grants under the Omnibus Incentive Plan fully vest in the event of a change-in-control (as defined by the plan) of the Company.

A limited number of executive officers and key employees of the Company were awarded an aggregate of 957,000 and 655,000 non-qualified stock options in January 2002 and May 2001, respectively. The stock option awards vest in three equal annual installments commencing on the first anniversary of the date of grant, and expire ten years from the date of grant. No other stock option awards were granted under the Omnibus Incentive Plan as of December 31, 2002 and 2001, respectively. No compensation expense was recognized for such equity-related awards under this plan in 2002 or 2001.

Long Term Incentive Plan: The Company has a Long Term Incentive Plan for certain management employees. Commencing in 2001, these awards have been granted under the Omnibus Incentive Plan by reference to the Long Term Incentive Plan. The plan provides for awards of Common Stock to be granted if annual Economic Value Added (“EVA^®”) targets are achieved, which can then vest at the end of the three-year vesting period. Unvested shares will be forfeited. A trust has been established to hold shares of Common Stock to fund this obligation. At December 31, 2002, 46,947 shares have been purchased at a total cost of $1 and are held in this trust. Compensation expense was $1 in 2002 and was not significant in 2001 and 2000.

Executive Long Term Incentive Plan: In 2000, the Company established an Executive Long Term Incentive Plan for its senior executives. Commencing in 2001, these awards have been granted under the Omnibus Incentive Plan by reference to the Executive Long Term Incentive Plan. One half of the award granted to each executive provides for Common Stock to be granted if annual EVA^® targets are achieved, which can then vest at the end of the three-year vesting period. Unvested shares will be forfeited. A trust has been established to hold shares of Common Stock to fund this obligation. At December 31, 2002, 220,722 shares have been purchased at a total cost of $4 and are held in this trust. The remaining half of the award is based on the total shareholder return on the Common Stock compared to total shareholder return on the common stock of the Company’s peer group (companies in the Standard & Poor’s Chemical Composite Index) over a three-year period, in each case including reinvested dividends. This award will be paid in cash. Compensation expense was $1 in 2002 and was $3 in each of 2001 and 2000.

Stock Incentive Plan: The Company’s Stock Incentive Plan was designed to enhance the profitability and value of the Company for the benefit of its shareholders and was ratified by the Company’s shareholders in 1997.

The Stock Incentive Plan provides for the following types of awards to employees: (i) stock options, including incentive stock options and non-qualified stock options; (ii) stock appreciation rights; (iii) restricted shares; (iv) performance units; and, (v) performance shares. At December 31, 2002, 1,398,872 of the maximum 3,909,000 shares of Common Stock originally reserved for delivery to participants under the Stock Incentive Plan were available to be granted as awards under the plan.

F-157

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Restricted Share Awards Under the Stock Incentive Plan: The vesting schedule for granted restricted share awards was as follows: (i) three equal tranches aggregating 25% of the total award vesting in each of October 1999, 2000 and 2001; and, (ii) three equal tranches aggregating 75% of the total award subject to the achievement of “value creation” performance criteria established by the Compensation Committee for each of the three performance cycles commencing January 1, 1997 and ending December 31, 1999, 2000 and 2001, respectively. Half of the earned portion of a tranche relating to a particular performance-based cycle of the award vested immediately and the remainder vests in five equal annual installments commencing on the first anniversary of the end of the cycle.

Unearned and/or unvested restricted shares, based on the market value of the shares at each balance sheet date, are included as a separate component of Shareholders’ (deficit) equity and amortized over the restricted period. Income recognized in 2002 was not significant. Income of $2 and $6 was recognized for the years ended December 31, 2001 and 2000, respectively.

Stock Option Awards Under the Stock Incentive Plan: Stock options granted under the Stock Incentive Plan vest three years from the date of grant and expire ten years from the date of grant. All stock options have been granted at exercise prices equal to the market price of the Company’s Common Stock on the date of grant. All grants under the Stock Incentive Plan fully vest in the event of a change-in-control (as defined by the plan) of the Company.

A summary of changes in all of the awards of restricted stock and stock options under the Omnibus Incentive Plan and the Stock Incentive Plan, which are the only plans under which such awards can be made, is as follows:

	Restricted Shares		Weighted- Average Grant Price		Stock Options		Weighted- Average Exercise Price
Balance at December 31, 1999	2,212,224		$	23.71	538,000		$	21.75
Vested and issued	(460,914	)	$	23.70	(5,000	)	$	19.00
Cancelled	(172,495	)	$	23.75	(40,000	)	$	21.24
Granted	—			—	117,000		$	19.07
Balance at December 31, 2000	1,578,815		$	23.73	610,000		$	21.31
Vested and issued	(298,065	)	$	23.81	—			—
Cancelled	(641,427	)	$	23.39	(57,000	)	$	21.33
Granted	—			—	748,000		$	16.83
Balance at December 31, 2001	639,323		$	23.69	1,301,000		$	18.73
Vested and issued	(63,447	)	$	24.22	—			—
Cancelled	(509,502	)	$	23.94	(103,000	)	$	20.67
Granted	—			—	999,000		$	12.33
Balance at December 31, 2002	66,374		$	21.19	2,197,000		$	15.73

F-158

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

A summary of the Company’s stock options as of December 31, 2002 is as follows:

	Options Outstanding				Options Exercisable
Range of exercise price	Shares	Weighted average remaining life (yrs)	Weighted average exercise price		Shares	Weighted average exercise price
$12.24–$16.00	1,044,000	9.0	$	12.48	—		—
$16.01–$20.00	981,000	7.6	$	17.49	252,000	$	19.35
$20.01–$24.00	110,000	6.1	$	22.27	54,000	$	23.33
$24.01–$28.00	32,000	6.4	$	27.38	32,000	$	27.38
$28.01–$34.88	30,000	5.4	$	34.88	30,000	$	34.88
$12.24–$34.88	2,197,000	8.2	$	15.73	368,000	$	21.90

The weighted average fair value of stock options at grant date was $4.04 per share, $3.16 per share and $9.00 per share for 2002, 2001 and 2000, respectively, using a Black-Scholes model with the following assumptions: expected dividend yield of 5%, 4% and 2% for 2002, 2001 and 2000, respectively; risk-free interest rate of 5% in 2002, 5% in 2001 and 6% in 2000; an expected life of 10 years; and, an expected volatility of 62%, 39% and 60% for 2002, 2001 and 2000, respectively.

Salary and Bonus Deferral Plan: The Company has a deferred compensation plan under which officers and certain management employees have deferred a portion of their compensation on a pre-tax basis in the form of Common Stock. A rabbi trust (the “Trust”) has been established to hold shares of Common Stock purchased in open market transactions to fund this obligation. Shares purchased by the Trust are reflected as Treasury stock, at cost, and, along with the related obligation for this plan, are included in Shareholders’ (deficit) equity. At December 31, 2002, 440,566 shares have been purchased at a total cost of $9 and are held in the Trust.

Note 14—Cumulative Other Comprehensive Loss

Cumulative other comprehensive loss consists of changes in foreign currency translation adjustments, net unrealized losses on certain derivative instruments, the minimum pension liability, and the Company’s share of Equistar’s Cumulative other comprehensive loss. The following table sets forth the components of Cumulative other comprehensive loss:

	Foreign Currency Translation Adjustments			Unrealized Losses on Derivative Instruments			Minimum Pension Liability			Equity in Other Comprehensive Loss of Equistar			Cumulative Other Comprehensive Loss
							(Restated— See Note 2)			(Restated— See Note 2)			(Restated— See Note 2)
Balance, December 31, 1999	$	(61	)	$	—		$	—		$	—		$	(61	)
2000 Change		(46	)		—			—			—			(46	)
Balance, December 31, 2000		(107	)		—			—			—			(107	)
2001 Change		(19	)		(6	)		(4	)		—			(29	)
Balance, December 31, 2001		(126	)		(6	)		(4	)		—			(136	)
2002 Change		27			5			(188	)		(7	)		(163	)
Balance, December 31, 2002	$	(99	)	$	(1	)	$	(192	)	$	(7	)	$	(299	)

F-159

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Note 15—Related Party Transactions

One of the Company’s subsidiaries purchases ethylene from Equistar at market-related prices pursuant to an agreement made in connection with the formation of Equistar. Under the agreement, the subsidiary is required to purchase 100% of its ethylene requirements for its La Porte, Texas facility up to a maximum of 330 million pounds per year. The initial term of the contract was through December 1, 2000 and automatically renews annually. Either party may terminate on one year’s notice, and neither party has provided such notice. The subsidiary incurred charges of $43, $53 and $90 in 2002, 2001 and 2000, respectively, under this contract.

One of the Company’s subsidiaries sells VAM to Equistar at formula-based prices pursuant to an agreement entered into in connection with the formation of Equistar. Under this agreement, Equistar is required to purchase 100% of its VAM feedstock requirements for its La Porte, Texas, and Clinton and Morris, Illinois, plants, estimated to be 48 to 55 million pounds per year, up to a maximum of 60 million pounds per year (the “Annual Maximum”) for the production of ethylene vinyl acetate products at those locations. If Equistar fails to purchase at least 42 million pounds of VAM in any calendar year, the Annual Maximum quantity may be reduced by as much as the total purchase deficiency for one or more successive years. In order to reduce the Annual Maximum quantity, Equistar must be notified within at least 30 days prior to restricting the VAM purchases provided that the notice is not later than 45 days after the year of the purchase deficiency. The initial term of the contract was through December 31, 2000 and renews annually. Either party may terminate on one year’s notice, and neither party has provided such notice. During the years ended December 31, 2002, 2001 and 2000, sales to Equistar were $10, $14 and $16, respectively.

One of the Company’s subsidiaries and Equistar have entered into various operating, manufacturing and technical service agreements. These agreements provide the subsidiary with certain utilities, steam, administrative office space, and health, safety and environmental services. The subsidiary incurred charges of $9, $17 and $23 in 2002, 2001 and 2000, respectively, for such services. In addition, the subsidiary charged Equistar $15, $18 and $13 in 2002, 2001 and 2000, respectively, for electricity and miscellaneous shared services.

Note 16—Commitments and Contingencies

Legal and Environmental: The Company and various Company subsidiaries are defendants in a number of pending legal proceedings relating to present and former operations. These include several proceedings alleging injurious exposure of plaintiffs to various chemicals and other materials on the premises of, or manufactured by, the Company’s current and former subsidiaries. Typically, such proceedings involve claims made by many plaintiffs against many defendants in the chemical industry. Millennium Petrochemicals is one of a number of defendants in 80 active premises-based asbestos cases (i.e., where the alleged exposure to asbestos-containing materials was to employees of third-party contractors or subcontractors on the premises of certain facilities, and did not relate to any products manufactured or sold by the Company or any of its predecessors). Millennium Petrochemicals is also one of a number of defendants in one inactive premises-based asbestos case where the court placed the claim on a formal registry for dormant claims, and for which no defense costs are being incurred. Millennium Petrochemicals is responsible for these premises-based cases as a result of its indemnification obligations under the Company’s agreements with Equistar; however, Equistar will be required to indemnify Millennium Petrochemicals for any such claims filed on or after December 1, 2004 related to the assets or businesses contributed by Millennium Petrochemicals to Equistar. Various other Company subsidiaries and alleged former subsidiaries are among a number of defendants in 50 active premises-based asbestos cases. The Company believes that it has valid defenses to these proceedings and is defending them vigorously. However, litigation is subject to uncertainties and the Company is unable to guarantee the outcome of these proceedings. In addition, the Company may be subject to potential unknown liabilities associated with its present

F-160

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

and former operations, including environmental liabilities, arising from the operations of its predecessors and prior owners or operators of its sites or operations for which it may be responsible.

Together with other alleged past manufacturers of lead-based paint and lead pigments for use in paint, the Company, a current subsidiary, as well as alleged predecessor companies, have been named as defendants in various legal proceedings alleging that they and other manufacturers are responsible for personal injury, property damage, and remediation costs allegedly associated with the use of these products. The plaintiffs in these legal proceedings include municipalities, counties, school districts, individuals and the State of Rhode Island, and seek recovery under a variety of theories, including negligence, failure to warn, breach of warranty, conspiracy, market share liability, fraud, misrepresentation and public nuisance. Legal proceedings relating to lead pigment or paint are in various procedural stages or pre-trial, post-trial and post-dismissal settings.

There are eight pending legal proceedings relating to lead pigment or paint in various pre-trial stages. One proceeding relating to lead pigment or paint was tried in 2002. On October 29, 2002, after a trial in which the jury deadlocked, the court in the State of Rhode Island v. Lead Industry Association, Inc., et al commenced in the Superior Court of Providence, Rhode Island, on October 13, 1999, declared a mistrial. The sole issue before the jury in this phase of the proceeding was whether lead pigment in paint in and on public and private Rhode Island buildings constitutes a “public nuisance.” On March 30, 2003, the court denied the motions for the judgment as a matter of law filed by both sides during and after the trial. The State of Rhode Island may seek a new trial.

There are four pending legal proceedings relating to lead pigment or paint that were dismissed after summary judgment was granted by the court in favor of the defendants, but are now pending appeal. There are four legal proceedings relating to lead pigment or paint which have been voluntarily dismissed by the plaintiffs. There is also one legal proceeding relating to lead pigment or paint that was dismissed after summary judgment was granted by the court in favor of the defendants, but which has not been appealed. There are four legal proceedings relating to lead pigment or paint that were abated under the laws of the State of Texas pending the resolution of an appeal in another legal proceeding involving lead pigment or paint where summary judgment was granted by the court in favor of one defendant. During the abatement period, expected to last one to two years, no defense costs will be incurred for the abated legal proceedings. Finally, there are nine legal proceedings relating to lead pigment or paint that have been filed with a court, are pending, but have yet to be formally served on the Company, any of its subsidiaries, or alleged predecessor companies.

The Company’s defense costs to date for lead-based paint and lead pigment litigation largely have been covered by insurance. The Company has not accrued any liabilities for any lead-based paint and lead pigment litigation. The Company has insurance policies that potentially provide approximately $1 billion in indemnity coverage for lead-based paint and lead pigment litigation. As a result of insurance coverage litigation initiated by the Company, an Ohio trial court issued a decision in 2002 effectively requiring certain insurance carriers to resume paying defense costs in the lead-based paint and lead pigment cases. Indemnity coverage was not at issue in the Ohio court’s decision. The insurance carriers may appeal the Ohio decision regarding defense costs, and they have in the past and may in the future attempt to deny indemnity coverage if there is ever a settlement or an adverse judgment in any lead-based paint or lead pigment case.

In 1986, a predecessor of a company that is now a subsidiary of the Company sold its recently acquired Glidden Paints business. As part of that sale, the seller agreed to indemnify the purchaser against certain claims made during the first eight years after the sale; the purchaser agreed to indemnify the seller against such claims made after the eight-year period. With the exception of the two cases discussed below, all pending lead-based paint and lead pigment litigation involving the Company and its subsidiaries, including the Rhode Island case,

F-161

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

was filed after the eight-year period. Accordingly, the Company believes that it is entitled to full indemnification from the purchaser against lead-based paint and lead pigment cases filed after the eight-year period. The purchaser disputes that it has such an indemnification obligation, and claims that the seller must indemnify it. Since the Company’s defense costs to date largely have been covered by insurance and there never has been a settlement paid by, nor any judgment rendered against, the Company (or any other company sued in any lead-based paint or lead pigment litigation), the parties’ indemnification claims have not been ruled on by a court.

A current subsidiary and an alleged predecessor company are parties to the only two remaining cases originally filed within the eight-year period following the 1986 sale of the Glidden Paints business referred to above. In the first of these cases, The City of New York et al. v. Lead Industries Association, Inc., et al., commenced in the Supreme Court of the State of New York on June 8, 1989, the New York City Housing Authority brought an action relating to tens of thousands of public housing units. All claims in that case have been dropped except for those relating to two housing projects. The other remaining case, Jackson, et al. v. The Glidden Co., et al., commenced in the Court of Common Pleas, Cuyahoga County, Ohio, on August 12, 1992, includes five minors as plaintiffs. Dispositive motions were filed in that case in late 2002 and have yet to be ruled on by the court.

The Company believes that it has valid defenses to all pending lead-based paint and lead pigment proceedings and is vigorously defending them. However, litigation is inherently subject to many uncertainties. There can be no assurance that additional lead-based paint and lead pigment litigation will not be filed against the Company or its subsidiaries in the future asserting similar or different legal theories and seeking similar or different types of damages and relief. While an outcome such as that reached in the Rhode Island proceeding may have a positive effect on the lead-based paint and lead pigment litigation against the Company, its subsidiaries and other defendants by reducing the number and nature of future claims and proceedings, other adverse court rulings or determinations of liability, among other factors, could encourage an increase in the number of future claims and proceedings. In addition, from time to time, legislation and administrative regulations have been enacted or proposed to impose obligations on present and former manufacturers of lead-based paint and lead pigment respecting asserted health concerns associated with such products or to overturn successful court decisions. Due to the uncertainties involved, the Company is unable to predict the outcome of lead-based paint and lead pigment litigation, the number or nature of possible future claims and proceedings, or the effect that any legislation and/or administrative regulations may have on the Company or its subsidiaries. In addition, management cannot reasonably estimate the scope or amount of the costs and potential liabilities related to such litigation, or any such legislation and regulations. Accordingly, the Company has not accrued any liabilities for such litigation. However, based upon, among other things, the outcome of such litigation to date, including the dismissal of most of the over 50 lawsuits brought in recent years, management does not currently believe that the costs or potential liabilities ultimately determined to be attributable to the Company arising out of such litigation will have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

The Company’s businesses are subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances concerning, among other things, emissions to the air, discharges and releases to land and water, the generation, handling, storage, transportation, treatment and disposal of wastes and other materials and the remediation of environmental pollution caused by releases of wastes and other materials (collectively, “Environmental Laws”). The operation of any chemical manufacturing plant and the distribution of chemical products entail risks under Environmental Laws, many of which provide for substantial fines and criminal sanctions for violations. There can be no assurance that significant costs or liabilities will not be incurred with respect to the Company’s operations and activities. In particular, the production of TiO₂, TiCl₄, VAM, acetic

F-162

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

acid, methanol and certain other chemicals involves the handling, manufacture or use of substances or compounds that may be considered to be toxic or hazardous within the meaning of certain Environmental Laws, and certain operations have the potential to cause environmental or other damage. Significant expenditures including facility-related expenditures could be required in connection with any investigation and remediation of threatened or actual pollution, triggers under existing Environmental Laws tied to production or new requirements under Environmental Laws.

The Company cannot predict whether future developments or changes in laws and regulations concerning environmental protection will affect its earnings or cash flow in a materially adverse manner or whether its operating units, Equistar or La Porte Methanol Company will be successful in meeting future demands of regulatory agencies in a manner that will not materially adversely affect the consolidated financial position, results of operations or cash flows of the Company. For example, the Texas Commission on Environmental Quality (the “TCEQ”) submitted a plan to the United States Environmental Protection Agency (“EPA”) requiring the eight-county Houston/Galveston, Texas area to come into compliance with the National Ambient Air Quality Standard for ozone by 2007. These requirements, if implemented, would mandate significant reductions of nitrogen oxide (“NOx”) emissions requiring increased capital investment by Equistar of between $200 and $260 before the 2007 regulatory deadline, as well as create higher annual operating costs. This result could potentially affect cash distributions from Equistar to the Company. In January 2001, Equistar, individually and as part of an industry coalition, filed a lawsuit in State District Court in Travis County, Texas seeking adoption of an alternative plan for air quality improvement. In response to the lawsuit, the TCEQ conducted an accelerated scientific review during 2001 and 2002. In December 2002, the TCEQ adopted revised rules, which changed the required NOx emission reduction levels from 90% to 80% while requiring new controls on emissions of highly reactive volatile organic compounds (“HRVOCs”), such as ethylene, propylene, butadiene and butanes. These new rules still require approval by the EPA. Based on the 80% NOx reduction requirement, Equistar estimates that its aggregate related capital expenditures could total between $165 and $200 before the 2007 deadline, and could result in higher annual operating costs. Equistar is still assessing the impact of the new HRVOC control requirements. Additionally, the TCEQ plans to make a final review of these rules, with final rule revisions to be adopted by May 2004. The timing and amount of these expenditures are subject to regulatory and other uncertainties, as well as obtaining the necessary permits and approvals. At this time, there can be no guarantee as to the ultimate capital cost of implementing any final plan developed to ensure ozone attainment by the 2007 deadline.

From time to time, various agencies may serve cease and desist orders or notices of violation on an operating unit or deny its applications for certain licenses or permits, in each case alleging that the practices of the operating unit are not consistent with regulations or ordinances. In some cases, the relevant operating unit may seek to meet with the agency to determine mutually acceptable methods of modifying or eliminating the practice in question. The Company believes that its operating units generally operate in compliance with applicable regulations and ordinances in a manner that should not have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

Certain Company subsidiaries have been named as defendants, potentially responsible parties (the “PRPs”), or both, in a number of environmental proceedings associated with waste disposal sites or facilities currently or previously owned, operated or used by the Company’s current or former subsidiaries or their predecessors, some of which are on the Superfund National Priorities List of the EPA or similar state lists. These proceedings seek cleanup costs, damages for personal injury or property damage, or both. Based upon third-party technical reports, the projections of outside consultants or outside counsel, or both, the Company has estimated its individual exposure at these sites to be between $0.025 and $26.7. In the most significant of these proceedings, a subsidiary

F-163

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

is named as one of four PRPs at the Kalamazoo River Superfund Site in Michigan. The site involves contamination of river sediments and floodplain soils with polychlorinated biphenyls. Originally commenced on December 2, 1987 in the United States District Court for the Western District of Michigan as Kelly v. Allied Paper, Inc. et al., the matter was stayed and is being addressed under the Comprehensive Environmental Response, Compensation and Liability Act. In October 2000, the Kalamazoo River Study Group (the “KRSG”), of which one of the Company’s subsidiaries is a member, submitted to the State of Michigan a Draft Remedial Investigation and Draft Feasibility Study (the “Draft Study”), which evaluated a number of remedial options and recommended a remedy involving the stabilization of several miles of river bank and the long-term monitoring of river sediments at a total collective cost of approximately $73. During 2001, additional sampling activities were performed in discrete parts of the river. At the end of 2001, the EPA took responsibility for the site at the request of the State. While the State has submitted comments to the EPA on the Draft Study, the EPA has yet to similarly comment. The Company has estimated its liability at this site based upon the KRSG’s recommended remedy. Guidance as to how the EPA will likely proceed with further evaluation and remediation, if required, at the Kalamazoo site is expected by early 2004. At that time, the Company’s estimate of its liability will be reevaluated. The Company’s ultimate liability for the Kalamazoo site will depend on many factors that have not yet been determined, including the ultimate remedy selected by the EPA, the number and financial viability of the other members of the KRSG as well as of other PRPs outside the KRSG, and the determination of the final allocation among the members of the KRSG and other PRPs.

The Company believes that the reasonably probable and estimable range of potential liability for environmental and other legal contingencies, collectively, but which primarily relates to environmental remediation activities, is between $67 and $95 and has accrued $71 as of December 31, 2002. Expense associated with these contingencies included in Selling, development and administrative expense totaled $15 and $6 in 2001 and 2000, respectively. These expenses resulted from increases in reserves for the estimated costs to resolve legal and environmental claims related to predecessor businesses. Included in 2002 is a benefit of $6 from a reduction of reserves due to favorable resolution of certain environmental claims related to predecessor businesses reserved for in prior years. The Company expects that cash expenditures related to these potential liabilities will be made over a number of years, and will not be concentrated in any single year. This accrual also reflects the fact that certain Company subsidiaries have contractual obligations to indemnify other parties against certain environmental and other liabilities. For example, the Company agreed as part of its Demerger to indemnify Hanson and certain of its subsidiaries against certain of such contractual indemnification obligations, and Millennium Petrochemicals agreed as part of the December 1, 1997 formation of Equistar to indemnify Equistar for certain liabilities related to the assets contributed by Millennium Petrochemicals to Equistar in excess of $7, which threshold was exceeded in 2001. The terms of these indemnification agreements do not limit the maximum potential future payments to the indemnified parties. The maximum amount of future indemnification payments is dependent upon many factors and is not practicable to estimate.

No assurance can be given that actual costs for environmental matters will not exceed accrued amounts or that estimates made with respect to indemnification obligations will be accurate. In addition, it is possible that costs will be incurred with respect to contamination, indemnification obligations or other environmental matters that currently are unknown or as to which it is currently not possible to make an estimate.

On January 16, 2002, Slidell Inc. (“Slidell”) filed a lawsuit against Millennium Inorganic Chemicals Inc., a wholly owned operating subsidiary of the Company, alleging breach of contract and other related causes of action arising out of a contract between the two parties for the supply of packaging equipment. In the suit, Slidell seeks unspecified monetary damages. The Company believes it has substantial defenses to these allegations and has filed a counterclaim against Slidell.

F-164

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

The Company believes that it has valid defenses to the legal proceedings described above and intends to defend these legal proceedings vigorously. However, litigation is subject to many uncertainties and the Company cannot guarantee the outcome of these proceedings. Based upon information currently available, the Company does not believe that the outcome of these proceedings will, either individually or in the aggregate, have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

Purchase Commitments: The Company has various agreements for the purchase of ore used in the production of TiO₂ and certain other agreements to purchase raw materials, utilities and services with various terms extending through 2020. The fixed and determinable portion of obligations under purchase commitments at December 31, 2002 (at current exchange rates, where applicable) is as follows:

	Ore		Other		Total
2003	$	195	$	132	$	327
2004		143		95		238
2005		167		81		248
2006		42		80		122
2007		—		78		78
Thereafter		—		654		654
Total	$	547	$	1,120	$	1,667

One of the Company’s subsidiaries has entered into an agreement with DuPont to toll acetic acid through DuPont’s VAM plant, thereby acquiring all of the VAM production at such plant not utilized by DuPont. The tolling fee is based on the market price of ethylene, plus a processing charge. The term of the contract is from January 1, 2001 through December 31, 2006, and thereafter from year-to-year. The total commitment over the remaining term of the contract is expected to be $247.

Future Minimum Rental Commitments: Future minimum rental commitments under non-cancelable operating leases, as of December 31, 2002, are as follows:

2003	$	21
2004		17
2005		14
2006		11
2007		10
Thereafter		88
	$	161

Other Contingencies: The Company is organized under the laws of Delaware and is subject to United States federal income taxation of corporations. However, in order to obtain clearance from the United Kingdom Inland Revenue as to the tax-free treatment of the Demerger stock dividend for United Kingdom tax purposes for Hanson and Hanson’s shareholders, Hanson agreed with the United Kingdom Inland Revenue that the Company would continue to be centrally managed and controlled in the United Kingdom at least until September 30, 2001. The Company agreed with Hanson not to take, or fail to take, during such five-year period, any action that would result in a breach of, or constitute non-compliance with, any of the representations and undertakings made by Hanson in its agreement with the United Kingdom Inland Revenue. The Company also agreed to indemnify Hanson against any liability and penalties arising out of a breach of such agreement.

F-165

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Effective February 4, 2002, the Company ceased being centrally managed and controlled in the United Kingdom. The Company believes that it has satisfied all obligations that it be managed and controlled in the United Kingdom for the requisite five-year period.

See Note 8 for additional information regarding income tax contingencies.

Note 17—Operations by Business Segment and Geographic Area

The Company’s principal operations are managed and grouped as three separate business segments: Titanium Dioxide and Related Products, Acetyls and Specialty Chemicals. Operating income and expense not identified with the three separate business segments, including certain of the Company’s S,D&A costs not allocated to its three business segments, employee-related costs from predecessor businesses and certain other expenses, are reflected as Other. The accounting policies of the segments are the same as those described in Note 1.

Most of the Company’s foreign operations are conducted by subsidiaries in the United Kingdom, France, Brazil and Australia. Sales between the Company’s operations are made on terms similar to those of its third-party distributors.

Income and expense not allocated to business segments in computing operating income include interest income and expense, other income and expense and (loss) earnings on Equistar investment.

Export sales from the United States for the years ended December 31, 2002, 2001 and 2000 were approximately $254, $245 and $201, respectively.

F-166

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

The following is a summary of the Company’s operations by business segment:

	2002		2001			2000
	(Restated— See Note 2)		(Restated— See Note 2)			(Restated— See Note 2)
Net sales
Titanium Dioxide and Related Products	$	1,129	$	1,145		$	1,355
Acetyls		334		355			337
Specialty Chemicals		91		90			101
Total	$	1,554	$	1,590		$	1,793
Operating income (loss)
Titanium Dioxide and Related Products	$	63	$	42		$	148
Acetyls		11		(21	)		47
Specialty Chemicals		6		11			20
Other		—		(18	)		(14	)
Total	$	80	$	14		$	201
Depreciation and amortization
Titanium Dioxide and Related Products	$	83	$	81		$	85
Acetyls		11		21			20
Specialty Chemicals		8		8			8
Total	$	102	$	110		$	113
Capital expenditures
Titanium Dioxide and Related Products	$	61	$	82		$	96
Acetyls		1		6			7
Specialty Chemicals		9		3			7
Other		—		6			—
Total	$	71	$	97		$	110
Identifiable assets
Titanium Dioxide and Related Products	$	1,389	$	1,385
Acetyls		294		568
Specialty Chemicals		99		96
Other (1)		614		916
Total	$	2,396	$	2,965

(1) Other assets consist primarily of cash and cash equivalents, the Company’s interest in Equistar and other assets.

	December 31,
	2002		2001
Goodwill
Titanium Dioxide and Related Products	$	58	$	58
Acetyls		48		323
Total	$	106	$	381

F-167

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

The following is a summary of the Company’s operations by geographic region:

	2002			2001			2000
	(Restated— See Note 2)			(Restated— See Note 2)			(Restated— See Note 2)
Net sales
United States	$	923		$	983		$	1,077
Non-United States
United Kingdom		404			364			428
France		183			179			205
Asia/Pacific		178			160			183
Brazil		103			113			148
		868			816			964
Inter-area elimination		(237	)		(209	)		(248	)
Total	$	1,554		$	1,590		$	1,793
Operating income (loss)
United States	$	6		$	(50	)	$	128
Non-United States
United Kingdom		5			(7	)		10
France		(11	)		(8	)		15
Asia/Pacific		54			51			55
Brazil		23			30			21
		71			66			101
Inter-area elimination		3			(2	)		(28	)
Total	$	80		$	14		$	201
Identifiable assets
United States	$	1,536		$	2,129
Non-United States
United Kingdom		346			363
France		250			216
Asia/Pacific		137			114
Brazil		116			134
All Other		11			9
		860			836
Total	$	2,396		$	2,965

F-168

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

Note 18—Quarterly Financial Data (Unaudited)

	1st Qtr.			2nd Qtr.			3rd Qtr.			4th Qtr.
	(Restated— See Note 2)			(Restated— See Note 2)			(Restated— See Note 2)			(Restated— See Note 2)
2002
Net sales	$	351		$	405		$	411		$	387
Operating income		7			20	(1)		30			23	(2)
Net (loss) income before cumulative effect of accounting change		(33	)		2	(1)		5			(2	)(3)
Cumulative effect of accounting change		(305	)		—			—			—
Net (loss) income after cumulative effect of accounting change		(338	)		2	(1)		5			(2	)(3)
Basic (loss) earnings per share before cumulative effect of accounting change		(0.52	)		0.02	(1)		0.08			(0.03	)(3)
Cumulative effect of accounting change		(4.80	)		—			—			—
Basic (loss) earnings per share after cumulative effect of accounting change		(5.32	)		0.02	(1)		0.08			(0.03	)(3)
Diluted (loss) earnings per share before cumulative effect of accounting change		(0.52	)		0.02	(1)		0.08			(0.03	)(3)
Cumulative effect of accounting change		(4.80	)		—			—			—
Diluted (loss) earnings per share after cumulative effect of accounting change		(5.32	)		0.02	(1)		0.08			(0.03	)(3)
2001
Net sales	$	444		$	419		$	393		$	334
Operating income (loss)		20	(4)		(9	)(6)		11	(7)		(8	)(8)
Net (loss) income		(17	)(5)		(26	)(6)		(16	)(7)		5	(9)
Basic (loss) earnings per share		(0.27	)(5)		(0.41	)(6)		(0.25	)(7)		0.08	(9)
Diluted (loss) earnings per share		(0.27	)(5)		(0.41	)(6)		(0.25	)(7)		0.08	(9)

(1) Includes a benefit of $5 ($3 after-tax or $0.05 per share) from a reduction of reserves due to favorable resolution of environmental claims related to predecessor businesses reserved for in prior years.

(2) Includes a benefit of $1 from a reduction of reserves due to favorable resolution of environmental claims related to predecessor businesses reserved for in prior years.

(3) Includes a benefit of $1 after-tax or $0.01 per share from a reduction of reserves due to favorable resolution of environmental claims related to predecessor businesses reserved for in prior years, a tax benefit of $22 or $0.35 per share, primarily related to a federal tax refund claim, and a tax charge of $10 or $0.16 per share to establish a valuation allowance against deferred tax assets for the Company’s French subsidiaries.

(4) Includes $5 in reorganization and plant closure charges and a charge of $4 to increase reserves for the estimated costs to resolve legal and environmental claims related to predecessor businesses.

(5) Includes $4 after-tax or $0.07 per share in reorganization and plant closure charges, an additional $4 or $0.07 per share representing the Company’s after-tax share of costs related to the shutdown of Equistar’s Port Arthur, Texas plant and $3 after-tax or $0.05 per share to increase reserves for the estimated costs to resolve legal and environmental claims related to predecessor businesses.

F-169

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

(6) Includes $31 ($20 after-tax or $0.31 per share) in reorganization and plant closure charges and a charge of $3 ($2 after-tax or $0.03 per share) to increase reserves for the estimated costs to resolve legal and environmental claims related to predecessor businesses.

(7) Includes a charge of $4 ($3 after-tax or $0.05 per share) to increase reserves for the estimated costs to resolve legal and environmental claims related to predecessor businesses.

(8) Includes a charge of $4 to increase reserves for the estimated costs to resolve legal and environmental claims related to predecessor businesses.

(9) Includes a tax benefit of $42 or $0.66 per share from a reduction in the Company’s income tax accruals due to favorable developments related to matters reserved for in prior years and a $2 charge after-tax or $0.03 per share to increase reserves for the estimated costs to resolve legal and environmental claims related to predecessor businesses.

Note 19—Supplemental Financial Information

Millennium America, a wholly owned indirect subsidiary of the Company, is a holding company for all of the Company’s operating subsidiaries other than its operations in the United Kingdom, France, Brazil and Australia. Millennium America is the issuer of the 7% Senior Notes, the 7.625% Senior Debentures, and the 9.25% Senior Notes, and is the principal borrower under the Credit Agreement. Millennium America guarantees all obligations under the Credit Agreement. The 7% Senior Notes, the 7.625% Senior Debentures and the 9.25% Senior Notes, as well as outstanding amounts under the Credit Agreement, are guaranteed by the Company. Accordingly, the following Condensed Consolidating Balance Sheets at December 31, 2002 and 2001, and the Condensed Consolidating Statements of Operations and Cash Flows for each of the three years in the period ended December 31, 2002, are provided for the Company as supplemental financial information to the Company’s consolidated financial statements to disclose the financial position, results of operations and cash flows of (i) the Company, (ii) Millennium America, and (iii) all subsidiaries of the Company other than Millennium America (the “Non-Guarantor Subsidiaries”). The investment in subsidiaries of Millennium America and the Company are accounted for by the equity method; accordingly, the shareholders’ (deficit) equity of Millennium America and the Company are presented as if each of those companies and their respective subsidiaries were reported on a consolidated basis.

F-170

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

	Millennium America Inc. (Issuer)			Millennium Chemicals Inc. (Guarantor)			Non-Guarantor Subsidiaries		Eliminations			Millennium Chemicals Inc. and Subsidiaries
2002 (Restated—See Note 2)
ASSETS
Inventories	$	—		$	—		$	406	$	—		$	406
Other current assets		10			—			403		—			413
Property, plant and equipment, net		—			—			862		—			862
Investment in Equistar		—			—			563		—			563
Investment in subsidiaries		349			95			—		(444	)		—
Other assets		15			—			31		—			46
Goodwill		—			—			106		—			106
Due from parent and affiliates		638			—			—		(638	)		—
Total assets	$	1,012		$	95		$	2,371	$	(1,082	)	$	2,396
LIABILITIES AND SHAREHOLDERS’ (DEFICIT) EQUITY
Current maturities of long-term debt	$	3		$	—		$	9	$	—		$	12
Other current liabilities		8			—			455		—			463
Long-term debt		1,196			—			16		—			1,212
Deferred income taxes		—			—			337		—			337
Other liabilities		—			—			388		—			388
Due to parent and affiliates		—			130			508		(638	)		—
Total liabilities		1,207			130			1,713		(638	)		2,412
Minority interest		—			—			19		—			19
Shareholders’ (deficit) equity		(195	)		(35	)		639		(444	)		(35	)
Total liabilities and shareholders’ (deficit) equity	$	1,012		$	95		$	2,371	$	(1,082	)	$	2,396
2001 (Restated—See Note 2)
ASSETS
Inventories	$	—		$	—		$	399	$	—		$	399
Other current assets		6			—			384		—			390
Property, plant and equipment, net		—			—			880		—			880
Investment in Equistar		—			—			677		—			677
Investment in subsidiaries		657			580			—		(1,237	)		—
Other assets		13			—			225		—			238
Goodwill		—			—			381		—			381
Due from parent and affiliates		590			—			—		(590	)		—
Total assets	$	1,266		$	580		$	2,946	$	(1,827	)	$	2,965
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current maturities of long-term debt	$	3		$	—		$	8	$	—		$	11
Other current liabilities		8			—			363		—			371
Long-term debt		1,156			—			16		—			1,172
Deferred income taxes		—			—			373		—			373
Other liabilities		—			1			526		—			527
Due to parent and affiliates		—			89			501		(590	)		—
Total liabilities		1,167			90			1,787		(590	)		2,454
Minority interest		—			—			21		—			21
Shareholders’ equity		99			490			1,138		(1,237	)		490
Total liabilities and shareholders’ equity	$	1,266		$	580		$	2,946	$	(1,827	)	$	2,965

F-171

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2002, 2001 and 2000

	Millennium America Inc. (Issuer)			Millennium Chemicals Inc. (Guarantor)			Non-Guarantor Subsidiaries			Eliminations			Millennium Chemicals Inc. and Subsidiaries
2002 (Restated—See Note 2)
Net sales	$	—		$	—		$	1,554		$	—		$	1,554
Cost of products sold		—			—			1,234			—			1,234
Depreciation and amortization		—			—			102			—			102
Selling, development and administrative expense		1			1			136			—			138
Operating (loss) income		(1	)		(1	)		82			—			80
Interest expense, net		(86	)		—			—			—			(86	)
Intercompany interest income (expense)		103			(5	)		(98	)		—			—
Loss on Equistar investment		—			—			(73	)		—			(73	)
Equity in loss of subsidiaries		(402	)		(328	)		—			730			—
Other expense		—			—			(7	)		—			(7	)
(Provision for) benefit from income taxes		(6	)		1			63			—			58
Cumulative effect of accounting change		—			—			(305	)		—			(305	)
Net loss	$	(392	)	$	(333	)	$	(338	)	$	730		$	(333	)
2001 (Restated—See Note 2)
Net sales	$	—		$	—		$	1,590		$	—		$	1,590
Cost of products sold		—			—			1,261			—			1,261
Depreciation and amortization		—			—			110			—			110
Selling, development and administrative expense		—			—			169			—			169
Reorganization and plant closure		—			—			36			—			36
Operating income		—			—			14			—			14
Interest expense, net		(81	)		—			(1	)		—			(82	)
Intercompany interest income (expense)		108			(4	)		(104	)		—			—
Loss on Equistar investment		—			—			(83	)		—			(83	)
Equity in loss of subsidiaries		(76	)		(51	)		—			127			—
Other expense		(2	)		(1	)		—			—			(3	)
(Provision for) benefit from income taxes		(9	)		2			107			—			100
Net loss	$	(60	)	$	(54	)	$	(67	)	$	127		$	(54	)
2000 (Restated—See Note 2)
Net sales	$	—		$	—		$	1,793		$	—		$	1,793
Cost of products sold		—			—			1,264			—			1,264
Depreciation and amortization		—			—			113			—			113
Selling, development and administrative expense		—			—			215			—			215
Operating income		—			—			201			—			201
Interest expense, net		(76	)		—			(1	)		—			(77	)
Intercompany interest income (expense)		109			(4	)		(105	)		—			—
Earnings on Equistar investment		—			—			45			—			45
Equity in earnings of subsidiaries		48			114			—			(162	)		—
Other income		—			—			7			—			7
(Provision for) benefit from income taxes		(12	)		1			(54	)		—			(65	)
Net income	$	69		$	111		$	93		$	(162	)	$	111

F-172

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2002, 2001 and 2000

	Millennium America Inc. (Issuer)			Millennium Chemicals Inc. (Guarantor)			Non-Guarantor Subsidiaries			Eliminations		Millennium Chemicals Inc. and Subsidiaries
2002
Cash flows from operating activities	$	18		$	(6	)	$	72		$	—	$	84
Cash flows from investing activities:
Capital expenditures		—			—			(71	)		—		(71	)
Proceeds from sales of property, plant & equipment		—			—			1			—		1
Cash used in investing activities		—			—			(70	)		—		(70	)
Cash flows from financing activities:
Dividends to shareholders		—			(35	)		—			—		(35	)
Proceeds from long-term debt		290			—			12			—		302
Repayment of long-term debt		(264	)		—			(8	)		—		(272	)
Intercompany		(43	)		41			2			—		—
Increase in notes payable		—			—			3			—		3
Cash (used in) provided by financing activities		(17	)		6			9			—		(2	)
Effect of exchange rate changes on cash		—			—			(1	)		—		(1	)
Increase in cash and cash equivalents		1			—			10			—		11
Cash and cash equivalents at beginning of year		5			—			109			—		114
Cash and cash equivalents at end of year	$	6		$	—		$	119		$	—	$	125
2001
Cash flows from operating activities	$	7		$	(5	)	$	110		$	—	$	112
Cash flows from investing activities:
Capital expenditures		—			—			(97	)		—		(97	)
Proceeds from sales of property, plant & equipment		—			—			19			—		19
Cash used in investing activities		—			—			(78	)		—		(78	)
Cash flows from financing activities:
Dividends to shareholders		—			(35	)		—			—		(35	)
Proceeds from long-term debt		741			—			42			—		783
Repayment of long-term debt		(675	)		—			(61	)		—		(736	)
Intercompany		(51	)		40			11			—		—
Decrease in notes payable		(17	)		—			(17	)		—		(34	)
Cash (used in) provided by financing activities		(2	)		5			(25	)		—		(22	)
Effect of exchange rate changes on cash		—			—			(5	)		—		(5	)
Increase in cash and cash equivalents		5			—			2			—		7
Cash and cash equivalents at beginning of year		—			—			107			—		107
Cash and cash equivalents at end of year	$	5		$	—		$	109		$	—	$	114

F-173

MILLENNIUM CHEMICALS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

(Dollars in millions, except share data)

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS – Continued

For the Years Ended December 31, 2002, 2001 and 2000

	Millennium America Inc. (Issuer)			Millennium Chemicals Inc. (Guarantor)			Non-Guarantor Subsidiaries			Eliminations		Millennium Chemicals Inc. and Subsidiaries
2000
Cash flows from operating activities	$	21		$	(3	)	$	2		$	—	$	20
Cash flows from investing activities:
Capital expenditures		—			—			(110	)		—		(110	)
Distributions from Equistar		—			—			83			—		83
Proceeds from sales of property, plant & equipment		—			—			4			—		4
Cash used in investing activities		—			—			(23	)		—		(23	)
Cash flows from financing activities:
Dividends to shareholders		—			(35	)		—			—		(35	)
Repurchase of common stock		—			—			(65	)		—		(65	)
Proceeds from long-term debt		275			—			36			—		311
Repayment of long-term debt		(165	)		—			(22	)		—		(187	)
Intercompany		(114	)		38			76			—		—
Decrease in notes payable		(17	)		—			—			—		(17	)
Cash (used in) provided by financing activities		(21	)		3			25			—		7
Effect of exchange rate changes on cash		—			—			(7	)		—		(7	)
Decrease in cash and cash equivalents		—			—			(3	)		—		(3	)
Cash and cash equivalents at beginning of year		—			—			110			—		110
Cash and cash equivalents at end of year	$	—		$	—		$	107		$	—	$	107

F-174

PROSPECTUS

Equistar Chemicals, LP

Equistar Funding Corporation

$250,000,000

Offer to Exchange

REGISTERED

10 ⁵/8% Senior Notes Due 2011

for

ALL OUTSTANDING UNREGISTERED

10 ⁵/8% Senior Notes Due 2011

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. Indemnification of Directors and Officers

Equistar

The partnership governance committee has provided for the indemnification of Equistar’s executive officers. Executives are entitled to indemnification with respect to all matters to which Section 145 of the General Corporation Law of the State of Delaware may relate, as if Section 145 were applicable to a partnership. The right to indemnification and payment of expenses incurred in defending a proceeding in advance of its final disposition is not exclusive of any other right which the executives may have or hereafter acquire under any statute, any agreement or otherwise, both as to action in that executive’s official capacity and as to action in any other capacity by holding office. The indemnification right continues after the executive ceases to serve as an Equistar officer or to serve another entity at the request of Equistar.

Equistar Funding

The by-laws of Equistar Funding provide for indemnification of Equistar Funding’s officers, directors, employees and agents to the extent permitted by the General Corporation Law of Delaware.

General Corporation Law of Delaware

Section 145 of the General Corporation Law of the State of Delaware provides as follows:

(a)    A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the corporation) by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by the person in connection with such action, suit or proceeding if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe the person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which the person reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that the person’s conduct was unlawful.

(b)    A corporation shall have power to indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that the person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorneys’ fees) actually and reasonably incurred by the person in connection with the defense or settlement of such action or suit if the person acted in good faith and in a manner the person reasonably believed to be in or not opposed to the best interests of the corporation and except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the Court of Chancery or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court of Chancery or such other court shall deem proper.

II-1

(c)    To the extent that a present or former director or officer of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in subsections (a) and (b) of this section or in defense of any claim, issue or matter therein, such person shall be indemnified against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection therewith.

(d)    Any indemnification under subsections (a) and (b) of this section (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the present or former director, officer, employee or agent is proper in the circumstances because the person has met the applicable standard of conduct set forth in subsections (a) and (b) of this section. Such determination shall be made, with respect to a person who is a director or officer at the time of such determination, (1) by a majority vote of the directors who are not parties to such action, suit or proceeding, even though less than a quorum, or (2) by a committee of such directors designated by majority vote of such directors, even though less than a quorum, or (3) if there are no such directors, or if such directors so direct, by independent legal counsel in a written opinion, or (4) by the stockholders.

(e)    Expenses (including attorneys’ fees) incurred by an officer or director in defending any civil, criminal, administrative, or investigative action, suit or proceeding may be paid by the corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the corporation as authorized in this section. Such expenses (including attorneys’ fees) incurred by former directors and officers or other employees and agents may be so paid upon such terms and conditions, if any, as the corporation deems appropriate.

(f)    The indemnification and advancement of expenses provided by, or granted pursuant to, the other subsections of this section shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under any bylaw, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such person’s official capacity and as to action in another capacity while holding such office.

(g)    A corporation shall have power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person’s status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.

(h)    For purposes of this section, references to “the corporation” shall include, in addition to the resulting corporation, any constituent corporation (including any constituent of a constituent) absorbed in a consolidation or merger which, if its separate existence had continued, would have had power and authority to indemnify its directors, officers, and employees or agents, so that any person who is or was a director, officer, employee or agent of such constituent corporation, or is or was serving at the request of such constituent corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise, shall stand in the same position under this section with respect to the resulting or surviving corporation as such person would have with respect to such constituent corporation if its separate existence had continued.

(i)    For purposes of this section, references to “other enterprises” shall include employee benefit plans; references to “fines” shall include any excise taxes assessed on a person with respect to any employee benefit plan; and references to “serving at the request of the corporation” shall include any service as a director, officer, employee or agent of the corporation which imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner such person reasonably believed to be in the interest of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner “not opposed to the best interests of the corporation” as referred to in this section.

II-2

(j)    The indemnification and advancement of expenses provided by, or granted pursuant to, this section shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person.

(k)    The Court of Chancery is hereby vested with exclusive jurisdiction to hear and determine all actions for advancement of expenses or indemnification brought under this section or under any bylaw, agreement, vote of stockholders or disinterested directors, or otherwise. The Court of Chancery may summarily determine a corporation’s obligation to advance expenses (including attorneys’ fees).

Other

Each of Equistar and Equistar Funding may elect to enter into indemnification agreements with its respective executive officers and with other persons as the partnership governance committee or board of directors, respectively, may designate.

In addition, Equistar may elect to maintain liability insurance to protect itself and any executive officer of Equistar or another partnership, corporation, joint venture, trust or other enterprise against any expense, liability or loss, whether or not Equistar would have the power to indemnify that person against any expense, liability or loss under the laws of the State of Delaware.

II-3

ITEM 21.    Exhibits

Exhibit No.		Exhibit
3.1		Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 17, 1997 (1)
3.1	(a)	Certificates of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP dated as of May 15, 1998 (1)
3.1	(b)	Certificates of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 31, 2002 (8)
3.2		Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP dated as of November 6, 2002 (7)
3.3		Certificate of Incorporation of Equistar Funding Corporation dated as of January 22, 1999 (1)
3.4		By-Laws of Equistar Funding Corporation dated as of January 22, 1999 (1)
4.1		Registration Rights Agreement dated as of November 21, 2003 by and among Equistar Chemicals, LP, Equistar Funding Corporation, and J.P. Morgan Securities, Inc., Banc of America Securities LLC, Citigroup Global Markets Inc. and Credit Suisse First Boston LLC, as Representatives of the Several Initial Purchasers
4.2		Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, dated as of January 15, 1999 (1)
4.2	(a)	Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, dated as of February 16, 1999 (1)
4.2	(b)	Form of Note (attached as Annex A to the Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee filed herewith as Exhibit 4.2(a)) (1)
4.3		Amended and Restated Credit Agreement dated as of August 24, 2001 among Equistar Chemicals, LP, the lenders from time to time party thereto and Citicorp USA, Inc. and Credit Suisse First Boston, as co-syndication agents; Bank of America, N.A., as servicing agent and as administrative agent and The Chase Manhattan Bank, as collateral agent and as administrative agent (2)
4.3	(a)	Amendment No. 1 dated as of March 26, 2002 to the Amended and Restated Credit Agreement dated as of August 24, 2001 among Equistar Chemicals, LP, the lenders from time to time party thereto and Citicorp USA, Inc. and Credit Suisse First Boston, as co-syndication agents, Bank of America, N.A., as servicing agent and as administrative agent and The Chase Manhattan Bank, as collateral agent and as administrative agent (6)
4.3	(b)	Amendment No. 2 dated as of March 7, 2003 to the Amended and Restated Credit Agreement dated as of August 24, 2001 among Equistar Chemicals, LP, the lenders from time to time party thereto and Citicorp USA, Inc. and Credit Suisse First Boston, as co-syndication agents; Bank of America, N.A., as servicing agent and as administrative agent and The Chase Manhattan Bank, as collateral agent and as administrative agent (8)
4.4		Indenture between Lyondell Petrochemical Company and Continental Bank, National Association, as Trustee, dated as of March 10, 1992 (1)
4.4	(a)	First Supplemental Indenture dated as of March 10, 1992 between Lyondell Petrochemical Company and Continental Bank, National Association, as Trustee, to the Indenture dated as of March 10, 1992 (1)
4.4	(b)	Second Supplemental Indenture dated as of December 1, 1997 among Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas Commerce Bank National Association, Trustee, to the Indenture dated as of March 10, 1992 (1)

II-4

Exhibit No.		Exhibit
4.4	(c)	Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and U.S. Bank Trust, National Association, Trustee to the Indenture dated as of March 10, 1992 (3)
4.4	(d)	Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and U.S. Bank Trust, National Association, Trustee to the Indenture dated as of March 10, 1992 (3)
4.5		Indenture between Lyondell Petrochemical Company and Texas Commerce Bank, National Bank Association, as Trustee, dated as of January 29, 1996 (1)
4.5	(a)	First Supplemental Indenture dated as of February 15, 1996 between Lyondell Petrochemical Company and Texas Commerce Bank, National Bank Association, as Trustee, to the Indenture dated as of January 29, 1996 (1)
4.5	(b)	Second Supplemental Indenture dated as of December 1, 1997 among Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas Commerce National Association, Trustee, to the Indenture dated as of January 29, 1996 (1)
4.5	(c)	Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank, Trustee, to the Indenture dated as of January 29, 1996 (3)
4.5	(d)	Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank, Trustee, to the Indenture dated as of January 29, 1996 (3)
4.6	(a)	Indenture dated as of August 24, 2001 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee (2)
4.6	(b)	Form of Note dated as of August 24, 2001 (attached as Exhibit A to the Indenture dated as of August 24, 2001 among Equistar, Equistar Funding and Bank of New York, as trustee filed herewith as Exhibit 4.6(a)) (2)
4.7	(a)	Indenture dated as of April 22, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee
4.7	(b)	Form of Note dated as of April 22, 2003 (attached as Exhibit A to the Indenture dated as of April 22, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.7(a))
4.7	(c)	First Supplemental Indenture dated as of November 21, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, to the Indenture dated as of April 22, 2003
Equistar is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of Equistar and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K, Equistar agrees to furnish a copy of such instruments to the Commission upon request.
5		Opinion of Baker Botts L.L.P. with respect to the legality of the new notes
EXECUTIVE COMPENSATION:
10.1		Lyondell Chemical Company Executive Severance Pay Plan (5)
10.2		Amended and Restated Bonus Plan (5)
10.3		Equistar Chemicals, LP Supplemental Executive Retirement Plan (2)

II-5

Exhibit No.		Exhibit
10.4		Equistar Chemicals, LP Executive Supplementary Savings Plan (2)
10.5		Summary Description of Equistar Chemicals, LP Executive Medical Plan (1)
10.6		Equistar Chemicals, LP Executive Deferral Plan (2)
10.7		Summary Description of Equistar Chemicals, LP Executive Disability Plan (1)
10.8		Summary Description of Equistar Chemicals, LP Executive Life Insurance Plan (1)
10.9		Equistar Chemicals, LP 2001 Incentive Plan (8)
OTHER MATERIAL CONTRACTS:
10.10		Asset Contribution Agreement among Lyondell Chemical Company, Lyondell Petrochemical LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.10	(a)	First Amendment, dated as of May 15, 1998 to the Asset Contribution Agreement among Lyondell Chemicals Company, Lyondell Petrochemicals LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.10	(b)	Second Amendment to Lyondell Asset Contribution Agreement, dated as of September 30, 2001, among Lyondell Chemical Company, Lyondell Petrochemical LP Inc. and Equistar Chemicals, LP (4)
10.11		Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.11	(a)	First Amendment dated as of May 15, 1998 to the Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.11	(b)	Second Amendment to Millennium Asset Contribution Agreement, dated as of September 30, 2001, among Millennium Petrochemicals Inc., Millennium Petrochemicals LP LLC and Equistar Chemicals, LP (4)
10.12		Master Transaction Agreement between Equistar Chemicals, LP, Occidental Petroleum Corporation, Lyondell Chemical Company and Millennium Chemicals Inc. dated as of May 15, 1998 (1)
10.13		Agreement and Plan of Merger and Asset Contribution among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and Equistar Chemicals, LP dated as of May 15, 1998 (1)
10.13	(a)	First Amendment to Occidental Asset Contribution Agreement, dated as of September 30, 2001, among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., PDG Chemical Inc., Occidental Petrochem Partner GP, Inc. and Equistar Chemicals, LP (4)
10.14		Amended and Restated Parent Agreement dated as of November 6, 2002 (7)
10.15		Ethylene Sales Agreement between Equistar Chemicals, LP and Occidental Chemical Corporation dated as of May 15, 1998 (1)
12		Statement Concerning Computation of Ratios
21		Subsidiaries of Equistar Chemicals, LP (8)
23.1		Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of Equistar Chemicals, LP
23.2		Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of Lyondell Chemical Company
23.3		Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of Millennium Chemicals Inc.
23.4		Consent of Baker Botts L.L.P. (included in Exhibit 5 Opinion)

II-6

Exhibit No.	Exhibit
24.1	Power of Attorney for Equistar Chemicals, LP
24.2	Power of Attorney for the Partnership Governance Committee of Equistar Chemicals, LP
24.3	Power of Attorney for Equistar Funding Corporation
24.4	Power of Attorney for Lyondell Petrochemical G.P. Inc.
24.5	Power of Attorney for Millennium Petrochemicals GP LLC
25	T-1 Statement of Eligibility of Trustee for the 10- 5/8% senior notes due 2011
99.1	Form of Letter to Clients for Tender of Notes
99.2	Form of Letter to The Depository Trust Company Participants for Tender of Notes
99.3	Form of Notice of Guaranteed Delivery
99.4	Form of Transmittal Letter for Tender of Notes

(1) Filed as an exhibit to Registrants’ Registration Statement on Form S-4 (No. 333-76473) and incorporated herein by reference.

(2) Filed as an exhibit to Registrants’ Registration Statement on Form S-4 (No. 333-70048) and incorporated herein by reference.

(3) Filed as an exhibit to Equistar Chemicals, LP’s Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.

(4) Filed as an exhibit to Equistar Chemicals, LP’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.

(5) Filed as an exhibit to Equistar Chemicals, LP’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

(6) Filed as an exhibit to Equistar Chemicals, LP’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference.

(7) Filed as an exhibit to Equistar Chemicals, LP’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference.

(8) Filed as an exhibit to Equistar Chemicals, LP’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.

(9) Filed as an exhibit to Equistar Chemicals, LP’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

II-7

ITEM 22.    Undertakings

1. The undersigned registrant hereby undertakes:

• To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:

— To include any prospectus required by section 10(a)(3) of the Securities Act of 1933.

— To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) of the Securities Act if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the “Calculation of Registration Fee” table in the effective registration statement.

— To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.

• That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

• To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering.

2. The undersigned registrant hereby undertakes that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant’s annual report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan’s annual report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in the registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.

3. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

4. The undersigned registrant hereby undertakes to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the registration statement through the date of responding to the request.

5. The undersigned registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in the registration statement when it became effective.

II-8

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrants have duly caused this Registration Statement or amendment thereto to be signed on their behalf by the undersigned, thereunto duly authorized, in the city of Houston, State of Texas, on December 12, 2003.

EQUISTAR CHEMICALS, LP, by its General Partner
LYONDELL PETROCHEMICAL G.P. INC.
By:	*
	Morris Gelb President

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrants and in the capacities indicated on December 12, 2003.

Name	Title
* Morris Gelb (Principal Executive Officer)	President and Director
* Karen A. Twitchell (Principal Financial and Accounting Officer)	Vice President and Treasurer
* T. Kevin DeNicola	Director
* Edward J. Dineen	Director
*By:                    /s/ Gerald A. O’Brien Gerald A. O’Brien, as Attorney-in-fact

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrants have duly caused this Registration Statement or amendment thereto to be signed on their behalf by the undersigned, thereunto duly authorized, in the city of Houston, State of Texas, on December 12, 2003.

EQUISTAR CHEMICALS, LP, by its General Partner
MILLENNIUM PETROCHEMICALS GP LLC
By:	Millennium Petrochemicals Inc.
	By:	*
		Robert E. Lee President and Chief Executive Officer

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrants and in the capacities indicated on December 12, 2003.

Name	Title
*   Robert E. Lee (Principal Executive Officer)	Director, President and Chief Executive Officer
*   John E. Lushefski (Principal Financial and Accounting Officer)	Senior Vice President
* C. William Carmean	Director, Senior Vice President, General Counsel and Secretary
* Timothy E. Dowdle	Director and Senior Vice President
*By:                    /s/ Gerald A. O’Brien Gerald A. O’Brien, as Attorney-in-fact

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrants and in the capacities indicated on December 12, 2003.

Name	Title
* Dan F. Smith (Principal Executive Officer)	Chief Executive Officer, Equistar Chemicals, LP, Co-Chairman, Partnership Governance Committee
* Charles L. Hall (Principal Financial and Accounting Officer)	Vice President and Controller, Equistar Chemicals, LP
* T. Kevin DeNicola	Member, Partnership Governance Committee
* Kerry A. Galvin	Member, Partnership Governance Committee
* Robert E. Lee	Co-Chairman, Partnership Governance Committee
* John E. Lushefski	Member, Partnership Governance Committee
* C. William Carmean	Member, Partnership Governance Committee
*By:                    /s/ Gerald A. O’Brien Gerald A. O’Brien, as Attorney-in-fact

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, the registrants have duly caused this Registration Statement or amendment thereto to be signed on their behalf by the undersigned, thereunto duly authorized, in the city of Houston, State of Texas, on December 12, 2003.

EQUISTAR FUNDING CORPORATION
By:	*
	Dan F. Smith Chief Executive Office

Pursuant to the requirements of the Securities Act of 1933, this registration statement has been signed by the following persons on behalf of the registrants and in the capacities indicated on December 12, 2003.

Name	Title
* Dan F. Smith (Principal Executive Officer)	Chief Executive Officer
* Karen A. Twitchell (Principal Financial and Accounting Officer)	Vice President and Treasurer
* Morris Gelb	President and Chief Operating Officer and Director
* T. Kevin DeNicola	Director
* Edward J. Dineen	Director
*By:                    /s/ Gerald A. O’Brien Gerald O’Brien, as Attorney-in-fact

INDEX TO EXHIBITS

Exhibit No.		Exhibit
3.1		Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 17, 1997 (1)
3.1	(a)	Certificates of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP dated as of May 15, 1998 (1)
3.1	(b)	Certificates of Amendment to the Certificate of Limited Partnership of Equistar Chemicals, LP dated as of October 31, 2002 (8)
3.2		Amended and Restated Limited Partnership Agreement of Equistar Chemicals, LP dated as of November 6, 2002 (7)
3.3		Certificate of Incorporation of Equistar Funding Corporation dated as of January 22, 1999 (1)
3.4		By-Laws of Equistar Funding Corporation dated as of January 22, 1999 (1)
4.1		Registration Rights Agreement dated as of November 21, 2003 by and among Equistar Chemicals, LP, Equistar Funding Corporation, and J.P. Morgan Securities, Inc., Banc of America Securities LLC, Citigroup Global Markets Inc. and Credit Suisse First Boston LLC, as Representatives of the Several Initial Purchasers
4.2		Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, dated as of January 15, 1999 (1)
4.2	(a)	Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, dated as of February 16, 1999 (1)
4.2	(b)	Form of Note (attached as Annex A to the Form of Second Supplemental Indenture among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee filed herewith as Exhibit 4.2(a)) (1)
4.3		Amended and Restated Credit Agreement dated as of August 24, 2001 among Equistar Chemicals, LP, the lenders from time to time party thereto and Citicorp USA, Inc. and Credit Suisse First Boston, as co-syndication agents; Bank of America, N.A., as servicing agent and as administrative agent and The Chase Manhattan Bank, as collateral agent and as administrative agent (2)
4.3	(a)	Amendment No. 1 dated as of March 26, 2002 to the Amended and Restated Credit Agreement dated as of August 24, 2001 among Equistar Chemicals, LP, the lenders from time to time party thereto and Citicorp USA, Inc. and Credit Suisse First Boston, as co-syndication agents, Bank of America, N.A., as servicing agent and as administrative agent and The Chase Manhattan Bank, as collateral agent and as administrative agent (6)
4.3	(b)	Amendment No. 2 dated as of March 7, 2003 to the Amended and Restated Credit Agreement dated as of August 24, 2001 among Equistar Chemicals, LP, the lenders from time to time party thereto and Citicorp USA, Inc. and Credit Suisse First Boston, as co-syndication agents; Bank of America, N.A., as servicing agent and as administrative agent and The Chase Manhattan Bank, as collateral agent and as administrative agent (8)
4.4		Indenture between Lyondell Petrochemical Company and Continental Bank, National Association, as Trustee, dated as of March 10, 1992 (1)
4.4	(a)	First Supplemental Indenture dated as of March 10, 1992 between Lyondell Petrochemical Company and Continental Bank, National Association, as Trustee, to the Indenture dated as of March 10, 1992 (1)
4.4	(b)	Second Supplemental Indenture dated as of December 1, 1997 among Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas Commerce Bank National Association, Trustee, to the Indenture dated as of March 10, 1992 (1)

Exhibit No.		Exhibit
4.4	(c)	Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and U.S. Bank Trust, National Association, Trustee to the Indenture dated as of March 10, 1992 (3)
4.4	(d)	Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and U.S. Bank Trust, National Association, Trustee to the Indenture dated as of March 10, 1992 (3)
4.5		Indenture between Lyondell Petrochemical Company and Texas Commerce Bank, National Bank Association, as Trustee, dated as of January 29, 1996 (1)
4.5	(a)	First Supplemental Indenture dated as of February 15, 1996 between Lyondell Petrochemical Company and Texas Commerce Bank, National Bank Association, as Trustee, to the Indenture dated as of January 29, 1996 (1)
4.5	(b)	Second Supplemental Indenture dated as of December 1, 1997 among Lyondell Petrochemical Company, Equistar Chemicals, LP and Texas Commerce National Association, Trustee, to the Indenture dated as of January 29, 1996 (1)
4.5	(c)	Third Supplemental Indenture dated as of November 3, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank, Trustee, to the Indenture dated as of January 29, 1996 (3)
4.5	(d)	Fourth Supplemental Indenture dated as of November 17, 2000 among Lyondell Chemical Company, Equistar Chemicals, LP and The Chase Manhattan Bank, Trustee, to the Indenture dated as of January 29, 1996 (3)
4.6	(a)	Indenture dated as of August 24, 2001 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee (2)
4.6	(b)	Form of Note dated as of August 24, 2001 (attached as Exhibit A to the Indenture dated as of August 24, 2001 among Equistar, Equistar Funding and Bank of New York, as trustee filed herewith as Exhibit 4.6(a)) (2)
4.7	(a)	Indenture dated as of April 22, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee
4.7	(b)	Form of Note dated as of April 22, 2003 (attached as Exhibit A to the Indenture dated as of April 22, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, filed herewith as Exhibit 4.7(a))
4.7	(c)	First Supplemental Indenture dated as of November 21, 2003 among Equistar Chemicals, LP, Equistar Funding Corporation and The Bank of New York, as Trustee, to the Indenture dated as of April 22, 2003
Equistar is a party to several debt instruments under which the total amount of securities authorized does not exceed 10% of the total assets of Equistar and its subsidiaries on a consolidated basis. Pursuant to paragraph 4(iii)(A) of Item 601(b) of Registration S-K, Equistar agrees to furnish a copy of such instruments to the Commission upon request.
5		Opinion of Baker Botts L.L.P. with respect to the legality of the new notes
EXECUTIVE COMPENSATION:
10.1		Lyondell Chemical Company Executive Severance Pay Plan (5)
10.2		Amended and Restated Bonus Plan (5)
10.3		Equistar Chemicals, LP Supplemental Executive Retirement Plan (2)
10.4		Equistar Chemicals, LP Executive Supplementary Savings Plan (2)
10.5		Summary Description of Equistar Chemicals, LP Executive Medical Plan (1)

Exhibit No.		Exhibit
10.6		Equistar Chemicals, LP Executive Deferral Plan (2)
10.7		Summary Description of Equistar Chemicals, LP Executive Disability Plan (1)
10.8		Summary Description of Equistar Chemicals, LP Executive Life Insurance Plan (1)
10.9		Equistar Chemicals, LP 2001 Incentive Plan (8)
OTHER MATERIAL CONTRACTS:
10.10		Asset Contribution Agreement among Lyondell Chemical Company, Lyondell Petrochemical LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.10	(a)	First Amendment, dated as of May 15, 1998 to the Asset Contribution Agreement among Lyondell Chemicals Company, Lyondell Petrochemicals LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.10	(b)	Second Amendment to Lyondell Asset Contribution Agreement, dated as of September 30, 2001, among Lyondell Chemical Company, Lyondell Petrochemical LP Inc. and Equistar Chemicals, LP (4)
10.11		Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.11	(a)	First Amendment dated as of May 15, 1998 to the Asset Contribution Agreement among Millennium Petrochemicals Inc., Millennium LP and Equistar Chemicals, LP dated as of December 1, 1997 (1)
10.11	(b)	Second Amendment to Millennium Asset Contribution Agreement, dated as of September 30, 2001, among Millennium Petrochemicals Inc., Millennium Petrochemicals LP LLC and Equistar Chemicals, LP (4)
10.12		Master Transaction Agreement between Equistar Chemicals, LP, Occidental Petroleum Corporation, Lyondell Chemical Company and Millennium Chemicals Inc. dated as of May 15, 1998 (1)
10.13		Agreement and Plan of Merger and Asset Contribution among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., Oxy Petrochemicals Inc., PDG Chemical Inc. and Equistar Chemicals, LP dated as of May 15, 1998 (1)
10.13	(a)	First Amendment to Occidental Asset Contribution Agreement, dated as of September 30, 2001, among Occidental Petrochem Partner 1, Inc., Occidental Petrochem Partner 2, Inc., PDG Chemical Inc., Occidental Petrochem Partner GP, Inc. and Equistar Chemicals, LP (4)
10.14		Amended and Restated Parent Agreement dated as of November 6, 2002 (7)
10.15		Ethylene Sales Agreement between Equistar Chemicals, LP and Occidental Chemical Corporation dated as of May 15, 1998 (1)
12		Statement Concerning Computation of Ratios
21		Subsidiaries of Equistar Chemicals, LP (8)
23.1		Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of Equistar Chemicals, LP
23.2		Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of Lyondell Chemical Company
23.3		Consent of PricewaterhouseCoopers LLP with respect to the consolidated financial statements of Millennium Chemicals Inc.
23.4		Consent of Baker Botts L.L.P. (included in Exhibit 5 Opinion)
24.1		Power of Attorney for Equistar Chemicals, LP
24.2		Power of Attorney for the Partnership Governance Committee of Equistar Chemicals, LP

Exhibit No.	Exhibit
24.3	Power of Attorney for Equistar Funding Corporation
24.4	Power of Attorney for Lyondell Petrochemical G.P. Inc.
24.5	Power of Attorney for Millennium Petrochemicals GP, LLC
25	T-1 Statement of Eligibility of Trustee for the 10-5/8% senior notes due 2011
99.1	Form of Letter to Clients for Tender of Notes
99.2	Form of Letter to The Depository Trust Company Participants for Tender of Notes
99.3	Form of Notice of Guaranteed Delivery
99.4	Form of Transmittal Letter for Tender of Notes

(1) Filed as an exhibit to Registrants’ Registration Statement on Form S-4 (No. 333-76473) and incorporated herein by reference.

(2) Filed as an exhibit to Registrants’ Registration Statement on Form S-4 (No. 333-70048) and incorporated herein by reference.

(3) Filed as an exhibit to Equistar Chemicals, LP’s Annual Report on Form 10-K for the year ended December 31, 2000 and incorporated herein by reference.

(4) Filed as an exhibit to Equistar Chemicals, LP’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2001 and incorporated herein by reference.

(5) Filed as an exhibit to Equistar Chemicals, LP’s Annual Report on Form 10-K for the year ended December 31, 2001 and incorporated herein by reference.

(6) Filed as an exhibit to Equistar Chemicals, LP’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2002 and incorporated herein by reference.

(7) Filed as an exhibit to Equistar Chemicals, LP’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2002 and incorporated herein by reference.

(8) Filed as an exhibit to Equistar Chemicals, LP’s Annual Report on Form 10-K for the year ended December 31, 2002 and incorporated herein by reference.

(9) Filed as an exhibit to Equistar Chemicals, LP’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003 and incorporated herein by reference.

EX-4.1

EXHIBIT 4.1

REGISTRATION RIGHTS AGREEMENT

Dated as of November 21, 2003

by and among

Equistar Chemicals, LP

Equistar Funding Corporation

and

J.P. Morgan Securities Inc.

Banc of America Securities LLC

Citigroup Global Markets Inc.

Credit Suisse First Boston LLC

As Representatives of the

Several Initial Purchasers

This Registration Rights Agreement (this “Agreement”) is made and entered into as of November 21, 2003, by and among Equistar Chemicals, LP, a Delaware limited partnership (the “Company”), Equistar Funding Corporation, a Delaware corporation (together with the Company, the “Issuers”), and J.P. Morgan Securities Inc., Banc of America Securities LLC, Citigroup Global Markets Inc. and Credit Suisse First Boston LLC, as representatives of the several initial purchasers named in the Purchase Agreement (as defined below) (each an “Initial Purchaser” and, collectively, the “Initial Purchasers”), each of whom has agreed to purchase the Issuers’ 10.625% Senior Notes due 2011 (together with any Additional Dividend Notes (as defined in the Indenture referred to below) that may be issued in respect thereof, the “Initial Notes”) pursuant to the Purchase Agreement (as defined below).

This Agreement is made pursuant to the Purchase Agreement, dated November 18, 2003, (the “Purchase Agreement”), by and among the Issuers and the Initial Purchasers. In order to induce the Initial Purchasers to purchase the Initial Notes, the Issuers have agreed to provide the registration rights set forth in this Agreement. The execution and delivery of this Agreement is a condition to the obligations of the Initial Purchasers set forth in Section 3 of the Purchase Agreement. Capitalized terms used herein and not otherwise defined shall have the meaning assigned to them in the Indenture dated as of April 22, 2003, as amended, relating to the Notes among the Issuers and The Bank of New York, as trustee (the “Indenture”).

The parties hereby agree as follows:

SECTION 1. Definitions. As used in this Agreement, the following capitalized terms shall have the following meanings:

Act: The Securities Act of 1933, as amended.

Affiliate: As defined in Rule 144 of the Act.

Broker-Dealer: Any broker or dealer registered under the Exchange Act.

Closing Date: The date hereof.

Commission: The Securities and Exchange Commission.

Consummate: The Exchange Offer shall be deemed “Consummated” for purposes of this Agreement upon the occurrence of (a) the filing and effectiveness under the Act of the Exchange Offer Registration Statement relating to Exchange Notes to be issued in the Exchange Offer, (b) the maintenance of such Exchange Offer Registration Statement continuously effective and the keeping of the Exchange Offer open for a period not less than the period required pursuant to Section 3(b) hereof and (c) the delivery by the Issuers to the Trustee of Exchange Notes in the same aggregate principal amount as the aggregate principal amount of Initial Notes validly tendered and not withdrawn by Holders thereof pursuant to the applicable Exchange Offer.

Consummation Deadline: As defined in Section 3(b) hereof.

Effectiveness Deadline: As defined in Section 3(a) and 4(a) hereof.

Exchange Act: The Securities Exchange Act of 1934, as amended.

Exchange Notes: The Issuers’ 10.625% Senior Notes due 2011 to be issued pursuant to the Indenture (i) in the Exchange Offer or (ii) as contemplated by Section 6(b) hereof. References to Exchange Notes received by a Broker-Dealer from the Issuers pursuant to the Exchange Offer shall also refer to any Additional Dividend Notes that are received by such Broker-Dealer from the Issuers prior to such Broker-Dealer’s sale of the Exchange Notes in respect of which such Additional Dividend Notes were issued.

Exchange Offer: The exchange and issuance by the Issuers of a principal amount of Exchange Notes (which shall be registered pursuant to the Exchange Offer Registration Statement) equal to the outstanding principal amount of Initial Notes that are validly tendered and not withdrawn by Holders in connection with such exchange and issuance.

Exchange Offer Registration Statement: The Registration Statement relating to the Exchange Offer for the Initial Notes, including the related Prospectus.

Filing Deadline: As defined in Section 3(a) and 4(a) hereof.

Holders: As defined in Section 2 hereof.

Majority Holders: As defined in Section 6(c)(xi) hereof.

Prospectus: The prospectus included in a Registration Statement at the time such Registration Statement is declared effective, as amended or supplemented by any prospectus supplement and by all other amendments thereto, including post-effective amendments, and all material incorporated by reference into such Prospectus.

Recommencement Date: As defined in Section 6(d) hereof.

Registration Default: As defined in Section 5 hereof.

Registration Statement: The Exchange Offer Registration Statement or the Shelf Registration Statement, in each case, (i) that is filed pursuant to the provisions of this Agreement and (ii) including the Prospectus included therein, all amendments and supplements thereto (including post-effective amendments) and all exhibits and material incorporated by reference therein.

Rule 144: Rule 144 promulgated under the Act.

Shelf Registration Statement: As defined in Section 4 hereof.

Suspension Notice: As defined in Section 6(d) hereof.

2

Suspension Period: As defined in Section 4(c) hereof.

TIA: The Trust Indenture Act of 1939 (15 U.S.C. Section 77aaa-77bbbb) as in effect on the Closing Date.

Transfer Restricted Securities: (I) Each Initial Note, until the earliest to occur of (a) the date on which such Initial Note is exchanged in an Exchange Offer for an Exchange Note and entitled to be resold to the public without complying with the prospectus delivery requirements of the Act, (b) the date on which such Initial Note has been disposed of in accordance with a Shelf Registration Statement (and, if an Exchange Offer has been Consummated prior to such purchase, purchasers thereof have been issued Exchange Notes), or (c) the date on which such Initial Note is distributed to the public pursuant to Rule 144 under the Act (and, if an Exchange Offer has been Consummated prior to such purchase, purchasers thereof have been issued Exchange Notes) or is saleable pursuant to Rule 144(k) under the Act and (II) each Exchange Note issued to a Broker-Dealer in an Exchange Offer until such Exchange Note is disposed of by a Broker-Dealer pursuant to the “Plan of Distribution” contemplated by the Exchange Offer Registration Statement (including the delivery of the Prospectus contained therein).

SECTION 2. Holders. A Person is deemed to be a holder of Transfer Restricted Securities (each, a “Holder”) whenever such Person owns Transfer Restricted Securities.

SECTION 3. Registered Exchange Offers.

(a) Unless the Exchange Offer shall not be permitted by applicable law or Commission policy (after the procedures set forth in Section 6(a)(i) below have been complied with), the Issuers shall (i) cause the Exchange Offer Registration Statement to be filed with the Commission as soon as practicable after the Closing Date, but in no event later than 120 days after the Closing Date (such 120th day being the “Filing Deadline”), (ii) use their reasonable best efforts to cause the Exchange Offer Registration Statement to become effective at the earliest possible time, but in no event later than 210 days after the Closing Date (such 210th day being the “Effectiveness Deadline”), (iii) in connection with the foregoing, (A) file all pre-effective amendments to the Exchange Offer Registration Statement as may be necessary in order to cause it to become effective, (B) file, if applicable, a post-effective amendment to the Exchange Offer Registration Statement pursuant to Rule 430A under the Act and (C) cause all necessary filings, if any, in connection with the registration and qualification of the Exchange Notes to be made under the Blue Sky laws of such jurisdictions as are necessary to permit Consummation of the Exchange Offer, subject to the proviso contained in Section 6(c)(xii) below, and (iv) upon the effectiveness of the Exchange Offer Registration Statement and within the time period contemplated by Section 3(b) hereof, commence and Consummate the Exchange Offer. The Exchange Offer shall be on the appropriate form available to the Issuers permitting (i) registration of the Exchange Notes to be offered in exchange for the Initial Notes that are Transfer Restricted Securities and (ii) resales of Exchange Notes by Broker-Dealers that tendered into the Exchange Offer Initial Notes that such Broker-Dealer acquired for its own account as a result of market

3

making activities or other trading activities (other than Initial Notes acquired directly from any Issuer or any of their Affiliates) as contemplated by Section 3(c) below.

(b) The Issuers shall use their respective reasonable best efforts to cause the Exchange Offer Registration Statement to be effective continuously, and shall keep the Exchange Offer open for a period of not less than the minimum period required under applicable federal and state securities laws to Consummate such Exchange Offer; provided, however, that in no event shall such period be less than 20 Business Days. The Issuers shall cause the Exchange Offer to comply with all applicable federal and state securities laws. No securities other than the Exchange Notes (including any registered notes being offered in exchange for other notes of the same series as the Initial Notes) shall be included in the Exchange Offer Registration Statement. The Issuers shall use their respective reasonable best efforts to cause the Exchange Offer to be Consummated on the earliest practicable date after the Exchange Offer Registration Statement has become effective, but in no event later than 30 Business Days thereafter (such 30th Business Day being the “Consummation Deadline”).

(c) The Issuers shall include a “Plan of Distribution” section in the Prospectus contained in the Exchange Offer Registration Statement and indicate therein that any Broker-Dealer who holds Transfer Restricted Securities that were acquired for the account of such Broker-Dealer as a result of market-making activities or other trading activities (other than Initial Notes acquired directly from the Issuers or any Affiliate of either Issuer), may exchange such Transfer Restricted Securities pursuant to the Exchange Offer. Such “Plan of Distribution” section shall also contain all other information with respect to such sales by such Broker-Dealers that the Commission may require in order to permit such sales pursuant thereto, but such “Plan of Distribution” shall not name any such Broker-Dealer or disclose the amount of Transfer Restricted Securities held by any such Broker-Dealer, except to the extent required by the Commission as a result of a change in policy, rules or regulations after the date of this Agreement. See the Shearman & Sterling no-action letter (available July 2, 1993).

Because such Broker-Dealer may be deemed to be an “underwriter” within the meaning of the Act and must, therefore, deliver a prospectus meeting the requirements of the Act in connection with its initial sale of any Exchange Notes received by such Broker-Dealer in the Exchange Offer, the Issuers shall permit the use of the Prospectus contained in the Exchange Offer Registration Statement by such Broker-Dealer to satisfy such prospectus delivery requirement. To the extent necessary to ensure that the Prospectus contained in the Exchange Offer Registration Statement is available for sales of Exchange Notes by Broker-Dealers, the Issuers agree to use their respective reasonable best efforts to keep the Exchange Offer Registration Statement continuously effective, supplemented, amended and current as required by and subject to the provisions of Sections 6(a) and 6(c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of 180 days from the Consummation Deadline or such shorter period as will terminate when all Transfer Restricted Securities covered by such Registration Statement have been sold pursuant thereto or are no longer outstanding. The Issuers shall provide sufficient copies of the latest version of such Prospectus to such

4

Broker-Dealers, promptly upon request, and in no event later than one day after such request, at any time during such period.

SECTION 4. Shelf Registration.

(a) Shelf Registration. If (i) (A) the Exchange Offer is not permitted by applicable law or Commission policy or (B) an Exchange Offer is not permitted with respect to Initial Notes that are Additional Dividend Notes (in each case after the Issuers have complied with the procedures set forth in Section 6(a)(i) below) or (ii) if any Holder of Transfer Restricted Securities shall notify the Issuers within 20 Business Days following the Consummation of the Exchange Offer that (A) such Holder was prohibited by law or Commission policy from participating in the applicable Exchange Offer or (B) such Holder may not resell the Exchange Notes acquired by it in the applicable Exchange Offer to the public without delivering a prospectus and the Prospectus contained in the Exchange Offer Registration Statement is not appropriate or available for such resales by such Holder or (C) such Holder is a Broker-Dealer and holds Initial Notes acquired directly from the Issuers or any of their Affiliates, then the Issuers shall:

(x) cause to be filed, on or prior to 120 days after the earlier of (i) the date on which the Issuers determine that the Exchange Offer Registration Statement cannot be filed as a result of clause 4(a)(i) above and (ii) the date on which the Issuers receive the notice specified in clause 4(a)(ii) above, (such earlier date, the “Filing Deadline”), a shelf registration statement pursuant to Rule 415 under the Act (which may be an amendment to the Exchange Offer Registration Statement (the “Shelf Registration Statement”)), relating to (1) all Transfer Restricted Securities in the case of clause 4(a)(i)(A) above or all Initial Notes that are Additional Dividend Notes in the case of clause 4(a)(i)(B) above or (2) the Transfer Restricted Securities specified in any notice in the case of clause 4(a)(ii), and

(y) shall use their respective reasonable best efforts to cause such Shelf Registration Statement to become effective on or prior to 120 days after the Filing Deadline for the Shelf Registration Statement (such 120th day the “Effectiveness Deadline”).

If, after the Issuers have filed an Exchange Offer Registration Statement that satisfies the requirements of Section 3(a) above, the Issuers are required to file and make effective a Shelf Registration Statement solely because the Exchange Offer is not permitted under clause 4(a)(i) above, then the filing of the Exchange Offer Registration Statement shall be deemed to satisfy the requirements of clause (x) above; provided that, in such event, the Issuers shall remain obligated to meet the Effectiveness Deadline set forth in clause (y).

To the extent necessary to ensure that the Shelf Registration Statement is available for sales of Transfer Restricted Securities by the Holders thereof entitled to the benefit of this Section 4(a) and the other securities required to be registered therein pursuant to Section 6(b)(ii) hereof, the Issuers shall use their respective reasonable best

5

efforts to keep any Shelf Registration Statement required by this Section 4(a) continuously effective, supplemented, amended and current as required by and subject to the provisions of Section 6(b) and 6(c) hereof and in conformity with the requirements of this Agreement, the Act and the policies, rules and regulations of the Commission as announced from time to time, for a period of at least two years (as extended pursuant to Section 6(d)) following the Closing Date, or such shorter period as will terminate on the earlier of the date when all Transfer Restricted Securities covered by such Shelf Registration Statement have been sold pursuant thereto, no longer constitute Transfer Restricted Securities or are no longer outstanding.

(b) Provision by Holders of Certain Information in Connection with the Shelf Registration Statement. No Holder of Transfer Restricted Securities may include any of its Transfer Restricted Securities in any Shelf Registration Statement pursuant to this Agreement unless and until such Holder furnishes to the Issuers in writing, within 20 days after receipt of a request therefor, the information specified in Item 507 or 508 of Regulation S-K, as applicable, of the Act for use in connection with any Shelf Registration Statement or Prospectus or preliminary Prospectus included therein. No Holder of Transfer Restricted Securities shall be entitled to liquidated damages pursuant to Section 5 hereof unless and until such Holder shall have provided all such information which is required by rules of the Commission to be included in the Shelf Registration Statement prior to the time it is declared effective. Each selling Holder agrees to promptly furnish additional information required to be disclosed in order to make the information previously furnished to the Issuers by such Holder not materially misleading.

(c) Suspension. The Issuers will have the ability to suspend the Shelf Registration Statement (a “Suspension Period”), if the Issuers determine, in their reasonable best judgment, upon advice of counsel, that the continued effectiveness or use of the Shelf Registration Statement would require the disclosure of confidential information or interfere with any financing, acquisition, reorganization or other material transaction involving the Company or any of its subsidiaries. A Suspension Period shall commence on and include the date that the Issuers give notice that the Shelf Registration Statement is no longer effective or the Prospectus included therein is no longer usable for offers and sales of Transfer Restricted Securities covered by such Registration Statement and continue until holders of such Transfer Restricted Securities either receive the copies of the supplemented or amended prospectus contemplated by Section 6(c) hereof or are advised in writing by the Issuers that use of the Prospectus may be resumed. Any such suspensions may not exceed (i) 60 days in the aggregate in the first twelve month period after the Closing Date, (ii) 60 days in the aggregate in the twelve month period immediately thereafter and (iii) 90 days in the aggregate during any subsequent twelve month period.

SECTION 5. Liquidated Damages. If (a) any Registration Statement required by this Agreement is not filed with the Commission on or prior to the applicable Filing Deadline, (b) any such Registration Statement has not been declared effective by the Commission on or prior to the applicable Effectiveness Deadline, (c) the Exchange Offer has not been Consummated on or prior to the Consummation Deadline or (d) any Registration Statement required by this Agreement is filed and declared effective but

6

shall thereafter cease to be effective or fail to be usable (provided that the unavailability of a Registration Statement for the use of a Holder as a result of such Holder’s failure to provide information pursuant to Section 4(b) or make representations required by Section 6(a)(ii) shall not be deemed to make the Registration Statement fail to be usable) for its intended purpose as required herein (except as provided in, and during the time periods specified in, Section 4(c)) without being succeeded within five days by a post-effective amendment to such Registration Statement that cures such failure and that is itself declared effective within 10 days of the filing of such post-effective amendment (each such event referred to in clauses (a) through (d), a “Registration Default”), then each Issuer hereby jointly and severally agrees to pay to each Holder of Transfer Restricted Securities liquidated damages in an amount equal to $.05 per week per $1,000 in principal amount of Transfer Restricted Securities held by such Holder for each week or portion thereof that the Registration Default continues for the first 90-day period immediately following the occurrence of such Registration Default. The amount of the liquidated damages shall increase by an additional $.05 per week per $1,000 in principal amount of Transfer Restricted Securities with respect to each subsequent 90-day period until all Registration Defaults have been cured, up to a maximum amount of liquidated damages of $.25 per week per $1,000 in principal amount of Transfer Restricted Securities; provided that the Issuers shall in no event be required to pay liquidated damages for more than one Registration Default at any given time. Notwithstanding anything to the contrary set forth herein, (i) upon filing of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of clause (a) above, (ii) upon the effectiveness of the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement), in the case of clause (b) above, (iii) upon Consummation of the Exchange Offer, in the case of clause (c) above, or (iv) upon the filing of a post-effective amendment to the Registration Statement or an additional Registration Statement that causes the Exchange Offer Registration Statement (and/or, if applicable, the Shelf Registration Statement) to again be declared effective or made usable in the case of clause (d) above, the liquidated damages payable with respect to the Transfer Restricted Securities as a result of such clause (a), (b), (c) or (d), as applicable, shall cease to accrue.

All accrued liquidated damages shall be paid to the record Holders entitled thereto in the manner provided for the payment of interest in the Indenture on each Interest Payment Date, as more fully set forth in the Indenture and the Notes. Notwithstanding the fact that any securities for which liquidated damages are due cease to be Transfer Restricted Securities, all obligations of the Issuers to pay liquidated damages with respect to securities shall survive until such time as such obligations with respect to such securities shall have been satisfied in full.

SECTION 6. Registration Procedures.

(a) Exchange Offer Registration Statement. In connection with the Exchange Offer, the Issuers shall (x) comply with all applicable provisions of Section 6(c) below, (y) use their respective reasonable best efforts to effect such exchange and to permit the resale of Exchange Notes by Broker-Dealers that tendered in the Exchange Offer Initial Notes that such Broker-Dealer acquired for its own account as a result of its market

7

making activities or other trading activities (other than Initial Notes acquired directly from any Issuers or any of their Affiliates) being sold in accordance with the intended method or methods of distribution thereof, and (z) comply with all of the following provisions:

(i) If, following the date hereof there has been announced a change in Commission policy with respect to exchange offers such as the Exchange Offer, that in the reasonable opinion of counsel to the Issuers raises a substantial question as to whether the Exchange Offer is permitted by applicable federal law (or, in the reasonable opinion of such counsel, there is a substantial question as to whether an Exchange Offer is permitted with respect to Additional Dividend Notes), the Issuers hereby agree to seek a no-action letter or other favorable decision from the Commission allowing the Issuers to Consummate an Exchange Offer for such Transfer Restricted Securities. The Issuers hereby agree to pursue the issuance of such a decision to the Commission staff level but shall not be required to take commercially unreasonable action to effect a change of Commission policy. In connection with the foregoing, the Issuers hereby agree to take all such other actions (other than such actions as may be commercially unreasonable) as may be requested by the Commission or otherwise required in connection with the issuance of such decision, including without limitation (A) participating in telephonic conferences with the Commission, (B) delivering to the Commission staff an analysis prepared by counsel to the Company setting forth the legal bases, if any, upon which such counsel has concluded that such an Exchange Offer should be permitted and (C) diligently pursuing a resolution (which need not be favorable) by the Commission staff.

(ii) As a condition to its participation in the Exchange Offer, each Holder of Transfer Restricted Securities (including, without limitation, any Holder who is a Broker-Dealer) shall furnish, upon the request of the Issuers, prior to the Consummation of the Exchange Offer, a written representation to the Issuers (which may be contained in the letter of transmittal contemplated by the Exchange Offer Registration Statement) to the effect that (A) such Holder is not an Affiliate of either Issuer or a Broker-Dealer tendering Initial Notes acquired directly from either Issuer for its own account, (B) such Holder will have no arrangement or understanding with any person to participate in the distribution of the Initial Notes or the Exchange Notes within the meaning of the Act, (C) if the Holder is not a Broker-Dealer or is a Broker-Dealer but will not receive Exchange Notes for its own account in exchange for Initial Notes, neither the Holder nor any such other Person is engaged in or intends to participate in a distribution of the Exchange Notes, and (D) any Exchange Notes received by such Holder will be acquired in the ordinary course of its business. If the Holder is a Broker-Dealer that will receive Exchange Notes for its own account in exchange for Initial Notes, it will represent that the Initial Notes to be exchanged for the Exchange Notes were acquired by it as a result of market-making activities or other trading activities, and will acknowledge that it will deliver a prospectus meeting the requirements of the Act in connection with any resale of such

8

Exchange Notes. It is understood that, by acknowledging that it will deliver, and by delivering, a prospectus meeting the requirements of the Act in connection with any resale of such Exchange Notes, the Holder is not admitting that it is an “underwriter” within the meaning of the Act.

(iii) Prior to effectiveness of the Exchange Offer Registration Statement, the Issuers shall provide a supplemental letter to the Commission (A) stating that the Issuers are registering the Exchange Offer in reliance on the position of the Commission enunciated in Exxon Capital Holdings Corporation (available May 13, 1988), Morgan Stanley and Co., Inc. (available June 5, 1991) as interpreted in the Commission’s letter to Shearman & Sterling dated July 2, 1993, and, if applicable, any no-action letter obtained pursuant to Section 6(a)(i) above, (B) including a representation that neither Issuer has entered into any arrangement or understanding with any Person to distribute the Exchange Notes to be received in the Exchange Offer and that, to the best of each Issuer’s information and belief, each Holder participating in the Exchange Offer is acquiring the Exchange Notes in its ordinary course of business and has no arrangement or understanding with any Person to participate in the distribution of the Exchange Notes received in the Exchange Offer and (C) any other undertaking or representation required by the Commission as set forth in any no-action letter obtained pursuant to Section 6(a)(i) above, if applicable.

(b) Shelf Registration Statement. In connection with the Shelf Registration Statement, the Issuers shall:

(i) comply with all the provisions of Section 6(c) below and use their respective reasonable best efforts to effect such registration to permit the sale of the Transfer Restricted Securities being sold in accordance with the intended method or methods of distribution thereof (as indicated in the information furnished to the Issuers pursuant to Section 4(b) hereof), and pursuant thereto the Issuers will prepare and file with the Commission a Registration Statement relating to the registration on any appropriate form under the Act, which form shall be available to the Issuers for the sale of the Transfer Restricted Securities in accordance with the intended method or methods of distribution thereof within the time periods and otherwise in accordance with the provisions hereof, and

(ii) issue, upon the request of any Holder or purchaser of Initial Notes covered by the Shelf Registration Statement, Exchange Notes having an aggregate principal amount equal to the aggregate principal amount of Initial Notes sold pursuant to the Shelf Registration Statement and surrendered to the Issuers for cancellation; the Issuers shall register Exchange Notes on the Shelf Registration Statement for this purpose and issue the Exchange Notes to the purchaser(s) of securities subject to the Shelf Registration Statement in the names as such purchaser(s) shall designate.

9

(c) General Provisions. In connection with any Registration Statement and any related Prospectus required by this Agreement, the Issuers shall:

(i) use their respective reasonable best efforts to keep such Registration Statement continuously effective and provide all requisite financial statements for the period specified in Section 3 or 4 of this Agreement, as applicable. Upon the occurrence of any event that would cause any such Registration Statement or the Prospectus contained therein (A) to contain an untrue statement of material fact or omit to state any material fact necessary to make the statements therein not misleading or (B) not to be effective and usable for resale of Transfer Restricted Securities during the period required by this Agreement, the Issuers shall file promptly an appropriate amendment to such Registration Statement curing such defect, and, if Commission review is required, use their respective reasonable best efforts to cause such amendment to be declared effective as soon as practicable.

(ii) prepare and file with the Commission such amendments and post-effective amendments to the applicable Registration Statement as may be necessary to keep such Registration Statement effective for the applicable period set forth in Section 3 or 4 hereof, as the case may be; cause the Prospectus to be supplemented by any required Prospectus supplement, and as so supplemented to be filed pursuant to Rule 424 under the Act, and to comply fully with Rules 424, 430A and 462, as applicable, under the Act in a timely manner; and comply with the provisions of the Act with respect to the disposition of all securities covered by such Registration Statement during the applicable period in accordance with the intended method or methods of distribution by the sellers thereof set forth in such Registration Statement or supplement to the Prospectus;

(iii) advise the Initial Purchasers and, in the case of a Shelf Registration Statement, each Holder of securities covered thereby, promptly and, if requested by such Holder, confirm such advice in writing, (A) when the Prospectus or any Prospectus supplement or post-effective amendment has been filed, and, with respect to any applicable Registration Statement or any post-effective amendment thereto, when the same has become effective, (B) of any request by the Commission for amendments to the Registration Statement or amendments or supplements to the Prospectus or for additional information relating thereto, (C) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement under the Act or of the suspension by any state securities commission of the qualification of the Transfer Restricted Securities for offering or sale in any jurisdiction, or the initiation of any proceeding for any of the preceding purposes, and (D) of the existence of any fact or the happening of any event that makes any statement of a material fact made in the Registration Statement, the Prospectus, any amendment or supplement thereto or any document incorporated by reference therein untrue, or that requires the making of any additions to or changes in the Registration Statement in order to make the statements therein not misleading, or that requires the making of any additions to or changes in the Prospectus in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. If at any time the Commission shall issue any stop order suspending the effectiveness of the

10

Registration Statement, or any state securities commission or other regulatory authority shall issue an order suspending the qualification or exemption from qualification of the Transfer Restricted Securities under state securities or Blue Sky laws, the Issuers shall use their respective reasonable best efforts to obtain the withdrawal or lifting of such order at the earliest possible time;

(iv) subject to Section 4(c), if any fact or event contemplated by Section 6(c)(iii)(D) above shall exist or have occurred, prepare a supplement or post-effective amendment to the Registration Statement or related Prospectus or any document incorporated therein by reference or file any other required document so that, as thereafter delivered to the purchasers of Transfer Restricted Securities, the Prospectus will not contain an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading;

(v) upon written request, furnish to the requesting Initial Purchasers and, in the case of a Shelf Registration Statement, each requesting Holder of securities covered thereby, in connection with such exchange or sale, if any, before filing with the Commission, copies of any Registration Statement or any Prospectus included therein or any amendments or supplements to any such Registration Statement or Prospectus (including all documents incorporated by reference after the initial filing of such Registration Statement), which documents will be subject to the review and comment of such Holders in connection with such sale, if any, for a period of at least five Business Days, and the Issuers will not file any such Registration Statement or Prospectus or any amendment or supplement to any such Registration Statement or Prospectus (including all such documents incorporated by reference) to which such Holders shall reasonably object within five Business Days after the receipt thereof. A Holder shall be deemed to have reasonably objected to such filing if such Registration Statement, amendment, Prospectus or supplement, as applicable, as proposed to be filed, contains an untrue statement of a material fact or omit to state any material fact necessary to make the statements therein not misleading or fails to comply with the applicable requirements of the Act;

(vi) upon written request, promptly prior to the filing of any document that is to be incorporated by reference into a Registration Statement or Prospectus, provide copies of such document to the requesting Initial Purchaser and in the case of a Shelf Registration Statement, each requesting Holder of securities covered thereby, in connection with such exchange or sale, if any, make the Company’s representatives available for discussion of such document and other customary due diligence matters, and include such information in such document prior to the filing thereof as the Initial Purchasers or such Holders may reasonably request;

(vii) make available, at reasonable times, for inspection by the Initial Purchasers and, in the case of a Shelf Registration Statement, each Holder of securities covered thereby, and the designated counsel or any accountant retained

11

by such Holders, all financial and other records, pertinent corporate documents of each Issuer and cause their officers, directors and employees to supply all information reasonably requested by any such Initial Purchaser, Holder, attorney or accountant in connection with such Registration Statement or any post-effective amendment thereto subsequent to the filing thereof and prior to its effectiveness; provided, however, that such persons shall first agree in writing with the Issuers that such information shall be kept confidential by such persons, unless (i) disclosure of such information is required by court or administrative order or is necessary to respond to inquiries of regulatory authorities, (ii) disclosure of such information is required by law (including any disclosure requirements pursuant to federal securities laws in connection with the filing of such Registration Statement or the use of any Prospectus), (iii) such information becomes generally available to the public other than as a result of a disclosure or failure to safeguard such information by such person or (iv) such information becomes available to such person from a source other than the Issuers or their subsidiaries and such source is not known, after due inquiry, by such person to be bound by a confidentiality agreement; provided further, that the foregoing investigation shall be coordinated on behalf of such persons by one representative designated by and on behalf of such persons and any such confidential information shall be available from such representative to such persons so long as any person agrees to be bound by such confidentiality agreement;

(viii) if requested by the Initial Purchasers and, in the case of a Shelf Registration Statement, any Holders of securities covered thereby, in connection with such exchange or sale, promptly include in any Registration Statement or Prospectus, pursuant to a supplement or post-effective amendment if necessary, such information as such Persons may reasonably request to have included therein, including, without limitation, information relating to the “Plan of Distribution” of the Transfer Restricted Securities; and make all required filings of such Prospectus supplement or post-effective amendment as soon as practicable after the Issuers are notified of the matters to be included in such Prospectus supplement or post-effective amendment;

(ix) furnish to the Initial Purchasers (upon their written request) and, in the case of a Shelf Registration Statement, each Holder of securities covered thereby, in connection with such exchange or sale, without charge, at least one copy of the Registration Statement, as first filed with the Commission, and of each amendment thereto, including all documents incorporated by reference therein and all exhibits (including exhibits incorporated therein by reference);

(x) deliver to each Holder without charge, as many copies of the Prospectus (including each preliminary prospectus) and any amendment or supplement thereto as such Persons reasonably may request; the Issuers hereby consent to the use (in accordance with law) of the Prospectus and any amendment or supplement thereto by each selling Holder in connection with the offering and the sale of the Transfer Restricted Securities covered by the Prospectus or any amendment or supplement thereto;

12

(xi) in the case of a Shelf Registration Statement, enter into such agreements (including underwriting agreements) and, in the case of any Registration Statement contemplated by this Agreement, make such customary representations and warranties similar to those contained in the Purchase Agreement and take all such other actions in connection therewith in order to expedite or facilitate the disposition of the Transfer Restricted Securities pursuant to any applicable Registration Statement contemplated by this Agreement as may be reasonably requested by any Initial Purchaser or, in the case of a Shelf Registration Statement, the Holders of a majority in aggregate principal amount of the Transfer Restricted Securities covered thereby (the “Majority Holders”) in connection with any sale or resale pursuant to any applicable Registration Statement. In such connection, the Issuers shall:

(A) upon request of the Majority Holders (in the case of a Shelf Registration Statement) or any Initial Purchaser (in the case of an Exchange Offer), furnish (or in the case of Sections 6(c)(xi)(A)(2) and 6(c)(xi)(A)(3), use their reasonable best efforts to cause to be furnished) to each Holder upon Consummation of the Exchange Offer or upon the effectiveness of the Shelf Registration Statement, as the case may be:

(1) a customary certificate, dated such date, signed on behalf of each Issuer by (x) the President or any Vice President and (y) a principal financial or accounting officer of such Issuer, confirming, as of the date thereof, matters similar to those set forth in Section 6(f) of the Purchase Agreement and such other similar matters as may be reasonably requested;

(2) an opinion, dated the date of Consummation of the Exchange Offer or the date of effectiveness of the Shelf Registration Statement, as the case may be, of counsel for the Issuers covering matters similar to those set forth in paragraphs (c) and (d) of Section 6 of the Purchase Agreement and such other matter as may be reasonably requested, and in any event including a statement to the effect that such counsel has participated in conferences with officers and other representatives of the Issuers and representatives of the independent public accountants for the Issuers and have considered the matters required to be stated therein and the statements contained therein, although such counsel has not independently verified the accuracy, completeness or fairness of such statements; and that such counsel advises that, on the basis of the foregoing (relying as to materiality to the extent such counsel deems appropriate upon the statements of officers and other representatives of the Issuers and without independent check or verification), no facts came to such counsel’s attention that caused such counsel to believe that the applicable Registration Statement, at the time such Registration Statement or any post-effective amendment

13

thereto became effective and, in the case of the Exchange Offer Registration Statement, as of the date of Consummation of the Exchange Offer, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or that the Prospectus contained in such Registration Statement as of its date and, in the case of the opinion dated the date of Consummation of the Exchange Offer, as of the date of Consummation, contained an untrue statement of a material fact or omitted to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. Without limiting the foregoing, such counsel may state further that such counsel assumes no responsibility for, and has not independently verified, the accuracy, completeness or fairness of the financial statements, notes and schedules and other financial and statistical data included in any Registration Statement contemplated by this Agreement or the related Prospectus; and

(3) a customary comfort letter, dated the date of Consummation of the Exchange Offer, or as of the date of effectiveness of the Shelf Registration Statement, as the case may be, from the Issuers’ independent accountants, in the customary form and covering matters of the type customarily covered in comfort letters to underwriters in connection with underwritten offerings; and

(B) deliver such other documents and certificates as may be reasonably requested by any of the Initial Purchasers or, in the case of any Shelf Registration Statement, the Majority Holders, to evidence compliance with the matters covered in Section 6(c)(xi)(A) above and with any customary conditions contained in any agreement entered into by the Issuers pursuant to this Section 6(c)(xi);

(xii) prior to any public offering of Transfer Restricted Securities, cooperate with the Holders named in the applicable Registration Statement (or any prospectus supplement thereto) and their counsel in connection with the registration and qualification of the Transfer Restricted Securities under the securities or Blue Sky laws of such jurisdictions as any such Holders may request and do any and all other acts or things necessary or advisable to enable the disposition in such jurisdictions of the Transfer Restricted Securities covered by the applicable Registration Statement; provided, however, that neither Issuer shall be required to register or qualify as a foreign corporation or partnership where it is not now so qualified or to take any action that would subject it to the service of process in suits or to taxation, other than as to matters and transactions relating to the Registration Statement, in any jurisdiction where it is not now so subject;

14

(xiii) in connection with any sale of Transfer Restricted Securities that will result in such securities no longer being Transfer Restricted Securities, cooperate with the Holders to facilitate the timely preparation and delivery of certificates representing Transfer Restricted Securities to be sold and not bearing any restrictive legends; and, subject to the provisions of the Indenture regarding global securities, to register such Transfer Restricted Securities in such denominations and such names as the selling Holders may request at least two Business Days prior to such sale of Transfer Restricted Securities;

(xiv) use their respective reasonable best efforts to cause the disposition of the Transfer Restricted Securities covered by the Registration Statement to be registered with or approved by such other governmental agencies or authorities as may be necessary to enable the seller or sellers thereof to consummate the disposition of such Transfer Restricted Securities, subject to the proviso contained in Section 6(c)(xii) above;

(xv) provide a CUSIP number for all Transfer Restricted Securities not later than the effective date of a Registration Statement covering such Transfer Restricted Securities and provide the Trustee with printed certificates for the Transfer Restricted Securities which are in a form eligible for deposit with the Depository Trust Company;

(xvi) otherwise use their respective reasonable best efforts to comply with all applicable rules and regulations of the Commission, and make generally available to its security holders with regard to any applicable Registration Statement, as soon as practicable, a consolidated earnings statement meeting the requirements of Rule 158 (which need not be audited) covering a twelve-month period beginning after the effective date of the Registration Statement (as such term is defined in paragraph (c) of Rule 158 under the Act); and

(xvii) provide promptly to each Holder, upon request, each document filed with the Commission pursuant to the requirements of Section 13 or Section 15(d) of the Exchange Act. Such documents may be provided electronically, at the Issuers’ discretion.

(d) Restrictions on Holders. Each Holder agrees by acquisition of a Transfer Restricted Security that, upon receipt of the notice referred to in Section 4(c) or Section 6(c)(iii)(C) or any notice from the Issuers of the existence of any fact of the kind described in Section 6(c)(iii)(D) hereof (in each case, a “Suspension Notice”), such Holder will forthwith discontinue disposition of Transfer Restricted Securities pursuant to the applicable Registration Statement until (i) such Holder has received copies of the supplemented or amended Prospectus contemplated by Section 6(c)(iv) hereof, or (ii) such Holder is advised in writing by the Issuers that the use of the Prospectus may be resumed, and has received copies of any additional or supplemental filings that are incorporated by reference in the Prospectus (in each case, the “Recommencement Date”). Each Holder receiving a Suspension Notice hereby agrees that it will either (i) destroy any Prospectuses, other than permanent file copies, then in such Holder’s

15

possession which have been replaced by the Issuers with more recently dated Prospectuses or (ii) deliver to the Issuers (at the Issuers’ expense) all copies, other than permanent file copies, then in such Holder’s possession of the Prospectus covering such Transfer Restricted Securities that was current at the time of receipt of the Suspension Notice. The time period regarding the effectiveness of such Registration Statement set forth in Section 3 or 4 hereof, as applicable, shall be extended by a number of days equal to the number of days in the period from and including the date of delivery of the Suspension Notice to the date of delivery of the Recommencement Date.

No Holder may participate in any underwritten registration under the Agreement unless such Holder (a) agrees to sell such Holder’s Transfer Restricted Securities on the basis provided in any underwriting arrangements approved by the Persons entitled under this Agreement to approve such arrangements and (b) completes and executes all reasonable questionnaires, powers of attorneys, indemnities, underwriting agreements, lock-up letters and other documents required under the terms of such underwriting arrangements.

The Issuers shall ensure that any Additional Dividend Notes issued with respect to securities that are not Transfer Restricted Securities are also not Transfer Restricted Securities when issued, whether through the maintenance of an effective Shelf Registration Statement or otherwise.

SECTION 7. Registration Expenses.

(a) All expenses incident to the Issuers’ performance of or compliance with this Agreement will be borne by the Issuers, regardless of whether a Registration Statement becomes effective, including without limitation: (i) all registration and filing fees and expenses; (ii) all fees and expenses of compliance with federal securities and state Blue Sky or securities laws; (iii) all expenses of printing (including printing certificates for the Exchange Notes to be issued in the Exchange Offer and printing of Prospectuses), messenger and delivery services and telephone; (iv) all fees and disbursements of counsel for the Issuers and, in accordance with Section 7(b) below, the Holders of Transfer Restricted Securities; (v) all application and filing fees in connection with listing the Exchange Notes on a national securities exchange or automated quotation system pursuant to the requirements hereof; and (vi) all fees and disbursements of independent certified public accountants of the Issuers (including the expenses of any special audit and comfort letters required by or incident to such performance).

The Issuers will, in any event, bear their internal expenses (including, without limitation, all salaries and expenses of its officers and employees performing legal or accounting duties), the expenses of any annual audit and the fees and expenses of any Person, including special experts, retained by either Issuer.

(b) In connection with any Registration Statement required by this Agreement (including, without limitation, the Exchange Offer Registration Statement and the Shelf Registration Statement), the Issuers will reimburse the Initial Purchasers and the Holders of Transfer Restricted Securities who are tendering Initial Notes in the Exchange Offer

16

and/or selling or reselling Initial Notes or Exchange Notes pursuant to the “Plan of Distribution” contained in the Exchange Offer Registration Statement or the Shelf Registration Statement, as applicable, for the reasonable fees and disbursements of not more than one counsel, who shall be Davis Polk & Wardwell, unless another firm shall be chosen by the Holders of a majority in principal amount of the Transfer Restricted Securities for whose benefit such Registration Statement is being prepared.

SECTION 8. Indemnification.

(a) Each Issuer agrees, jointly and severally, to indemnify and hold harmless each Holder, its directors, officers and each Person, if any, who controls such Holder (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act), from and against any and all losses, claims, damages, liabilities, judgments, (including without limitation, any legal or other expenses incurred in connection with investigating or defending any matter, including any action that could give rise to any such losses, claims, damages, liabilities or judgments) caused by any untrue statement or alleged untrue statement of a material fact contained in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto) provided by either Issuer to any Holder or any prospective purchaser of Exchange Notes or registered Initial Notes, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages, liabilities or judgments are caused by an untrue statement or omission or alleged untrue statement or omission that is based upon information relating to any of the Holders furnished in writing to the Issuers by any of the Holders; provided, however, that the foregoing indemnity agreement with respect to the preliminary prospectus shall not inure to the benefit of any Holder who failed to deliver the Prospectus, as then amended or supplemented (so long as the Prospectus and any such amendment or supplement was provided by the Issuers to the Holders in the requisite quantity and on a timely basis to permit proper delivery) to the person asserting any losses, claims, damages, liabilities or judgments caused by any untrue statement or alleged untrue statement of a material fact contained in the preliminary prospectus, or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such material misstatement or omission or alleged material misstatement or omission was cured in the Prospectus, as so amended or supplemented.

(b) Each Holder of Transfer Restricted Securities agrees, severally and not jointly, to indemnify and hold harmless each Issuer, and their respective directors and officers, and each person, if any, who controls each Issuer (within the meaning of Section 15 of the Act or Section 20 of the Exchange Act) to the same extent as the foregoing indemnity from the Issuers set forth in Section 8(a) above, but only with reference to information relating to such Holder furnished in writing to the Issuers by such Holder expressly for use in any Registration Statement, preliminary prospectus or Prospectus (or any amendment or supplement thereto). In no event shall any Holder, its directors, officers or any Person who controls such Holder be liable or responsible for any amount in excess of the total amount received by such Holder with respect to its sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds the amount of any

17

damages that such Holder, its directors, officers or any Person who controls such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission.

(c) In case any action shall be commenced involving any person in respect of which indemnity may be sought pursuant to Section 8(a) or 8(b) (the “indemnified party”), the indemnified party shall promptly notify the person against whom such indemnity may be sought (the “indemnifying person”) in writing and the indemnifying party shall assume the defense of such action, including the employment of counsel reasonably satisfactory to the indemnified party and the payment of all reasonable fees and expenses of such counsel, as incurred (except that in the case of any action in respect of which indemnity may be sought pursuant to both Sections 8(a) and 8(b), a Holder shall not be required to assume the defense of such action pursuant to this Section 8(c), but may employ separate counsel and participate in the defense thereof, but the fees and expenses of such counsel, except as provided below, shall be at the expense of the Holder). Any indemnified party shall have the right to employ separate counsel in any such action and participate in the defense thereof, but the fees and expenses of such counsel shall be at the expense of the indemnified party unless (i) the employment of such counsel shall have been specifically authorized in writing by the indemnifying party, (ii) the indemnifying party shall have failed to assume the defense of such action or employ counsel reasonably satisfactory to the indemnified party or (iii) the named parties to any such action (including any impleaded parties) include both the indemnified party and the indemnifying party, and the indemnified party shall have been advised by such counsel that there may be one or more legal defenses available to it which are different from or additional to those available to the indemnifying party (in which case the indemnifying party shall not have the right to assume the defense of such action on behalf of the indemnified party). In any such case, the indemnifying party shall not, in connection with any one action or separate but substantially similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances, be liable for the fees and expenses of more than one separate firm of attorneys (in addition to any local counsel) for all indemnified parties and all such fees and expenses shall be reimbursed as they are incurred. Such firm shall be designated in writing by a majority of the Holders, in the case of the parties indemnified pursuant to Section 8(a), and by the Company, in the case of parties indemnified pursuant to Section 8(b). No indemnifying party shall be liable for any settlement of any proceeding effected without its written consent, but if settled with such consent or if there be final judgment for the plaintiff, each indemnifying party shall indemnify and hold harmless the indemnified party from and against any and all losses, claims, damages, liabilities and judgments by reason of such settlement or judgment. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement or compromise of, or consent to the entry of judgment with respect to, any pending or threatened action in respect of which the indemnified party is or could have been a party and indemnity or contribution may be or could have been sought hereunder by the indemnified party, unless such settlement, compromise or judgment (i) includes an unconditional release of the indemnified party from all liability on claims that are or could have been the subject

18

matter of such action and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act, by or on behalf of the indemnified party.

(d) To the extent that the indemnification provided for in this Section 8 is unavailable to an indemnified party in respect of any losses, claims, damages, liabilities or judgments referred to therein, then each indemnifying party, in lieu of indemnifying such indemnified party, shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages, liabilities or judgments (i) in such proportion as is appropriate to reflect the relative benefits received by the Issuers from their sale of Transfer Restricted Securities, on the one hand, and the Holders from their sale of Transfer Restricted Securities, on the other hand, or (ii) if the allocation provided by clause (i) is not permitted by applicable law, in such proportion as is appropriate to reflect not only the relative benefits referred to in clause (i) but also the relative fault of the Issuers, on the one hand, and of the Holder, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or judgments, as well as any other relevant equitable considerations. The relative fault of the Issuers, on the one hand, and of the Holder, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Issuers, on the one hand, or by the Holder, on the other hand, and the parties’ relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission.

Each Issuer and each Holder agree that it would not be just and equitable if contribution pursuant to this Section 8(d) were determined by pro rata allocation (even if the Holders were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to in the immediately preceding paragraph. The amount paid or payable by an indemnified party as a result of the losses, claims, damages, liabilities or judgments referred to in the immediately preceding paragraph shall be deemed to include, subject to the limitations set forth above, any legal or other expenses incurred by such indemnified party in connection with investigating or defending any matter, including any action, that could have given rise to such losses, claims, damages, liabilities or judgments. Notwithstanding the provisions of this Section 8, no Holder, its directors, its officers or any Person, if any, who controls such Holder shall be required to contribute, in the aggregate, any amount in excess of the amount by which the total received by such Holder with respect to the sale of Transfer Restricted Securities pursuant to a Registration Statement exceeds the amount of any damages which such Holder has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. No person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Holders’ obligations to contribute pursuant to this Section 8(d) are several in proportion to the respective principal amount of Transfer Restricted Securities held by each Holder hereunder and not joint.

SECTION 9. Rule 144A And Rule 144. Each Issuer agrees with each Holder of Transfer Restricted Securities, for so long as any Transfer Restricted Securities remain

19

outstanding and during any period in which the Issuers (i) are not subject to Section 13 or 15(d) of the Exchange Act, to make available, upon request of any Holder, to such Holder or beneficial owner of Transfer Restricted Securities in connection with any sale thereof and any prospective purchaser of such Transfer Restricted Securities designated by such Holder or beneficial owner, the information required by Rule 144A(d)(4) under the Act in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144A, and (ii) are subject to Section 13 or 15(d) of the Exchange Act, to make all filings required thereby in a timely manner in order to permit resales of such Transfer Restricted Securities pursuant to Rule 144.

SECTION 10. Miscellaneous.

(a) Remedies. The Issuers acknowledge and agree that any failure by them to comply with their respective obligations under Sections 3 and 4 hereof may result in material irreparable injury to the Initial Purchasers or the Holders for which there is no adequate remedy at law, that it will not be possible to measure damages for such injuries precisely and that, in the event of any such failure, the Initial Purchasers or any Holder may obtain such relief as may be required to specifically enforce the Issuers’ obligations under Sections 3 and 4 hereof. The Issuers further agree to waive the defense in any action for specific performance that a remedy at law would be adequate.

(b) No Inconsistent Agreements. Neither Issuer will, on or after the date of this Agreement, enter into any agreement with respect to its securities that is inconsistent with the rights granted to the Holders in this Agreement or otherwise conflicts with the provisions hereof. The rights granted to the Holders hereunder do not in any way conflict with and are not inconsistent with the rights granted to the holders of either Issuers’ securities under any agreement in effect on the date hereof.

(c) Amendments and Waivers. The provisions of this Agreement may not be amended, modified or supplemented, and waivers or consents to or departures from the provisions hereof may not be given unless (i) in the case of Section 5 hereof and this clause 10(c)(i), the Issuers have obtained the written consent of Holders of all outstanding Transfer Restricted Securities and (ii) in the case of all other provisions hereof, the Issuers have obtained the written consent of Holders of a majority of the outstanding principal amount of Transfer Restricted Securities (excluding Transfer Restricted Securities held by the Issuers or their Affiliates). Notwithstanding the foregoing, a waiver or consent to departure from the provisions hereof that relates exclusively to the rights of Holders whose Transfer Restricted Securities are being tendered pursuant to the Exchange Offer, and that does not affect directly or indirectly the rights of other Holders whose Transfer Restricted Securities are not being tendered pursuant to such Exchange Offer, may be given by the Holders of a majority of the outstanding principal amount of Transfer Restricted Securities subject to such Exchange Offer.

(d) Third Party Beneficiary. The Holders shall be third party beneficiaries to the agreements made hereunder between the Issuers, on the one hand, and the Initial Purchasers, on the other hand, and shall have the right to enforce such agreements

20

directly to the extent they may deem such enforcement necessary or advisable to protect its rights or the rights of Holders hereunder.

(e) Notices. All notices and other communications provided for or permitted hereunder shall be made in writing by hand-delivery, first-class mail (registered or certified, return receipt requested), telex, telecopier, or air courier guaranteeing overnight delivery:

(i) if to a Holder, at the address set forth on the records of the Registrar, with a copy to the Registrar; and

(ii) if to the Issuers:

Equistar Chemicals, LP

One Houston Center, Suite 700

1221 McKinney Street

Houston, Texas 77010

Telecopier No.: 713-309-2143

Attention: General Counsel

With a copy to:

Baker Botts L.L.P.

910 Louisiana

Houston, Texas 77002

Telecopier No.: 713-229-1522

Attention: Stephen Massad, Esq.

All such notices and communications shall be deemed to have been duly given: at the time delivered by hand, if personally delivered; five Business Days after being deposited in the mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and on the next Business Day, if timely delivered to an air courier guaranteeing overnight delivery.

Copies of all such notices, demands or other communications shall be concurrently delivered by the Person giving the same to the Trustee at the address specified in the Indenture.

(f) Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the successors and assigns of each of the parties, including without limitation and without the need for an express assignment, subsequent Holders; provided, that nothing herein shall be deemed to permit any assignment, transfer or other disposition of Transfer Restricted Securities in violation of the terms hereof or of the Purchase Agreement or the Indenture. If any transferee of any Holder shall acquire Transfer Restricted Securities in any manner, whether by operation of law or otherwise, such Transfer Restricted Securities shall be held subject to all of the terms of this Agreement, and by taking and holding such Transfer Restricted Securities such Person

21

shall be conclusively deemed to have agreed to be bound by and to perform all of the terms and provisions of this Agreement, including the restrictions on resale set forth in this Agreement and, if applicable, the Purchase Agreement, and such Person shall be entitled to receive the benefits hereof.

(g) Counterparts. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement.

(h) Headings. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof.

(i) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE CONFLICT OF LAW RULES THEREOF.

(j) Severability. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions contained herein shall not be affected or impaired thereby.

(k) Entire Agreement. This Agreement is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein with respect to the registration rights granted with respect to the Transfer Restricted Securities. This Agreement supersedes all prior agreements and understandings between the parties with respect to such subject matter.

22

IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first written above.

EQUISTAR CHEMICALS, LP
By:	/s/ Karen A. Twitchell
	Name: Karen A. Twitchell Title: Principal Financial Officer
EQUISTAR FUNDING CORPORATION
By:	/s/ Charles L. Hall
	Name: Charles L. Hall Title: Vice President and Controller

J.P. MORGAN SECURITIES INC. BANC OF AMERICA SECURITIES LLC CITIGROUP GLOBAL MARKETS INC. CREDIT SUISSE FIRST BOSTON LLC
Acting on behalf of themselves and as the Representatives of the several Initial Purchasers
By:	J.P. MORGAN SECURITIES INC.
By:	/s/ David J. Lynch
	Name: David J. Lynch Title: Vice President

EX-4.7A

                                                                  Exhibit 4.7(a)



                             EQUISTAR CHEMICALS, LP
                          EQUISTAR FUNDING CORPORATION,
                                   as Issuers

                                       and

                              THE BANK OF NEW YORK,
                                   as Trustee

                                   ----------

                                    INDENTURE

                           Dated as of April 22, 2003

                                   ----------

                          10 5/8% Senior Notes Due 2011



                                TABLE OF CONTENTS

                                                                            Page
                                                                            ----

                                    ARTICLE 1

            Definitions and Other Provisions of General Application

Section 1.01.    Definitions...................................................1
Section 1.02.    Other Definitions............................................29
Section 1.03.    Rules of Construction........................................30
Section 1.04.    Incorporation by Reference of TIA............................30
Section 1.05.    Conflict with TIA............................................31
Section 1.06.    Compliance Certificates and Opinions.........................31
Section 1.07.    Form of Documents Delivered to Trustee.......................32
Section 1.08.    Acts of Noteholders; Record Dates............................32
Section 1.09.    Notices, Etc., to Trustee and Issuers........................34
Section 1.10.    Notices to Holders; Waivers..................................35
Section 1.11.    Effect of Headings and Table of Contents.....................35
Section 1.12.    Successors and Assigns.......................................35
Section 1.13.    Separability Clause..........................................35
Section 1.14.    Benefits of Indenture........................................35
Section 1.15.    Governing Law................................................35
Section 1.16.    Legal Holidays...............................................36
Section 1.17.    No Personal Liability of Directors, Officers, Employees,
                    Stockholders and Partners.................................36
Section 1.18.    Exhibits.....................................................36
Section 1.19.    Counterparts.................................................36

                                    ARTICLE 2

                                   Note Forms

Section 2.01.    Forms Generally..............................................36
Section 2.02.    Form of Trustee' Certificate of Authentication...............38
Section 2.03.    Restrictive Legends..........................................39

                                    ARTICLE 3

                                   The Notes

Section 3.01.    Title and Terms..............................................41
Section 3.02.    Denominations................................................42
Section 3.03.    Execution, Authentication and Delivery and Dating............42
Section 3.04.    Temporary Notes..............................................43
Section 3.05.    Registration, Registration of Transfer and Exchange..........43
Section 3.06.    Mutilated, Destroyed, Lost and Stolen Notes..................44
Section 3.07.    Payment of Interest Rights Preserved.........................45
Section 3.08.    Persons Deemed Owners........................................46
Section 3.09.    Cancellation.................................................46
Section 3.10.    Computation of Interest......................................46



Section 3.11.    Payment of Liquidated Damages................................47
Section 3.12.    CUSIP Numbers................................................47
Section 3.13.    Book-entry Provisions for Global Notes.......................47
Section 3.14.    Transfer Provisions..........................................48

                                    ARTICLE 4

                                   Covenants

Section 4.01.    Payment of Principal, Premium and Interest...................54
Section 4.02.    Maintenance of Office or Agency..............................55
Section 4.03.    Money for Payments to Be Held in Trust.......................55
Section 4.04.    SEC Reports..................................................56
Section 4.05.    Certificates to Trustee......................................57
Section 4.06.    Limitation on Indebtedness...................................57
Section 4.07.    Limitation on Restricted Payments............................61
Section 4.08.    Additional Interest upon Payment of Permitted Dividends......65
Section 4.09.    Limitation on Dividend and other Payment Restrictions
                    affecting Restricted Subsidiaries.........................66
Section 4.10.    Limitation on Sales of Assets................................68
Section 4.11.    Limitation on Affiliate Transactions.........................69
Section 4.12.    Limitation on Liens..........................................71
Section 4.13.    Repurchase of Notes upon a Change in Control.................71
Section 4.14.    Limitation on Sale and Leaseback Transactions................72
Section 4.15.    Limitation on Line of Business...............................72
Section 4.16.    Limitation on Accounts Receivable Facilities.................72
Section 4.17.    Limitation on Business Activities by Equistar Funding........72
Section 4.18.    Limited Applicability of Covenants when Notes are rated
                    Investment-Grade..........................................73
Section 4.19.    Existence....................................................73
Section 4.20.    Payment of Taxes and Other Claims............................73
Section 4.21.    Maintenance of Properties and Insurance......................73
Section 4.22.    Limitation on Issuance of Guarantees by Restricted
                    Subsidiaries..............................................74
Section 4.23.    Payments for Consents........................................74

                                    ARTICLE 5

                    Consolidation, Merger or Sale of Assets

Section 5.01.    Consolidation, Merger or Sale of Assets by the Company.......74
Section 5.02.    Successor Company Substituted................................75
Section 5.03.    Consolidation, Merger or Sale of Assets by Equistar
                    Funding...................................................76
Section 5.04.    Opinion of Counsel to Trustee................................77

                                    ARTICLE 6

                                    Remedies

Section 6.01.    Events of Default............................................77
Section 6.02.    Acceleration.................................................78
Section 6.03.    Other Remedies...............................................78



Section 6.04.    Waiver of Past Defaults......................................79
Section 6.05.    Control by Majority..........................................79
Section 6.06.    Limitation on Suits..........................................79
Section 6.07.    Rights of Holders to Receive Payment.........................80
Section 6.08.    Collection Suit by Trustee...................................80
Section 6.09.    Trustee May File Proofs of Claim.............................80
Section 6.10.    Priorities...................................................80
Section 6.11.    Undertaking for Costs........................................81
Section 6.12.    Restoration of Rights and Remedies...........................81
Section 6.13.    Rights and Remedies Cumulative...............................81
Section 6.14.    Waiver of Stay, Extension or Usury Laws......................81

                                    ARTICLE 7

                                  The Trustee

Section 7.01.    Certain Duties and Responsibilities..........................82
Section 7.02.    Notice of Defaults...........................................83
Section 7.03.    Certain Rights of Trustees...................................83
Section 7.04.    Not Responsible for Recitals or Issuance of Notes............84
Section 7.05.    Trustee's Disclaimer.........................................85
Section 7.06.    May Hold Notes...............................................85
Section 7.07.    Money Held in Trust..........................................85
Section 7.08.    Compensation and Reimbursement...............................85
Section 7.09.    Conflicting Interests........................................86
Section 7.10.    Corporate Trustee Required; Eligibility......................86
Section 7.11.    Resignation and Removal; Appointment of Successor............86
Section 7.12.    Acceptance of Appointment by Successor.......................87
Section 7.13.    Merger, Conversion, Consolidation or Succession to Business..88
Section 7.14.    Preferential Collection of Claims Against the Issuers........88
Section 7.15.    Appointment of Authenticating Agent..........................88

                                    ARTICLE 8

              Holders' List and Reports by Trustee and the Issuers

Section 8.01.    The Issuers to Furnish Trustee Names and Addresses of
                    Holders; Stock Exchange Listing...........................88
Section 8.02.    Preservation of Information; Communications to Holders.......89
Section 8.03.    Reports by Trustee...........................................89

                                    ARTICLE 9

                        Amendment, Supplement or Waiver

Section 9.01.    Without Consent of the Holders...............................90
Section 9.02.    With Consent of Holders......................................90
Section 9.03.    Execution of Amendments, Supplements or Waivers..............92
Section 9.04.    Revocation and Effect of Consents............................92
Section 9.05.    Conformity with TIA..........................................92
Section 9.06.    Notation on or Exchange of Notes.............................92



                                   ARTICLE 10

                              Redemption of Notes

Section 10.01.   Right of Redemption..........................................93
Section 10.02.   Applicability of Article.....................................93
Section 10.03.   Election to Redeem; Notice to Trustee........................93
Section 10.04.   Selection by Trustee of Notes to Be Redeemed.................93
Section 10.05.   Notice of Redemption.........................................93
Section 10.06.   Deposit of Redemption Price..................................94
Section 10.07.   Notes Payable on Redemption Date.............................95
Section 10.08.   Notes Redeemed in Part.......................................95

                                   ARTICLE 11

                           Satisfaction and Discharge

Section 11.01.   Satisfaction and Discharges of Indenture.....................96
Section 11.02.   Application of Trust Money...................................97

                                   ARTICLE 12

                       Defeasance and Covenant Defeasance

Section 12.01.   Option of the Issuers to Effect Defeasance or Covenant
                    Defeasance................................................97
Section 12.02.   Legal Defeasance and Discharge...............................97
Section 12.03.   Covenant Defeasance..........................................98
Section 12.04.   Conditions to Legal or Covenant Defeasance...................98
Section 12.05.   Deposited Money and Government Securities to Be Held in
                    Trust; Other Miscellaneous Provisions ...................100
Section 12.06.   Repayment to Issuers........................................100
Section 12.07.   Reinstatement...............................................100

                                   ARTICLE 13

                             Subsidiary Guarantees

Section 13.01.   The Guarantees..............................................101
Section 13.02.   Guarantee Unconditional.....................................101
Section 13.03.   Discharge; Reinstatement....................................102
Section 13.04.   Waiver by the Subsidiary Guarantors.........................102
Section 13.05.   Subrogation and Contribution................................102
Section 13.06.   Stay of Acceleration........................................102
Section 13.07.   Limits of Guarantees........................................103
Section 13.08.   Execution and Delivery of Subsidiary Guarantee..............103
Section 13.09.   Release of Guarantee........................................103
Section 13.10.   Consolidation, Merger or Sale of Assets by a Subsidiary
                    Guarantor................................................104



                                                                            Page
                                                                            ----

EXHIBIT A - Form of Note

EXHIBIT B - Form of Supplemental Indenture

EXHIBIT C - Form of Certificate of Beneficial Ownership

EXHIBIT D - Form of Regulation S Certificate

EXHIBIT E - Form of Institutional Accredited Investor Certificate

                                       v




          INDENTURE, dated as of April 22, 2003 (as amended, supplemented or
otherwise modified from time to time, the "Indenture"), among EQUISTAR
CHEMICALS, LP, a Delaware limited partnership (as further defined below, the
"Company"), EQUISTAR FUNDING CORPORATION, a Delaware corporation (as further
defined below, "Equistar Funding") and THE BANK OF NEW YORK, a New York banking
corporation, as trustee (the "Trustee").

                             RECITALS OF THE COMPANY

          The Company and Equistar Funding (collectively, the "Issuers") have
duly authorized the execution and delivery of this Indenture to provide for the
issuance of (i) initially, $450,000,000 aggregate principal amount of 10 %
                                                                        -
Senior Notes due 2011 of the Company (together with any Additional Dividend
Notes (as defined herein) issued in respect thereof and as further defined
below, the "Initial Notes" and, together with any Exchange Notes (as defined
herein) issued in respect thereof (and any Additional Dividend Notes issued in
respect thereof), the "Original Notes"), (ii) if and when issued, additional
10 % Senior Notes due 2011 of the Company (together with any Additional Dividend
  -
Notes issued in respect thereof and as further defined below, the "Initial
Additional Notes" and, together with any Exchange Notes issued in respect
thereof (and any Additional Dividend Notes issued in respect thereof), the
"Additional Notes") issuable as provided in this Indenture. All things necessary
to make the Original Notes, when duly issued, executed and delivered by each
Issuer and authenticated and delivered by the Trustee hereunder, the valid
obligation of each Issuer, and to make this Indenture a valid agreement of each
Issuer as of the date hereof, in accordance with the terms of the Original Notes
and this Indenture, have been done.

          NOW, THEREFORE, THIS INDENTURE WITNESSETH:

          For and in consideration of the premises and the purchase of the Notes
(as defined herein) by the Holders (as defined herein) thereof, it is mutually
agreed, for the equal and ratable benefit of all Holders, as follows:

                                    ARTICLE 1

             Definitions and Other Provisions of General Application

          Section 1.1. Definitions.

          "Accounts Receivable Subsidiary" means any Wholly Owned Subsidiary of
the Company (i) which is formed solely for the purpose of, and which engages in
no activities other than activities in connection with, financing accounts
receivable of the Company and/or its Restricted Subsidiaries, (ii) which is
designated by the Company as an Accounts Receivables Subsidiary pursuant to an
Officers' Certificate delivered to the Trustee, (iii) no portion of Indebtedness
or any other obligation (contingent or otherwise) of which is at any time
recourse to or obligates the Company or any Restricted Subsidiary in any way, or



subjects any property or asset of the Company or any Restricted Subsidiary,
directly or indirectly, contingently or otherwise, to the satisfaction thereof,
other than pursuant to (1) representations, warranties and covenants (or, any
indemnity with respect to such representations, warranties and covenants)
entered into in the ordinary course of business in connection with the sale
(including a sale in exchange for a promissory note of or Equity Interest in
such Accounts Receivable Subsidiary) of accounts receivable to such Accounts
Receivable Subsidiary or (2) any Guarantee of any such accounts receivable
financing by the Company or any Restricted Subsidiary that is permitted to be
incurred pursuant to Section 4.06 and Section 4.07, (iv) with which neither the
Company nor any Restricted Subsidiary of the Company has any contract,
agreement, arrangement or understanding other than contracts, agreements,
arrangements and understandings entered into in the ordinary course of business
in connection with the sale (including a sale in exchange for a promissory note
of or Equity Interest in such Accounts Receivable Subsidiary) of accounts
receivable in accordance with Section 4.16 and fees payable in the ordinary
course of business in connection with servicing accounts receivable and (v) with
respect to which neither the Company nor any Restricted Subsidiary of the
Company has any obligation (a) to subscribe for additional shares of Capital
Stock or other Equity Interests therein or make any additional capital
contribution or similar payment or transfer thereto other than in connection
with the sale (including a sale in exchange for a promissory note of or Equity
Interest in such Accounts Receivable Subsidiary) of accounts receivable to such
Accounts Receivable Subsidiary in accordance with Section 4.16 or (b) to
maintain or preserve the solvency, any balance sheet term, financial condition,
level of income or results of operations thereof.

          "Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.

          "Acquired Disqualified Stock" means, with respect to any specified
Person, Disqualified Stock of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Disqualified Stock incurred in connection with,
or in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person.

          "Acquired Preferred Stock" means, with respect to any specified
Person, Preferred Stock of any other Person existing at the time such other
Person is merged with or into or became a Subsidiary of such specified Person,
including, without limitation, Preferred Stock incurred in connection with, or
in contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person.

          "Additional Assets" means (a) Capital Stock of a Person that becomes a
Restricted Subsidiary as a result of the acquisition of such Capital Stock by
the Company or another Restricted Subsidiary from any Person other than the
Company or an Affiliate of the Company, (b) any controlling interest or joint
venture interest in another business or

                                       2



(c) any other asset (other than securities, cash, Cash Equivalents, or other
current assets) to be owned by the Company or any Restricted Subsidiary.

          "Additional Notes" means any notes issued under this Indenture in
addition to the Original Notes, including any Exchange Notes issued in exchange
therefor, hIaving the same terms in all respects (except (i) that such Notes
need not provide for payment of interest scheduled and paid prior to the date of
issuance of such notes and (ii) provisions relating to Liquidated Damages
thereon) as the Initial Notes, together with any Additional Dividend Notes
issued in respect thereof.

          "Additional Interest Amount" means an amount, to be paid on the
applicable Dividend Payment Date to each Holder of record on the applicable
Notice Date, equal to the amount of interest that would be paid on the aggregate
principal amount of the Notes held by such Holder for a period of 90 days at a
rate of 3.0% per annum, calculated on the basis of a 360-day year (without any
compounding of such interest).

          "Affiliate" of any specified Person means any other Person directly or
indirectly, through one or more intermediaries, controlling or controlled by or
under direct or indirect common control with such specified Person. For the
purpose of this definition, "control" when used with respect to any specified
Person means the possession, direct or indirect, of the power to manage or
direct or cause the direction of the management and policies of such Person
directly or indirectly, whether through the ownership of voting stock, by
contract or otherwise; and the terms "controlling" and "controlled" have
meanings correlative to the foregoing.

          "Asset Sale" means (i) the sale, lease, conveyance or other
disposition (other than the creation of a Lien) of any assets (other than the
disposition of inventory or equipment in the ordinary course of business
consistent with industry practices or the disposition of Cash Equivalents)
(provided that the sale, conveyance or other disposition of all or substantially
all the assets of the Company and its Restricted Subsidiaries taken as a whole
will be governed by Section 4.13 and/or Section 5.01 and not by the provisions
of Section 4.10), (ii) the sale by the Company or any of its Restricted
Subsidiaries of Equity Interests of any of the Company's Restricted
Subsidiaries, Unrestricted Subsidiaries or Joint Ventures and (iii) the issuance
by any of the Company's Restricted Subsidiaries of Equity Interests of such
Restricted Subsidiary, in the case of clauses (i), (ii) or (iii), whether in a
single transaction or a series of related transactions (a) that have a fair
market value in excess of $25 million or (b) for Net Proceeds in excess of $25
million.

          Notwithstanding the foregoing:

          (a) a transfer of assets by the Company to a Restricted Subsidiary or
by a Restricted Subsidiary to the Company or to another Restricted Subsidiary;

          (b) an issuance of Equity Interests by a Restricted Subsidiary to the
Company or to another Restricted Subsidiary;

          (c) an issuance of Preferred Stock by a Finance Subsidiary that is
permitted by Section 4.06;

                                       3



          (d) sales (including a sale in exchange for a promissory note of or
Equity Interest in such Accounts Receivable Subsidiary) of accounts receivable,
related assets to an Accounts Receivable Subsidiary in connection with any
Receivables Facility;

          (e) Sale and Lease-Back Transactions; and

          (f) Restricted Payments (and Permitted Dividends payable in cash)
permitted by Section 4.07 and Permitted Investments

will not be deemed to be an Asset Sale.

          "Attributable Debt" in respect of a Sale and Lease-Back Transaction
means, at the time of determination, the present value (discounted at the rate
of interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such Sale and Lease-Back Transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended).

          "Authenticating Agent" means any Person authorized by the Trustee
pursuant to Section 7.15 to act on behalf of the Trustee to authenticate Notes
of one or more series.

          "Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the board of directors (or any committee thereof)
of such Person (or, in the case of the Company, the Partnership Governance
Committee) and to be in full force and effect on the date of such certification,
and delivered to the Trustee. Unless the context otherwise requires, "Board
Resolution" refers to a Board Resolution of the Company.

          "Business Day" means any day except a Saturday, Sunday or other day on
which commercial banks in The City of New York are authorized by law to close.

          "Capital Lease Obligation" means, at the time any determination
thereof is to be made, the amount of the liability in respect of a capital lease
that would at such time be required to be capitalized on a balance sheet in
accordance with GAAP.

          "Capital Stock" means (i) in the case of a corporation, corporate
stock, (ii) in the case of an association or business entity, any and all
shares, interests, participations, rights or other equivalents (however
designated) of corporate stock, (iii) in the case of a partnership, partnership
interests (whether general or limited) and (iv) any other interest or
participation that confers on a Person the right to receive a share of the
profits and losses of, or distributions of assets of, the issuing Person.

          "Cash Equivalents" means (a) United States dollars, (b) securities
issued or directly and fully guaranteed or insured by the United States
government or any agency or instrumentality thereof having maturities of not
more than one year from the date of acquisition, (c) demand deposits, time
deposits and certificates of deposit with maturities of one year or less from
the date of acquisition, bankers' acceptances with maturities not exceeding one
year from the date of acquisition and overnight bank deposits, in each case

                                       4



with any bank or trust company organized or licensed under the laws of the
United States or any State thereof having capital, surplus and undivided profits
in excess of $250 million, (d) repurchase obligations with a term of not more
than seven days for underlying securities of the type described in clauses (b)
and (c) above entered into with any financial institution meeting the
qualifications specified in clause (c) above, (e) commercial paper rated as
least P-1 or A-1 by Moody's or S&P, respectively, (f) investments in any U.S.
dollar-denominated money market fund as defined by Rule 2a-7 of the General
Rules and Regulations promulgated under the Investment Company Act of 1940 and
(g) in the case of a Foreign Subsidiary, substantially similar investments
denominated in foreign currencies (including similarly capitalized foreign
banks).

          "Change of Control" means the occurrence of any of the following:

          (i) the sale, transfer, conveyance or other disposition, in one or a
series of related transactions, of all or substantially all the assets of the
Company and its Subsidiaries taken as a whole to any person or group (as such
terms are used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act) other than
to one or more Permitted Holders;

          (ii) the acquisition by any person or group (as defined above), other
than one or more Permitted Holders, of a direct or indirect interest in more
than 50% of the Capital Stock of the Company and the right to exercise a
substantial portion of the powers of (a) Lyondell to act on behalf of the
Partnership Governance Committee and (b) the representatives of Lyondell on the
Partnership Governance Committee (in each case as in effect on the Issue Date),
by way of merger or consolidation or otherwise;

          (iii) any person or group (as defined above), other than one or more
Permitted Holders (or their representatives on the Partnership Governance
Committee), acquires the right, directly or indirectly, to exercise, without the
need for the consent of any Permitted Holder (or their representatives on the
Partnership Governance Committee), a substantial portion of the rights and
powers of the Partnership Governance Committee with respect to matters that
require unanimous consent under the partnership agreement as in effect on the
Issue Date; or

          (iv) the adoption of a plan for the liquidation or dissolution of one
or both of the Issuers, except in connection with a sale, conveyance, transfer
or other disposition of all or substantially all of such Issuer's assets or an
acquisition of Capital Stock of the Company that would not otherwise constitute
a Change of Control pursuant to clauses (i) through (iii).

          "Clearstream" means Clearstream Banking SA and its successors.

          "Code" means the Internal Revenue Code of 1986, as amended.

          "Company" means Equistar Chemicals, LP, a Delaware limited
partnership, or any successor obligor under the Indenture and the Notes pursuant
to Section 5.01.

                                       5



          "Consolidated Cash Flow" means, with respect to any Person for any
period, the Consolidated Net Income of such Person for such period, plus in each
case, without duplication:

          (i) provision for taxes based on income or profits of such Person and
its Restricted Subsidiaries for such period (including any provision for taxes
on the Net Income of any Joint Venture that is a pass-through entity for federal
income tax purposes, to the extent such taxes are paid or payable by such Person
or any of its Restricted Subsidiaries), to the extent that such provision for
taxes was included in computing such Consolidated Net Income;

          (ii) the Fixed Charges of such Person and its Restricted Subsidiaries
for such period, to the extent that such Fixed Charges were deducted in
computing such Consolidated Net Income;

          (iii) depreciation and amortization (including amortization of
goodwill and other intangibles but excluding amortization of prepaid cash
expenses that were paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such depreciation and
amortization were deducted in computing such Consolidated Net Income; and

          (iv) any non-cash charges reducing Consolidated Net Income for such
period (excluding any such non-cash charge to the extent that it represents an
accrual of or reserve for cash expenses in any future period or amortization of
a prepaid cash expense that was paid in a prior period); minus

          (v) any non-cash items increasing Consolidated Net Income for such
period; minus

          (vi) the lesser of (x) the aggregate amount of all Investments made by
the Company or any of its Restricted Subsidiaries in any Joint Venture during
the period under clause (f) of the second paragraph of Section 4.07 and (y) the
aggregate amount of Net Income (but not loss) of any such Joint Venture referred
to in clause (x) of this clause (vi) included in calculating the Company's
Consolidated Net Income during such period;

in each case, on a consolidated basis and determined in accordance with GAAP.

          Notwithstanding the foregoing, the provision for taxes on the income
or profits of, and the depreciation and amortization of, a Restricted Subsidiary
of the referent Person shall be added to Consolidated Net Income to compute
Consolidated Cash Flow only to the extent (and in the same proportion) that the
Net Income of such Restricted Subsidiary was included in calculating the
Consolidated Net Income of such Person.

          "Consolidated Net Income" means, with respect to any Person for any
period, the aggregate of the Net Income of such Person and its Restricted
Subsidiaries for such period, on a consolidated basis, determined in accordance
with GAAP; provided that:

          (i) the Net Income of any Person that is not a Restricted Subsidiary
shall be included only to the extent of the lesser of (x) the amount of
dividends or distributions

                                       6



paid in cash (but not by means of a loan) to the referent Person or a Restricted
Subsidiary thereof or (y) the referent Person's (or, subject to clause (ii), a
Restricted Subsidiary of the referent Person's) proportionate share of the Net
Income of such other Person;

          (ii) the Net Income (but not loss) of any Restricted Subsidiary shall
be excluded to the extent that the declaration or payment of dividends or
similar distributions by that Restricted Subsidiary of that Net Income is not at
the date of determination permitted without any prior governmental approval
(that has not been obtained) or, directly or indirectly, by operation of the
terms of its charter or any agreement, instrument, judgment, decree, order,
statute, rule or governmental regulation applicable to that Subsidiary or its
stockholders;

          (iii) the Net Income of any Person acquired in a pooling of interests
transaction for any period prior to the date of such acquisition shall be
excluded; and

          (iv) the cumulative effect of a change in accounting principles shall
be excluded.

          "Consolidated Net Tangible Assets" shall mean the total amount of
assets (less applicable reserves and other properly deductible items) after
deducting therefrom (a) all current liabilities (excluding any thereof which are
by their terms extendible or renewable at the option of the obligor thereon to a
time more than 12 months after the time as of which the amount thereof is being
computed), and (b) all goodwill, trade names, trademarks, patents, purchased
technology, unamortized debt discount and other like intangible assets, all as
set forth on the most recent financial statements of the Company and its
consolidated Subsidiaries filed with the SEC pursuant to Section 4.04 and
computed in accordance with GAAP.

          "Consolidated Net Worth" means, with respect to any Person as of any
date, the sum, without duplication, of:

               (i) the consolidated equity of holders of Capital Stock (other
     than Preferred Stock and Disqualified Stock) of such Person and its
     consolidated Restricted Subsidiaries as of such date; plus

               (ii) the respective amounts reported on such Person's balance
     sheet as of such date with respect to any series of Preferred Stock (other
     than Disqualified Stock) less

               (iii) all write-ups (other than write-ups resulting from foreign
     currency translations and write-ups of tangible assets of a going concern
     business made in accordance with GAAP as a result of the acquisition of
     such business) subsequent to the Issue Date in the book value of any asset
     owned by such Person or a consolidated Restricted Subsidiary of such
     Person; and excluding

               (iv) the cumulative effect of a change in accounting principles;

all as determined in accordance with GAAP.

                                       7



          "Corporate Trust Office" means the principal office of the Trustee, at
which at any particular time its corporate trust business shall be administered,
which office on the Issue Date is located at 101 Barclay Street, Floor 8 West,
New York, New York 10286.

          "Credit Facility" means that certain Amended and Restated Credit
Agreement dated as of August 24, 2001 by and among the Company, the lenders
party thereto and Bank of America, N.A. and JPMorgan Chase Bank, as
administrative agents, including any related Notes, instruments, and agreements
executed in connection therewith, as amended, restated, modified, extended,
renewed, refunded, replaced or refinanced, in whole or in part, from time to
time, whether or not with the same lenders or agents.

          "Default" means any event that is, or with the giving of notice or
lapse of time, or both, would constitute an Event of Default.

          "Depositary" means The Depository Trust Company, its nominees and
successors.

          "Disqualified Stock" means any Capital Stock that, by its terms (or by
the terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event, matures or is mandatorily
redeemable, pursuant to a sinking fund obligation or otherwise, or redeemable at
the option of the holder thereof, in whole or in part, on or prior to the date
on which the Notes mature; provided that any Capital Stock that would not
constitute Disqualified Stock but for provisions thereof giving holders thereof
the right to require such Person to repurchase or redeem such Capital Stock upon
the occurrence of an "asset sale" or "change of control" occurring prior to the
date on which the Notes mature shall not constitute Disqualified Stock if the
"asset sale" or "change of control" provisions applicable to such Capital Stock
are no more favorable to the holders of such Capital Stock than Section 4.10 and
Section 4.13 and such Capital Stock specifically provides that such Person will
not repurchase or redeem any such stock pursuant to such provision prior to the
Company's repurchase of such Notes as are required pursuant to such covenants.
The "liquidation preference" of any Disqualified Stock shall be the amount
payable thereon upon liquidation prior to any payment to holders of common stock
or, if none, the amount payable by the issuer thereof upon maturity or mandatory
redemption.

          "Equistar Funding" means Equistar Funding Corporation, a Delaware
corporation, or any successor obligor under the Indenture and the Notes pursuant
to Section 5.03.

          "Equity Interests" means Capital Stock and all warrants, options or
other rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).

          "Euroclear" means Euroclear Bank S.A./N.V., and its successors or
assigns, as operator of the Euroclear System.

          "Exchange Act" means the Securities Exchange Act of 1934, as amended.

                                       8



          "Exchange Notes" means the debt securities of the Issuers issued
pursuant to this Indenture in exchange for, and in an aggregate principal amount
equal to, the Initial Notes or any Initial Additional Notes in compliance with
the terms of a Registration Rights Agreement and containing terms substantially
identical to the Initial Notes or any Initial Additional Notes (except that (i)
such Exchange Notes shall not contain terms with respect to transfer
restrictions and shall be registered under the Securities Act and (ii) certain
provisions relating to Liquidated Damages thereon shall be eliminated).

          "Exchange Offer" means an offer by the Company to the Holders of the
Initial Notes or Initial Additional Notes to exchange Outstanding Notes for
Exchange Notes, as provided for in a Registration Rights Agreement.

          "Exchange Offer Registration Statement" means the Exchange Offer
Registration Statement as defined in a Registration Rights Agreement.

          "Existing Indebtedness" means Indebtedness of the Company and its
Restricted Subsidiaries in existence, and considered Indebtedness of the Company
or any of its Restricted Subsidiaries, on the Issue Date, until such amounts are
repaid, including all reimbursement obligations with respect to letters of
credit outstanding as of the Issue Date.

          "Finance Subsidiary" means a Restricted Subsidiary of the Company, all
the Capital Stock of which (other than Preferred Stock) is owned by the Company
and/or one or more Wholly-Owned Restricted Subsidiaries thereof that does not
engage in any activity other than:

          (i) holding of Indebtedness of the Company and/or one or more
Wholly-Owned Restricted Subsidiaries thereof;

          (ii) the issuance of Capital Stock; and

          (iii) any activity necessary, incidental or related to the foregoing.

          "Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries or any other applicable Person
incurs, assumes or redeems any Indebtedness (other than revolving credit
borrowings) or issues or redeems Disqualified Stock or Preferred Stock
subsequent to the commencement of the period for which the Fixed Charge Coverage
Ratio is being calculated but prior to the date on which the event for which the
calculation of the Fixed Charge Coverage Ratio is made (the "Calculation Date"),
then the Fixed Charge Coverage Ratio shall be calculated giving pro forma effect
to such incurrence, assumption or redemption of Indebtedness or such issuance or
redemption of Disqualified Stock or Preferred Stock as if the same had occurred
at the beginning of the applicable four-quarter reference period.

          In addition, for purposes of making the computation referred to above:

                                       9



          (i) acquisitions that have been made by the Company or any of its
Restricted Subsidiaries or any other applicable Person, including through
mergers or consolidations and including any related financing transactions,
during the four-quarter reference period or subsequent to such reference period
and on or prior to the Calculation Date shall be deemed to have occurred on the
first day of the four-quarter reference period;

          (ii) the Consolidated Cash Flow and Fixed Charges attributable to
operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but, in the case of such Fixed Charges, only to the extent that the
obligations giving rise to such Fixed Charges will not be obligations of the
referent Person or any of its Restricted Subsidiaries following the Calculation
Date; and

          (iii) if since the beginning of the four-quarter reference period any
Person was designated as an Unrestricted Subsidiary or redesignated as or
otherwise became a Restricted Subsidiary, such event shall be deemed to have
occurred on the first day of the four-quarter reference period.

          "Fixed Charges" means, with respect to any Person for any period, the
sum, without duplication, of:

               (i) the consolidated interest expense of such Person and its
     Restricted Subsidiaries for such period, whether paid or accrued,
     determined in accordance with GAAP;

               (ii) all commissions, discounts and other fees and charges
     incurred in respect of letters of credit or bankers' acceptance financings,
     determined in accordance with GAAP, and net payments or receipts (if any)
     pursuant to Hedging Obligations of the types described in clauses (i)
     through (iii) of the definition thereof to the extent such Hedging
     Obligations relate to Indebtedness that is not itself a Hedging Obligation;

               (iii) the consolidated interest expense of such Person and its
     Restricted Subsidiaries that was capitalized during such period;

               (iv) any interest expense on Indebtedness of another Person
     (other than Non-Recourse Indebtedness of a Joint Venture that is not a
     Restricted Subsidiary or Unrestricted Subsidiary secured by a
     Limited-Recourse Stock Pledge) that is Guaranteed by such Person or one of
     its Restricted Subsidiaries or secured by a Lien on assets of such Person
     or one of its Restricted Subsidiaries (whether or not such Guarantee or
     Lien is called upon);

               (v) amortization or write-off of debt discount in connection with
     any Indebtedness of the Company and its Restricted Subsidiaries, on a
     consolidated basis in accordance with GAAP, other than amortization of
     deferred financing costs incurred on or prior to the Issue Date; and

               (vi) the product of (a) all dividend payments (other than any
     payments to the referent Person or any of its Restricted Subsidiaries and
     any dividends payable in the form of Qualified Equity Interests) on any
     series of Preferred Stock or Disqualified

                                       10



     Stock of such Person and its Restricted Subsidiaries, times (b) (x) a
     fraction, the numerator of which is one and the denominator of which is one
     minus the then current combined federal, state and local statutory tax rate
     of such Person, expressed as a decimal, in each case, on a consolidated
     basis and in accordance with GAAP or (y) if the dividends are deductible by
     such Person for income tax purposes, one;

provided that interest payments on Indebtedness of a Joint Venture shall, in
each case, not be deemed Fixed Charges of the Company or any Restricted
Subsidiary as of any date of determination when such Indebtedness is not
considered Indebtedness of the Company or any Restricted Subsidiary of the
Company shall not be deemed Fixed Charges of the Company or any Restricted
Subsidiary.

          "Foreign Subsidiary" means any Restricted Subsidiary that is not
organized under the laws of the United States, any State thereof or the District
of Columbia.

          "GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, as in effect on August 24, 2001.

          "General Partner" means a Restricted Subsidiary of the Company or any
of its Restricted Subsidiaries that has no assets and conducts no operations
other than its ownership of a general partnership interest in a Joint Venture.

          "Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness or Disqualified
Stock of any other Person and, without limiting the generality of the foregoing,
any obligation, direct or indirect, contingent or otherwise, of such Person (i)
to purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness or Disqualified Stock of such other Person (including those
arising by virtue of partnership arrangements (other than with respect to the
obligations of a Joint Venture, solely by virtue of a Restricted Subsidiary of
the Company being the General Partner of such Joint Venture if, as of the date
of determination, no payment on such Indebtedness or obligation has been made by
such General Partner of such Joint Venture and such arrangement would not be
classified and accounted for, in accordance with GAAP, as a liability on a
consolidated balance sheet of the Company)) or (ii) entered into for the purpose
of assuring in any other manner the obligee of such Indebtedness or Disqualified
Stock of the payment thereof or to protect such obligee against loss in respect
thereof in whole or in part (including by agreement to keep-well, to purchase
assets, goods, securities or services, to take-or-pay, to maintain financial
statement conditions or otherwise); provided that the term "Guarantee" shall not
include endorsements for collection or deposit in the ordinary course of
business. The term "Guarantee" used as a verb has a corresponding meaning.

          "Hedging Obligations" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements, (ii) forward foreign
exchange contracts or currency swap

                                       11



agreements, (iii) other agreements or arrangements designed to protect such
Person against fluctuations in interest rates or currency values and (iv)
commodity price protection agreements or commodity price hedging agreements
designed to manage fluctuations in prices or costs in raw materials,
manufactured products or related commodities.

          "Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.

          "incur" means, with respect to any Indebtedness, to incur, create,
issue, assume or Guarantee such Indebtedness. If any Person becomes a Restricted
Subsidiary on any date after the Issue Date (including by redesignation of an
Unrestricted Subsidiary), the Indebtedness and Capital Stock of such Person
outstanding on such date will be deemed to have been incurred by such Person on
such date for purposes of Section 4.06 but will not be considered the sale or
issuance of Equity Interests for purposes of Section 4.10. The accretion of
original issue discount or payment of interest in kind will not be considered an
incurrence of Indebtedness.

          "Indebtedness" means, with respect to any Person,

          (i) any indebtedness of such Person, whether or not contingent, in
respect of borrowed money or evidenced by bonds, notes, debentures or similar
instruments;

          (ii) letters of credit (or reimbursement agreements in respect
thereof) or banker's acceptances;

          (iii) Capital Lease Obligations and Attributable Debt in respect of
Sale and Lease-Back Transactions;

          (iv) the balance deferred and unpaid of the purchase price of any
property, except any such balance that constitutes an accrued expense or trade
payable; and

          (v) net Hedging Obligations,

if and to the extent any of the foregoing indebtedness (other than letters of
credit and Hedging Obligations) would appear as a liability on a balance sheet
of such Person prepared in accordance with GAAP, as well as

          (x) all indebtedness of others secured by a Lien on any asset of such
Person whether or not such indebtedness is assumed by such Person; provided
that, for purposes of determining the amount of any Indebtedness of the type
described in this clause, if recourse with respect to such Indebtedness is
limited to such asset, the amount of such Indebtedness shall be limited to the
lesser of the fair market value of such asset or the amount of such
Indebtedness; and

          (y) to the extent not otherwise included, the Guarantee by such Person
of any indebtedness of the types described above of any other Person.

          The amount of any Indebtedness outstanding as of any date shall be (i)
the accreted value thereof, in the case of any Indebtedness that does not
require current

                                       12



payments of interest and (ii) the principal amount thereof, together with any
interest thereon that is more than 30 days past due, in the case of any other
Indebtedness.

          Notwithstanding the foregoing, a Limited Recourse Stock Pledge shall
not be considered Indebtedness of the Company or any of its Restricted
Subsidiaries.

          "Initial Additional Notes" means Additional Notes issued in an
offering not registered under the Securities Act and any Additional Dividend
Notes issued in respect thereof (and any Notes issued in respect thereof
pursuant to Section 3.04, 3.05, 3.06, 3.13, 3.14 or 10.08), but not including
any Exchange Notes issued in exchange therefor.

          "Initial Notes" means the Issuers' 10 % Senior Notes due 2011, issued
                                               -
on the Issue Date and any Additional Dividend Notes issued in respect thereof
(and any Notes issued in respect thereof pursuant to Section 3.04, 3.05, 3.06,
3.13, 3.14 or 10.08), but not including any Exchange Notes issued in exchange
therefor.

          "Institutional Accredited Investor" means an institution that is an
"accredited investor" as that term is defined in Rule 501(a)(1), (2), (3) or (7)
under the Securities Act.

          "Interest Payment Date" means, when used with respect to any Note and
any installment of interest thereon, the date specified in such Note as the
fixed date on which such installment of interest is due and payable, as set
forth in such Note.

          "Investment Grade" means a rating of BBB- or higher by S&P and Baa3 or
higher by Moody's or the equivalent of such ratings by S&P or Moody's. In the
event that the Company shall select any other Rating Agency pursuant to the
provisions of the definition thereof, the equivalent of such ratings by such
Rating Agency shall be used.

          "Investments" means, with respect to any Person, all investments by
such Person in another Person (including an Affiliate of such Person) in the
form of direct or indirect loans, advances or extensions of credit to such other
Person (including any Guarantee by such Person of the Indebtedness or
Disqualified Stock of such other Person) or capital contributions or purchases
or other acquisitions for consideration of Indebtedness, Equity Interests or
other securities of such other Person, together with all items that are or would
be classified as investments of such investing Person on a balance sheet
prepared in accordance with GAAP; provided that:

               (x) trade credit and accounts receivable in the ordinary course
     of business;

               (y) commissions, loans, advances, fees and compensation paid in
     the ordinary course of business to officers, directors and employees; and

               (z) reimbursement obligations in respect of letters of credit and
     tender, bid, performance, government contract, surety and appeal bonds,

in each case solely with respect to obligations of the Company or any of its
Restricted Subsidiaries shall not be considered Investments.

                                       13



          If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such Person is no longer a Restricted Subsidiary of the Company,
the Company shall be deemed to have made an Investment on the date of any such
sale or disposition equal to the fair market value of the Equity Interests of
such Restricted Subsidiary not sold or disposed of in an amount determined as
provided in the first paragraph of Section 4.07

          "Issue Date" means the date on which the Initial Notes (other than
Initial Notes that are Additional Dividend Notes) are originally issued.

          "Issuer Request" and "Issuer Order" mean, respectively, a written
request or order signed in the name of an Issuer by an Officer of such Issuer.

          "Joint Venture" means any joint venture between the Company or any
Restricted Subsidiary and any other Person, whether or not such joint venture is
a Subsidiary of the Company or any Restricted Subsidiary.

          "Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, and any
lease in the nature thereof) or the assignment or conveyance of any right to
receive income therefrom.

          "Limited Recourse Stock Pledge" means the pledge of Equity Interests
in any Joint Venture (that is not a Restricted Subsidiary) or any Unrestricted
Subsidiary to secure Non-Recourse Debt of such Joint Venture or Unrestricted
Subsidiary, which pledge is made by a Restricted Subsidiary of the Company, the
activities of which are limited to making and managing Investments, and owning
Equity Interests, in such Joint Venture or Unrestricted Subsidiary, but only for
so long as its activities are so limited.

          "Liquidated Damages" means liquidated damages owed to the Holders
pursuant to a Registration Rights Agreement.

          "Lyondell" means Lyondell Chemical Company, any successor of Lyondell
that is a Permitted Holder or any Subsidiary of Lyondell.

          "Make-Whole Amount" shall mean, in connection with any optional
redemption of any Note, the excess, if any, of:

          (1) the aggregate present value as of the Redemption Date of each
dollar of principal being redeemed and the amount of interest (exclusive of
interest accrued to the Redemption Date) that would have been payable in respect
of such dollar if such prepayment had not been made, determined by discounting,
on a semiannual basis, such principal and interest at the Treasury Rate
(determined on the business day preceding the Redemption Date) plus 0.5%, from
the respective dates on which such principal and interest would have been
payable if such payment had not been made; over

                                       14



          (2) the principal amount of the Note being redeemed.

          "Moody's" means Moody's Investors Service, Inc., and its successors.

          "Net Income" means, with respect to any Person, the net income (loss)
of such Person, determined in accordance with GAAP and before any reduction in
respect of Preferred Stock dividends, excluding, however,

          (i) any gain or loss, together with any related provision for taxes on
such gain or loss, realized in connection with

                    (a) any Asset Sale or any disposition pursuant to a Sale and
          Lease-Back Transaction or

                    (b) the disposition of any securities by such Person or any
          of its Restricted Subsidiaries or the extinguishment of any
          Indebtedness of such Person or any of its Restricted Subsidiaries; and

          (ii) any extraordinary gain or loss, together with any related
provision for taxes on such extraordinary gain or loss.

          "Net Proceeds" means the aggregate cash proceeds (excluding any
proceeds deemed to be "cash" pursuant to Section 4.10) received by the Company
or any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale), net of (i) the direct costs
relating to such Asset Sale (including, without limitation, legal, accounting
and investment banking fees and sales commissions) and any relocation expenses
incurred as a result thereof, (ii) taxes paid or payable as a result thereof
(after taking into account any available tax credits or deductions and any tax
sharing arrangements), (iii) amounts required to be paid to holders of minority
interests in Restricted Subsidiaries or Joint Ventures as a result of such Asset
Sale, (iv) amounts required to be applied to the repayment of Indebtedness
(other than Indebtedness under the Credit Facility) secured by a Lien on any
asset sold in such Asset Sale, or which must by the terms of such Lien or by
applicable law be repaid out of the proceeds of such Asset Sale, (v) all
payments made with respect to liabilities directly associated with the assets
which are the subject of the Asset Sale, including, without limitation, trade
payables and other accrued liabilities, and (vi) any reserves for adjustment in
respect of the sale price of such asset or assets established in accordance with
GAAP and any reserve for future liabilities established in accordance with GAAP;
provided that the reversal of any such reserve that reduced Net Proceeds when
issued shall be deemed a receipt of Net Proceeds in the amount of such proceeds
on such day.

          "Non-Recourse Indebtedness" means Indebtedness as to which (i) the
lenders have been notified in writing that they will not have any recourse to
the stock or assets of the Company or any of its Restricted Subsidiaries, other
than the Equity Interests of a Joint Venture that is not a Restricted Subsidiary
or Unrestricted Subsidiary pledged by the Company or any of its Restricted
Subsidiaries as a Limited Recourse Stock Pledge and (ii) no default thereunder
would, as such, constitute a default under any Indebtedness of the

                                       15



Company or any Restricted Subsidiary or give any rights to or in other assets of
the Company or its Restricted Subsidiaries.

          "Non-U.S. Person" means a Person who is not a U.S. person, as defined
in Regulation S.

          "Notes" means the Initial Notes, any Additional Notes and the Exchange
Notes and any Additional Dividend Notes issued in respect thereof.

          "Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness and in all cases whether direct or
indirect, absolute or contingent, now outstanding or hereafter created, assumed
or incurred and including, without limitation, interest accruing subsequent to
the filing of a petition in bankruptcy or the commencement of any insolvency,
reorganization or similar proceedings at the rate provided in the relevant
documentation, whether or not an allowed claim, and any obligation to redeem or
defease any of the foregoing.

          "Officer" means, with respect to any Issuer or any other obligor on
the Notes, the Chief Executive Officer, the Chief Financial Officer, the
Principal Financial Officer, the Secretary, the Treasurer, any Assistant
Secretary or Assistant Treasurer or any Vice President of such Person.

          "Officers' Certificate" means, with respect to the Company, Equistar
Funding or any other obligor on the Notes, a certificate signed by two Officers
of such Person.

          "Opinion of Counsel" means a written opinion from legal counsel. The
counsel may be an employee of or counsel to either Issuer.

          "Original Notes" means the Initial Notes and any Exchange Notes issued
in exchange therefor, together with any Additional Dividend Notes issued in
respect thereof.

          "Outstanding" when used with respect to Notes means, as of the date of
determination, all Notes theretofore authenticated and delivered under this
Indenture, except:

                    (i) Notes theretofore canceled by the Trustee or delivered
          to the Trustee for cancellation;

                    (ii) Notes for whose payment or redemption money in the
          necessary amount has been theretofore deposited with the Trustee or
          any Paying Agent in trust for the Holders of such Notes, provided
          that, if such Notes are to be redeemed, notice of such redemption has
          been duly given pursuant to this Indenture or provision therefor
          reasonably satisfactory to the Trustee has been made;

                    (iii) Notes paid pursuant to Section 3.06; and

                                       16



                    (iv) Notes in exchange for or in lieu of which other Notes
          have been authenticated and delivered pursuant to this Indenture.

          A Note does not cease to be Outstanding because an Issuer or any
Affiliate of an Issuer holds the Note, provided that in determining whether the
Holders of the requisite amount of Outstanding Notes have given any request,
demand, authorization, direction, notice, consent or waiver hereunder, Notes
owned by an Issuer or any Affiliate of an Issuer shall be disregarded and deemed
not to be Outstanding, except that, for the purpose of determining whether the
Trustee shall be protected in relying on any such request, demand,
authorization, direction, notice, consent or waiver, only Notes which a
Responsible Officer of the Trustee actually knows are so owned shall be so
disregarded. Notes so owned that have been pledged in good faith may be regarded
as Outstanding if the pledgee establishes to the reasonable satisfaction of the
Trustee the pledgee's right to act with respect to such Notes and that the
pledgee is not an Issuer or an Affiliate of any Issuer.

          "Partner" means any Person owning Equity Interests in the Company and
having the right to select at least one member of the Partnership Governance
Committee.

          "Partnership Governance Committee" means the Company's Partnership
Governance Committee, together with any successor or substitute committee or
board exercising similar power and authority.

          "Paying Agent" means any Person authorized by the Issuers to pay the
principal of (and premium, if any) or interest and Liquidated Damages, if any,
on any Notes on behalf of the Issuers.

          "Payment Default" means any failure to pay any scheduled installment
of interest or principal on any Indebtedness within the grace period provided
for such payment in the documentation governing such Indebtedness.

          "Permitted Business" means the petrochemical, chemical and petroleum
refining businesses and any business reasonably related, incidental,
complementary or ancillary thereto.

          "Permitted Dividends" means (i) dividends and distributions by the
Company on any class of its Equity Interests; provided that a portion of such
class is held by any Permitted Holder or (ii) any payment of principal on, or
purchase, redemption, defeasance or other acquisition for value of Subordinated
Debt owed to Lyondell except for a payment of principal or interest at Stated
Maturity.

          "Permitted Holders" means Lyondell Chemical Company, Millennium
Chemical Company, Occidental Petroleum Corporation, the successor of any
Permitted Holder (including any entity that is a party to any merger or business
combination transaction to which such Permitted Holder shall be a party;
provided that immediately after such transaction Equity Interests having a
majority of the voting power of such entity's outstanding Equity Interests shall
be held by holders of Equity Interests of such Permitted

                                       17



Holder immediately prior to such transaction), and the respective Subsidiaries
of any of the foregoing.

          "Permitted Investments" means:

                    (a) any Investment in the Company or in a Restricted
          Subsidiary of the Company that is engaged in a Permitted Business;

                    (b) any Investment in Cash Equivalents;

                    (c) any Investment by the Company or any Subsidiary of the
          Company in a Person, if as a result of such Investment; (i) such
          Person becomes a Restricted Subsidiary of the Company engaged in a
          Permitted Business or (ii) such Person is merged, consolidated or
          amalgamated with or into, or transfers or conveys substantially all
          its assets to, or is liquidated into, the Company or a Restricted
          Subsidiary of the Company engaged in a Permitted Business;

                    (d) any non-cash consideration received as consideration in
          an Asset Sale that was made pursuant to and in compliance with Section
          4.10 (other than a joint venture interest received in full or partial
          satisfaction of the 75% requirement in clause (ii) of the first
          paragraph of Section 4.10);

                    (e) any acquisition of assets or Equity Interests solely in
          exchange for, or out of the net cash proceeds of a substantially
          concurrent, issuance of Equity Interests (other than Disqualified
          Stock) of the Company;

                    (f) Hedging Obligations entered into in the ordinary course
          of business and otherwise permitted under the Indenture;

                    (g) Investments in an Accounts Receivable Subsidiary that,
          as conclusively determined by the Partnership Governance Committee,
          are necessary or advisable to effect a Receivables Facility;

                    (h) Investments in Unrestricted Subsidiaries and Joint
          Ventures in an aggregate amount, taken together with all other
          Investments made in reliance on this clause (h), not to exceed at any
          time outstanding $75 million (after giving effect to any reductions in
          the aggregate amount of such Investments as a result of the
          disposition thereof, including through liquidation, repayment or other
          reduction, including by way of dividend or distribution, for cash, the
          aggregate amount of such reductions not to exceed the aggregate amount
          of such Investments outstanding and previously made pursuant to this
          clause (h));

                    (i) any Investment received by the Company or any Restricted
          Subsidiary as consideration for the settlement of any litigation,
          arbitration or claim in bankruptcy or in partial or full satisfaction
          of accounts receivable owed by a financially troubled Person to the
          extent reasonably necessary in order to prevent or limit any loss by
          the Company or any of its Restricted Subsidiaries in connection with
          such accounts receivable;

                                       18



                    (j) loans to Lyondell; provided that such loans are made in
          compliance with Section 4.11; and

                    (k) Limited Recourse Stock Pledges.

          "Permitted Liens" means:

                    (1) Liens in favor of the Company or any Subsidiary
          Guarantor;

                    (2) Liens securing the Notes and the Subsidiary Guarantees;

                    (3) Limited Recourse Stock Pledges;

                    (4) Liens on property of a Person existing at the time it
          becomes a Subsidiary or at the time it is merged into or consolidated
          with the Company or a Subsidiary; provided that such Liens were in
          existence prior to the contemplation of such merger, consolidation or
          acquisition and do not extend to any assets of the Company or its
          Restricted Subsidiaries other than those of the Person merged into or
          consolidated with the Company or that becomes a Restricted Subsidiary
          of the Company;

                    (5) Liens on property (together with general intangibles and
          proceeds related to such property) existing at the time of acquisition
          thereof by the Company or any Restricted Subsidiary of the Company;
          provided that such Liens were in existence prior to the contemplation
          of such acquisition;

                    (6) Liens (including the interest of a lessor under a
          capital lease) on any asset (together with general intangibles and
          proceeds related to such property) existing at the time of acquisition
          thereof or incurred within 180 days of the time of acquisition or
          completion of construction thereof, whichever is later, to secure or
          provide for the payment of all or any part of the purchase price (or
          construction price) thereof (including obligations of the lessee under
          any such capital lease);

                    (7) Liens imposed by law, such as carriers', warehousemen's
          and mechanics' Liens on the property of the Company or any Restricted
          Subsidiary;

                    (8) easements, building restrictions, rights-of-ways,
          irregularities of title, and such other encumbrances or charges not
          interfering in any material respect with the ordinary conduct of
          business of the Company or any of its Restricted Subsidiaries;

                    (9) Leases, subleases or licenses by the Company or any of
          its Restricted Subsidiaries as lessor, sublessor or licensor in the
          ordinary course of business and otherwise permitted by the Indenture;

                    (10) Liens securing reimbursement obligations with respect
          to commercial letters of credit obtained in the ordinary course of
          business which encumber documents and other property or assets
          relating to such letters of credit and products and proceeds thereof;

                                       19



                    (11) Liens in favor of custom and revenue authorities
          arising as a matter of law to secure payment of nondelinquent customs
          duties in connection with the importation of goods;

                    (12) Liens encumbering customary initial deposits and margin
          deposits, netting provisions and setoff rights, in each case securing
          Indebtedness under Hedging Obligations;

                    (13) Liens incurred in the ordinary course of business to
          secure nondelinquent obligations arising from statutory, regulatory,
          contractual or warranty requirements of the Company or its Restricted
          Subsidiaries or any tender, bid, performance, government contract,
          surety or appeal bonds or other obligations of a like nature for which
          a reserve or other appropriate provision, if any, as shall be required
          by GAAP shall have been made;

                    (14) Liens arising out of consignment or similar
          arrangements for the sale of goods entered into by the Company or any
          Restricted Subsidiary in the ordinary course of business in accordance
          with industry practice;

                    (15) Liens incurred or assumed in connection with the
          issuance of revenue bonds the interest on which is exempt from federal
          income taxation pursuant to Section 103(b) of the Internal Revenue
          Code;

                    (16) Liens arising by reason of deposits necessary to
          qualify the Company or any Restricted Subsidiary to conduct business,
          maintain self insurance or comply with any law;

                    (17) until the Notes are rated Investment Grade, Liens
          securing Obligations with respect to Indebtedness under the Credit
          Facility that is permitted to be incurred under clause (i) of the
          second paragraph of Section 4.06(a) (including any paid-in-kind
          interest) and Hedging Obligations owed to any lender thereunder or
          Affiliate thereof;

                    (18) Liens for taxes, assessments or governmental charges or
         claims that are not yet delinquent or that are being contested in good
         faith by appropriate proceedings, prejudgment Liens that are being
         contested in good faith by appropriate proceedings and Liens arising
         out of judgments or awards against the Company or any Restricted
         Subsidiary with respect to which the Company or such Restricted
         Subsidiary at the time shall be prosecuting an appeal or proceedings
         for review and with respect to which it shall have secured a stay of
         execution pending such appeal or proceedings for review; provided that
         in each case any reserve or other appropriate provision as shall be
         required in conformity with GAAP shall have been made therefor;

                    (19) Liens securing assets under construction arising from
          progress or partial payments by a customer of the Company or its
          Restricted Subsidiaries relating to such property or assets;

                                       20



                    (20) Liens resulting from the deposit of funds or evidences
          of Indebtedness in trust for the purpose of (A) defeasing Indebtedness
          of the Company or any of its Restricted Subsidiaries (which defeasance
          is otherwise permitted under the Indenture) having an aggregate
          principal amount at any one time outstanding not to exceed $25 million
          or (B) defeasing Indebtedness ranking pari passu with the Notes;
          provided that the Notes are defeased concurrently with such
          Indebtedness;

                    (21) customary Liens for the fees, costs and expenses of
          trustees and escrow agents pursuant to any indenture, escrow agreement
          or similar agreement establishing a trust or escrow arrangement, and
          Liens pursuant to merger agreements, stock purchase agreements, asset
          sale agreements, option agreements and similar agreements in respect
          of the disposition of property or assets of the Company or any
          Restricted Subsidiary on the property to be disposed of, to the extent
          such dispositions are permitted hereunder;

                    (22) from and after the first date when the Notes are rated
          Investment Grade, Liens on any asset of the Company other than
          Restricted Property;

                    (23) Liens on assets (other than Restricted Property) of the
          Company or any Restricted Subsidiary arising as a result of a Sale and
          Lease-Back Transaction with respect to such assets; provided that the
          proceeds from such Sale and Lease-Back Transaction are applied to the
          repayment of Indebtedness or acquisition of Additional Assets or the
          making of capital expenditures pursuant to Section 4.10;

                    (24) other Liens on assets of the Company or any Restricted
          Subsidiary of the Company securing Indebtedness or other obligations
          that is permitted by the terms of the Indenture to be outstanding
          having an aggregate principal amount at any one time outstanding not
          to exceed $50 million;

                    (25) Liens existing on the Issue Date, other than Liens
          securing Indebtedness under the Credit Facility;

                    (26) Liens on accounts receivable and related property
          deemed to arise in connection with any Receivables Facility;

                    (27) the interest of a lessor or licensor under an operating
          lease or license under which the Company or any of its Restricted
          Subsidiaries are lessee, sublessee, or licensee, including protective
          financing statement filings;

                    (28) Liens to secure a Permitted Refinancing incurred to
          refinance Indebtedness that was secured by a Lien permitted under the
          Indenture and that was incurred in accordance with the provisions of
          the Indenture; provided that such Liens do not extend to or cover any
          property or assets of the Company or any Restricted Subsidiary other
          than assets or property securing the Indebtedness so refinanced; and

                                       21



                    (29) from and after the first date when the Notes are rated
          Investment Grade, Liens upon Restricted Property securing Indebtedness
          or other obligations in an aggregate principal amount which, together
          with the aggregate outstanding principal amount of all other
          Indebtedness or other obligations secured by Restricted Property of
          the Company and its Restricted Subsidiaries which would otherwise be
          subject to the restrictions set forth in Section 4.12 (not including
          Indebtedness or other obligations permitted to be secured under
          clauses (1) to (28) inclusive above) and the aggregate Value of the
          Sale and Lease-Back Transactions of any Restricted Property in
          existence at the time of the incurrence of such Indebtedness or other
          obligations (not including Sale and Lease-Back Transactions as to
          which the proceeds from such Sale and Lease-Back Transaction are
          applied to the repayment of Indebtedness or acquisition of Additional
          Assets or the making of capital expenditures pursuant to Section
          4.10), does not at such time exceed 15% of the Consolidated Net
          Tangible Assets of the Company and its consolidated Subsidiaries as
          shown on the most recent audited annual consolidated balance sheet
          delivered at such time pursuant to Section 4.04.

          "Permitted Refinancing" means any Indebtedness of the Company or any
of its Subsidiaries or Preferred Stock of a Finance Subsidiary issued in
exchange for, or the net proceeds of which are used solely to extend, refinance,
renew, replace, defease or refund, other Indebtedness of the Company or any of
its Restricted Subsidiaries; provided that:

                    (i) the principal amount (or liquidation preference in the
          case of Preferred Stock) of such Permitted Refinancing (or if such
          Permitted Refinancing is issued at a discount, the initial issuance
          price of such Permitted Refinancing) does not exceed the principal
          amount of the Indebtedness so extended, refinanced, renewed, replaced,
          defeased or refunded (plus the amount of any premiums paid and
          reasonable expenses incurred in connection therewith);

                    (ii) such Permitted Refinancing or, in the case of Preferred
          Stock of a Finance Subsidiary, the Indebtedness issued to such Finance
          Subsidiary, has a Stated Maturity date later than the Stated Maturity
          date of, and has a Weighted Average Life to Maturity equal to or
          greater than the Weighted Average Life to Maturity of, the
          Indebtedness being extended, refinanced, renewed, replaced, defeased
          or refunded;

                    (iii) if the Indebtedness being extended, refinanced,
          renewed, replaced, defeased or refunded is subordinated by its terms
          in right of payment to the Notes or the Subsidiary Guarantees, such
          Permitted Refinancing, or, in the case of Preferred Stock, the
          Indebtedness issued to such Finance Subsidiary, has a Stated Maturity
          date later than the Stated Maturity date of, and is subordinated by it
          terms in right of payment to, the Notes on subordination terms at
          least as favorable to the holders of Notes as those contained in the
          documentation governing the Indebtedness being extended, refinanced,
          renewed, replaced, defeased or refunded;

                    (iv) such Indebtedness is incurred by the Company or a
          Subsidiary Guarantor (or such Preferred Stock is issued by a Finance
          Subsidiary) if the

                                       22



          Company or a Subsidiary Guarantor is the obligor on the Indebtedness
          being extended, refinanced, renewed, replaced, defeased or refunded;
          and

                    (v) such Indebtedness is incurred by the Company or a
          Restricted Subsidiary (or such Preferred Stock is issued by a Finance
          Subsidiary) if a Restricted Subsidiary that is not a Subsidiary
          Guarantor is the obligor on the Indebtedness being extended,
          refinanced, renewed, replaced, defeased or refunded.

          "Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.

          "Predecessor Notes" of any particular Note means every previous Note
evidencing all or a portion of the same debt as that evidenced by such
particular Note; and, for the purposes of this definition, any Note
authenticated and delivered under Section 3.06 in lieu of a mutilated,
destroyed, lost or stolen Note shall be deemed to evidence the same debt as the
mutilated, destroyed, lost or stolen Note.

          "Preferred Stock" means, with respect to any Person, any and all
shares, interests, participations or other equivalents (however designated,
whether voting or non-voting) of preferred or preference stock of such Person
which is outstanding or issued on or after the date of the Indenture.

          "principal" of a Note means the principal of the Note plus the
premium, if any, payable on the Note which is due or overdue or is to become due
at the relevant time.

          "QIB", or "Qualified Institutional Buyer" means a "qualified
institutional buyer," as the term is defined in Rule 144A under the Securities
Act.

          "Qualified Equity Interests" shall mean all Equity Interests of a
Person other than Disqualified Stock of such Person.

          "Rating Agency" means (i) S&P and (ii) Moody's or (iii) if either S&P
or Moody's or both shall no longer exist, a nationally recognized securities
rating agency or agencies, as the case may be, selected by the Company, which
shall be substituted for S&P or Moody's or both, as the case may be.

          "Receivables Facility" means one or more receivables financing
facilities or arrangements, as amended from time to time, pursuant to which the
Company or any of its Restricted Subsidiaries sells (including a sale in
exchange for a promissory note of or Equity Interest in an Accounts Receivable
Subsidiary) its accounts receivable, related assets and the provision of
billing, collection and other services in connection therewith, in each case to
an Accounts Receivable Subsidiary.

          "Receivables Fees" means distributions or payments made directly or by
means of discounts with respect to any participation interests issued or sold in
connection with,

                                       23



and other fees paid to a Person that is not the Company or a Restricted
Subsidiary in connection with, any Receivables Facility.

          "Redemption Date" when used with respect to any Note to be redeemed or
purchased means the date fixed or such redemption or purchase by or pursuant to
this Indenture and the Notes.

          "Redemption Price" when used with respect to any Note to be redeemed
or purchased means the price at which it is to be redeemed or purchased pursuant
to this Indenture and the Notes.

          "Registration Rights Agreement" means (i) the Registration Rights
Agreement dated as of April 22, 2003 among the Issuers and Citigroup Global
Markets, Inc., Credit Suisse First Boston LLC, Banc of America Securities LLC
and J.P. Morgan Securities Inc., as Initial Purchasers, as such agreement may be
amended from time to time, and (ii) with respect to any Initial Additional
Notes, one or more registration rights agreements between the Issuers and the
other parties thereto, as such agreement(s) may be amended from time to time,
relating to rights given by the Issuers to the purchasers of Initial Additional
Notes to register or exchange such Initial Additional Notes under the Securities
Act.

          "Registration Statement" means the Registration Statement as defined
in the Registration Rights Agreement.

          "Regulation S" means Regulation S under the Securities Act.

          "Resale Restriction Termination Date" means, with respect to any Note,
the date that is two years (or such other period as may hereafter be provided
under Rule 144(k) under the Securities Act or any successor provision thereto as
permitting the resale by non-affiliates of Restricted Securities without
restriction) after the later of the original issue date in respect of such Note
and the last date on which an Issuer or any Affiliate of an Issuer was the owner
of such Note (or any Predecessor Note thereto).

          "Responsible Officer" when used with respect to the Trustee means any
officer in the corporate trust department of the Trustee, including any vice
president, assistant vice president, assistant secretary, assistant treasurer,
trust officer or any other officer of the Trustee who customarily performs
functions similar to those performed by the persons who at the time shall be
such officers, respectively, and also means, with respect to a particular
corporate trust matter, any other officer to whom such matter is referred
because of his or her knowledge of and familiarity with the particular subject
and who shall have direct responsibility for the administration of this
Indenture.

          "Restricted Investment" means an Investment other than a Permitted
Investment.

          "Restricted Period" means, with respect to the Initial Notes and any
Initial Additional Notes, the 40-day distribution compliance period as defined
in Regulation S which, in the case of the Initial Notes issued on the Issue
Date, ends June 1, 2003.

                                       24



          "Restricted Property" means:

          (a) Any plant for the production of petrochemicals owned by the
Company or a Subsidiary, except (i) related facilities which in the opinion of
the Partnership Governance Committee are transportation or marketing facilities,
and (ii) any plant for the production of petrochemicals which in the opinion of
the Partnership Governance Committee is not a principal plant of the Company and
its Subsidiaries; and

          (b) Any shares of Capital Stock or Indebtedness of a Subsidiary owning
Restricted Property owned by the Company or a Subsidiary.

          "Restricted Security" has the meaning assigned to such term in Rule
144(a)(3) under the Securities Act; provided, however, that the Trustee shall be
entitled to receive, at its request, and conclusively rely on an Opinion of
Counsel with respect to whether any Note constitutes a Restricted Security.

          "Restricted Subsidiary" of a Person means any Subsidiary of the
referent Person that is not an Unrestricted Subsidiary. Unless the context
otherwise requires, references to a "Restricted Subsidiary" refer to a
Restricted Subsidiary of the Company.

          "S&P" means Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc., and its successors.

          "Sale and Lease-Back Transaction" means any arrangement with any
Person (other than the Company or a Subsidiary), or to which any such Person is
a party, providing for the leasing, pursuant to a capital lease that would at
such time be required to be capitalized on a balance sheet in accordance with
GAAP, to the Company or a Restricted Subsidiary of any property or asset which
has been or is to be sold or transferred by the Company or such Restricted
Subsidiary to such Person or to any other Person (other than the Company or a
Subsidiary), to which funds have been or are to be advanced by such Person.

          "SEC" means the Securities and Exchange Commission.

          "Securities Act" means the Securities Act of 1933, as amended.

          "Shelf Registration Statement" means the Shelf Registration Statement
as defined in a Registration Rights Agreement.

          "Significant Subsidiary" means (1) Equistar Funding and (2) any
Restricted Subsidiary of the Company that would be a "significant subsidiary" as
defined in Article 1, Rule 1-02 of Regulation S-X, promulgated pursuant to the
Securities Act, as such Regulation was in effect on August 24, 2001.

          "Special Record Date" for the payment of any Defaulted Interest means
a date fixed by the Trustee pursuant to Section 3.07.

          "Stated Maturity" means, with respect to any installment of interest
or principal on any series of Indebtedness, the date on which such payment of
interest or principal was

                                       25



scheduled to be paid in the original documentation governing such Indebtedness
(or any later date established by any amendment to such original documentation)
and shall not include any contingent obligations to repay, redeem or repurchase
any such interest or principal prior to the date originally scheduled for the
payment thereof.

          "Statistical Release" means the statistical release designated
"H.15(519)" or any successor publication which is published weekly by the
Federal Reserve System and which establishes yields on actively traded U.S.
government securities adjusted to constant maturities or, if such statistical
release is not published at the time of any determination, then such other
reasonably comparable index which shall be designated by the Trustee.

          "Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) or (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or of one or more
Subsidiaries of such Person (or any combination thereof).

          "Subsidiary Guarantee" means a Guarantee by a Subsidiary Guarantor of
the Issuers' obligations with respect to the Notes.

          "Subsidiary Guarantor" means any Subsidiary that executes a
supplemental indenture, in the form of Exhibit B hereto, providing for the
Guarantee of the payment of the Notes, in each case until such time as the
Subsidiary Guarantee of such Person is released in accordance with the
provisions of this Indenture.

          "TIA" means the Trust Indenture Act of 1939 (15 U.S.C. sections
77aaa-77bbbb) as in effect on the date of this Indenture, except as provided by
Section 9.05.

          "Treasury Rate" means, in connection with the calculation of any
Make-Whole Amount with respect to any Note, the yield to maturity at the time of
computation of United States Treasury securities with a constant maturity, as
compiled by and published in the most recent Statistical Release that has become
publicly available at least two business days prior to the Redemption Date,
equal to the then remaining maturity of the Note being prepaid. If no maturity
exactly corresponds to such maturity, yields for the published maturities
occurring prior to and after such maturity most closely corresponding to such
maturity shall be calculated pursuant to the immediately preceding sentence and
the Treasury Rate shall be interpolated or extrapolated from such yields on a
straight-line basis, rounding in each of such relevant periods to the nearest
month.

          "Trustee" means the Person named as the "Trustee" in the first
paragraph of this Indenture until a successor Trustee shall have become such
pursuant to the applicable provisions of this Indenture, and thereafter
"Trustee" shall mean such successor Trustee.

                                       26



          "Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
is designated by the Partnership Governance Committee of the Company as an
Unrestricted Subsidiary pursuant to a resolution, (ii) any Subsidiary of an
Unrestricted Subsidiary and (iii) any Accounts Receivable Subsidiary. The
Partnership Governance Committee may designate any Subsidiary of the Company
(including any newly acquired or newly formed Subsidiary) to be an Unrestricted
Subsidiary unless such Subsidiary or any of its Subsidiaries owns any Equity
Interest or Indebtedness of, or holds any Lien on any property of, the Company
or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided that

               (a) any Guarantee by the Company or any Restricted Subsidiary of
     any Indebtedness of the Subsidiary being so designated or any of its
     Subsidiaries shall be deemed an "incurrence" of such Indebtedness and an
     "Investment" by the Company or such Restricted Subsidiary (or both, if
     applicable) at the time of such designation,

               (b) either (1) the Subsidiary to be so designated has total
     assets of $1,000 or less or (2) if such Subsidiary has assets greater than
     $1,000, such designation would be permitted under Section 4.07, and

               (c) if applicable, the Investment and the incurrence of
     Indebtedness referred to in clause (a) of this proviso would be permitted
     under Section 4.06 and Section 4.07.

          Any such designation by the Partnership Governance Committee of the
Company pursuant to clause (i) above shall be evidenced to the Trustee by filing
with the Trustee a certified copy of the resolution giving effect to such
designation and an Officers' Certificate certifying that such designation
complied with the foregoing conditions and was permitted by Section 4.06 and
Section 4.07.

          If at any time the Company or any Restricted Subsidiary Guarantees any
Indebtedness of such Unrestricted Subsidiary or makes any other Investment in
such Unrestricted Subsidiary and such incurrence of Indebtedness or Investment
would not be permitted under Section 4.06 and Section 4.07, it shall thereafter
cease to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred by a Restricted
Subsidiary of the Company as of such date (and, if such Indebtedness is not
permitted to be incurred as of such date under the covenant described above
under Section 4.06 the Company shall be in default of such covenant). The
Partnership Governance Committee of the Company may at any time designate any
Unrestricted Subsidiary to be a Restricted Subsidiary; provided that such
designation shall be deemed to be an incurrence of Indebtedness by a Restricted
Subsidiary of the Company of any outstanding Indebtedness of such Unrestricted
Subsidiary and such designation shall only be permitted if (i) such Indebtedness
is permitted under Section 4.06 and (ii) no Default or Event of Default would be
in existence following such designation.

          "U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith

                                       27



and credit of the United States of America is pledged and which are not callable
at the issuer's option.

          "Value" means, with respect to a Sale and Lease-Back Transaction, the
amount equal to the greater of (i) the net proceeds of the sale or transfer of
the property leased pursuant to such Sale and Lease-Back Transaction or (ii) the
fair value, in the opinion of the Partnership Governance Committee, of such
property at the time of entering into such Sale and Lease-Back Transaction, in
either case divided first by the number of full years of the term of the lease
and then multiplied by the number of full years of such term remaining at the
time of determination, without regard to any renewal or extension options
contained in the lease.

          "Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing:

               (i) the sum of the products obtained by multiplying

                    (a) the amount of each then remaining installment, sinking
          fund, serial maturity or other required payments of principal,
          including payment at final maturity, in respect thereof, by

                    (b) the number of years (calculated to the nearest
          one-twelfth) that will elapse between such date and the making of such
          payment, by

               (ii) the then outstanding principal amount of such Indebtedness.

          "Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all the outstanding Equity Interests of which (other
than directors' qualifying shares) shall at the time be owned by such Person or
by one or more Wholly Owned Restricted Subsidiaries of such Person or by such
Person and one or more Wholly Owned Restricted Subsidiaries of such Person.

          "Wholly Owned Subsidiary" of any Person means a Subsidiary of such
Person all the outstanding Equity Interests of which (other than directors'
qualifying shares) shall at the time be owned by such Person or by one or more
Wholly Owned Subsidiaries of such Person or by such Person and one or more
Wholly Owned Subsidiaries of such Person.

          Section 1.2. Other Definitions.

                                     Defined
            Term                   in Section
- ------------------------------     ----------

Act                                    1.08
Additional Dividend Notes              4.08
Affiliate Transaction                  4.11
Agent Members                          3.13
Asset Sale Offer                       4.10

                                       28



                                     Defined
            Term                   in Section
- ------------------------------     ----------

Authentication Order                   3.03
Change of Control Offer                4.13
Change of Control Payment              4.13
Change of Control Payment Date         4.13
Covenant Defeasance                   12.03
Defaulted Interest                     3.07
Dividend Payment Date                  4.08
DTC                                    2.03
Event of Default                       6.01
Excess Proceeds                        4.10
Expiration Date                        1.08
Global Notes                           2.01
Guaranteed Indebtedness                4.20
Legal Defeasance                      12.02
Notice Date                            4.08
Offshore Global Note                   2.01
Offshore Note Exchange Date            2.01
Offshore Physical Note                 2.01
Permanent Offshore Global Note         2.01
Physical Notes                         2.01
Place of Payment                       3.01
Plan Participants                      4.07
Private Placement Legend               2.03
Redemption Amount                     10.01
Register                               3.05
Registrar                              3.05
Regular Record Date                    3.01
Restricted Payment                     4.07
Subordinated Debt                      4.07
Temporary Offshore Global Note         2.01
U.S. Global Notes                      2.01
U.S. Physical Notes                    2.01

          Section 1.3. Rules of Construction. For all purposes of this
Indenture, except as otherwise expressly provided or unless the context
otherwise requires:

          (a) the terms defined in this Indenture have the meanings assigned to
them in this Indenture;

          (b) "or" is not exclusive;

                                       29



          (c) all accounting terms not otherwise defined herein have the
meanings assigned to them in accordance with GAAP and, unless expressly provided
otherwise, all determinations and computations made pursuant to any provision
hereof shall be made in accordance with GAAP; provided that references to any
Person and its Restricted Subsidiaries on a consolidated basis, and any
calculations of amounts with respect to any Person and its Restricted
Subsidiaries on a consolidated basis, shall refer to such Person and all its
Restricted Subsidiaries, whether or not such Restricted Subsidiaries would be
accounted for as consolidated subsidiaries on such Person's financial statements
prepared in accordance with GAAP;

          (d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Indenture as a whole and not to any particular
Article, Section or other subdivision;

          (e) all references to "$" or "dollars" shall refer to the lawful
currency of the United States of America;

          (f) the words "include," "included" and "including" as used herein
shall be deemed in each case to be followed by the phrase "without limitation,"
if not expressly followed by such phrase or the phrase "but not limited to";

          (g) words in the singular include the plural, and words in the plural
include the singular; and

          (h) any reference to a Section or Article refers to such Section or
Article of this Indenture unless otherwise indicated.

          Section 1.4. Incorporation by Reference of TIA. Whenever this
Indenture refers to a provision of the TIA, the provision is incorporated by
reference in and made a part of this Indenture. This Indenture is subject to the
mandatory provisions of the TIA, which are incorporated by reference in and made
a part of this Indenture. Any terms incorporated by reference in this Indenture
that are defined by the TIA, defined by any TIA reference to another statute or
defined by SEC rule under the TIA, have the meanings so assigned to them
therein. The following TIA terms have the following meanings:

          "indenture securities" means the Notes.

          "indenture security holder" means a Holder or Noteholders.

          "indenture to be qualified" means this Indenture.

          "indenture trustee" or "institutional trustee" means the Trustee.

          "obligor" on the indenture securities means the Company, Equistar
Funding and any other obligor on the indenture securities.

          Section 1.5. Conflict with TIA. If any provision hereof limits,
qualifies or conflicts with a provision of the TIA that is required under the
TIA to be a part of and

                                       30



govern this Indenture, the latter provision shall control. If any provision of
this Indenture modifies or excludes any provision of the TIA that may be so
modified or excluded, the latter provision shall be deemed (a) to apply to this
Indenture as so modified or (b) to be excluded, as the case may be.

          Section 1.6. Compliance Certificates and Opinions. Upon any
application or request by an Issuer or by any other obligor upon the Notes to
the Trustee to take any action under any provision of this Indenture, such
Issuer or other obligor upon the Notes, as the case may be, shall furnish to the
Trustee such certificates and opinions as may be required under the TIA. Each
such certificate or opinion shall be given in the form of one or more Officers'
Certificates, if to be given by Officers, or an Opinion of Counsel, if to be
given by counsel, and shall comply with the requirements of the TIA and any
other requirements set forth in this Indenture. Notwithstanding the foregoing,
in the case of any such request or application as to which the furnishing of any
Officers' Certificate or Opinion of Counsel is specifically required by any
provision of this Indenture relating to such particular request or application,
no additional certificate or opinion need be furnished.

          Every certificate or opinion with respect to compliance with a
condition or covenant provided for in this Indenture (except for certificates
provided for in Section 4.05) shall include:

          (a) a statement that the individual signing such certificate or
opinion has read such covenant or condition and the definitions herein relating
thereto;

          (b) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;

          (c) a statement that, in the opinion of such individual, he or she
made such examination or investigation as is necessary to enable him or her to
express an informed opinion as to whether or not such covenant or condition has
been complied with; and

          (d) a statement as to whether, in the opinion of such individual, such
condition or covenant has been complied with.

          Section 1.7. Form of Documents Delivered to Trustee. In any case where
several matters are required to be certified by, or covered by an opinion of,
any specified Person, it is not necessary that all such matters be certified by,
or covered by the opinion of, only one such Person, or that they be so certified
or covered by only one document, but one such Person may certify or give an
opinion with respect to some matters and one or more other such Persons as to
other matters, and any such Person may certify or give an opinion as to such
matters in one or several documents.

          Any certificate or opinion of an Officer may be based, insofar as it
relates to legal matters, upon a certificate or opinion of, or representations
by, counsel, unless such Officer knows that the certificate or opinion or
representations with respect to the matters upon which his certificate or
opinion is based are erroneous. Any such certificate or

                                       31



opinion of counsel may be based, insofar as it relates to factual matters, upon
a certificate or opinion of, or representations by, an Officer or Officers to
the effect that the information with respect to such factual matters is in the
possession of the Issuers, unless such counsel knows that the certificate or
opinion or representations with respect to such matters are erroneous.

          Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.

          Section 1.8. Acts of Noteholders; Record Dates. (a) Any request,
demand, authorization, direction, notice, consent, waiver or other action
provided by this Indenture to be given or taken by Holders may be embodied in
and evidenced by one or more instruments of substantially similar tenor signed
by such Holders in person or by agent duly appointed in writing; and, except as
herein otherwise expressly provided, such action shall become effective when
such instrument or instruments are delivered to the Trustee, and, where it is
hereby expressly required, to the Issuers. Such instrument or instruments (and
the action embodied therein and evidenced thereby) are herein sometimes referred
to as the "Act" of the Holders signing such instrument or instruments. Proof of
execution of any such instrument or of a writing appointing any such agent shall
be sufficient for any purpose of this Indenture and (subject to Section 7.01)
conclusive in favor of the Trustee, the Issuers and any other obligor upon the
Notes, if made in the manner provided in this Section 1.08.

          (b) The fact and date of the execution by any Person of any such
instrument or writing may be proved by the affidavit of a witness of such
execution or by the certificate of any notary public or other officer authorized
by law to take acknowledgments of deeds, certifying that the individual signing
such instrument or writing acknowledged to him the execution thereof. Where such
execution is by an officer of a corporation or a member of a partnership or
other entity, on behalf of such corporation or partnership or other entity, such
certificate or affidavit shall also constitute sufficient proof of such Person's
authority. The fact and date of the execution of any such instrument or writing,
or the authority of the person executing the same, may also be proved in any
other manner that the Trustee deems sufficient.

          (c) The ownership of Notes shall be proved by the Register.

          (d) Any request, demand, authorization, direction, notice, consent,
waiver or other action by the Holder of any Note shall bind the Holder of every
Note issued upon the transfer thereof or in exchange therefor or in lieu
thereof, in respect of anything done or suffered to be done by the Trustee, the
Issuers or any other obligor on the Notes in reliance thereon, whether or not
notation of such action is made upon such Note.

          (e) (i) The Issuers may set any day as a record date for the purpose
of determining the Holders of Outstanding Notes entitled to give, make or take
any request, demand, authorization, direction, notice, consent, waiver or other
action provided or permitted by this Indenture to be given, made or taken by
Holders, provided that the Issuers may not set a record date for, and the
provisions of this paragraph shall not apply

                                       32



with respect to, the giving or making of any notice, declaration, request or
direction referred to in Section 1.08(e)(ii). If any record date is set pursuant
to this paragraph, the Holders of Outstanding Notes on such record date (or
their duly designated proxies), and no other Holders, shall be entitled to take
the relevant action, whether or not such Persons remain Holders after such
record date; provided that no such action shall be effective hereunder unless
taken on or prior to the applicable Expiration Date by Holders of the requisite
principal amount of Outstanding Notes on such record date. Nothing in this
paragraph shall be construed to prevent the Issuers from setting a new record
date for any action for which a record date has previously been set pursuant to
this paragraph (whereupon the record date previously set shall automatically and
with no action by any Person be canceled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by Holders
of the requisite principal amount of Outstanding Notes on the date such action
is taken. Promptly after any record date is set pursuant to this paragraph, the
Issuers, at their own expense, shall cause notice of such record date, the
proposed action by Holders and the applicable Expiration Date to be given to the
Trustee in writing and to each Holder in the manner set forth in Section 1.10.

          (ii) The Trustee may set any day as a record date for the purpose of
determining the Holders of Outstanding Notes entitled to join in the giving or
making of (w) any Notice of Default, (x) any declaration of acceleration
referred to in Section 6.02, (y) any request to institute proceedings referred
to in Section 6.06(b) or (z) any direction referred to in Section 6.05, in each
case with respect to Notes. If any record date is set pursuant to this
paragraph, the Holders of Outstanding Notes on such record date, and no other
Holders, shall be entitled to join in such notice, declaration, request or
direction, whether or not such Holders remain Holders after such record date;
provided that no such action shall be effective hereunder unless taken on or
prior to the applicable Expiration Date by Holders of the requisite principal
amount of Outstanding Notes on such record date. Nothing in this paragraph shall
be construed to prevent the Trustee from setting a new record date for any
action for which a record date has previously been set pursuant to this
paragraph (whereupon the record date previously set shall automatically and with
no action by any Person be canceled and of no effect), and nothing in this
paragraph shall be construed to render ineffective any action taken by Holders
of the requisite principal amount of Outstanding Notes on the date such action
is taken. Promptly after any record date is set pursuant to this paragraph, the
Trustee, at the expense of the Issuers, shall cause notice of such record date,
the proposed action by Holders and the applicable Expiration Date to be given to
the Issuers in writing and to each Holder in the manner set forth in Section
1.10.

          (iii) With respect to any record date set pursuant to this Section
1.08, the party hereto that sets such record dates may designate any day as the
"Expiration Date" and from time to time may change the Expiration Date to any
earlier or later day; provided that no such change shall be effective unless
notice of the proposed new Expiration Date is given to the Issuers or the
Trustee, whichever such party is not setting a record date pursuant to this
Section 1.08(e), in writing, and to each Holder in the manner set forth in
Section 1.10, on or prior to the existing Expiration Date. If an Expiration Date
is not designated with respect to any record date set pursuant to this Section,
the party hereto that set such record date shall be deemed to have initially
designated the 180th day after such

                                       33



record date as the Expiration Date with respect thereto, subject to its right to
change the Expiration Date as provided in this paragraph. Notwithstanding the
foregoing, no Expiration Date shall be later than the 180th day after the
applicable record date.

          (iv) Without limiting the foregoing, a Holder entitled hereunder to
take any action hereunder with regard to any particular Note may do so with
regard to all or any part of the principal amount of such Note or by one or more
duly appointed agents each of which may do so pursuant to such appointment with
regard to all or any part of such principal amount.

          Section 1.9. Notices, Etc., to Trustee and Issuers. Any request,
demand, authorization, direction, notice, consent, waiver or Act of Holders or
other document provided or permitted by this Indenture to be made upon, given or
furnished to, or filed with,

          (a) the Trustee by any Holder or by the Issuers or any other obligor
upon the Notes shall be sufficient for every purpose hereunder if made, given,
furnished or filed in writing to or with the Trustee at the Corporate Trust
Office (facsimile: (212) 815-5131), or at any other address furnished in writing
to the Issuers by the Trustee, or

          (b) the Issuers by the Trustee or by any Holder shall be sufficient
for every purpose hereunder if in writing and delivered in person or mailed,
first-class postage prepaid, to the Company at One Houston Center, Suite 700,
1221 McKinney, Houston, Texas 77010, Attention: General Counsel (facsimile:
(713) 309-2143), with copies to Baker Botts L.L.P. at 910 Louisiana, Houston,
Texas 77002, Attention: Stephen Massad, Esq. (facsimile: (713) 229-1522), or at
any other address previously furnished in writing to the Trustee by the Issuers.

          Section 1.10. Notices to Holders; Waivers. Where this Indenture
provides for notice to Holders of any event, such notice shall be deemed to have
been given upon the mailing by first class mail, postage prepaid, of such
notices to Holders at their registered addresses as recorded in the Register,
not later than the latest date, and not earlier than the earliest date,
prescribed herein for the giving of such notice. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders.

          Where this Indenture provides for notice in any manner, such notice
may be waived in writing by the Person entitled to receive such notice, either
before or after the event, and such waiver shall be the equivalent of such
notice. Waivers of notice by Holders shall be filed with the Trustee, but such
filing shall not be a condition precedent to the validity of any action taken in
reliance upon such waiver.

          In case, by reason of the suspension of regular mail service, or by
reason of any other cause, it shall be impossible to mail notice of any event as
required by any provision of this Indenture, then such notification as shall be
made with the approval of the Trustee (such approval not to be unreasonably
withheld) shall constitute a sufficient notification for every purpose
hereunder.

                                       34



          Section 1.11. Effect of Headings and Table of Contents. The Article
and Section headings herein and the Table of Contents are for convenience only
and shall not affect the construction hereof.

          Section 1.12. Successors and Assigns. All covenants and agreements in
this Indenture by each Issuer shall bind its respective successors and assigns,
whether so expressed or not.

          Section 1.13. Separability Clause. In case any provision in this
Indenture or in the Notes shall be invalid, illegal or unenforceable, the
validity, legality and enforceability of the remaining provisions shall not in
any way be affected or impaired thereby.

          Section 1.14. Benefits of Indenture. Nothing in this Indenture or in
the Notes, express or implied, shall give to any Person, other than the parties
hereto and their successors hereunder, any Paying Agent and the Holders, any
benefit or any legal or equitable right, remedy or claim under this Indenture.

          Section 1.15. Governing Law. THIS INDENTURE, THE NOTES AND THE
SUBSIDIARY GUARANTEES SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH,
THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ANY PRINCIPLES OF
CONFLICT OF LAWS TO THE EXTENT THAT THE APPLICATION OF THE LAW OF ANOTHER
JURISDICTION WOULD BE REQUIRED THEREBY. TO THE EXTENT PERMITTED BY LAW, THE
TRUSTEE, EACH ISSUER, ANY OTHER OBLIGORS IN RESPECT OF THE NOTES AND (BY THEIR
ACCEPTANCE OF THE NOTES) THE HOLDERS, AGREE TO SUBMIT TO THE NON-EXCLUSIVE
JURISDICTION OF ANY UNITED STATES FEDERAL OR STATE COURT LOCATED IN THE BOROUGH
OF MANHATTAN, IN THE CITY OF NEW YORK IN ANY ACTION OR PROCEEDING ARISING OUT OF
OR RELATING TO THIS INDENTURE OR THE NOTES.

          Section 1.16. Legal Holidays. In any case where any Interest Payment
Date, Redemption Date or Stated Maturity of any Note shall not be a Business
Day, then (notwithstanding any other provision of this Indenture or of the
Notes) payment of interest and Liquidated Damages, if any, or principal and
premium (if any) need not be made on such date, but may be made on the next
succeeding Business Day with the same force and effect as if made on the
Interest Payment Date or Redemption Date, or at the Stated Maturity.

          Section 1.17. No Personal Liability of Directors, Officers, Employees,
Stockholders and Partners. No director, officer, employee, incorporator,
partner, member of the Partnership Governance Committee or holder of Capital
Stock of either Issuer or any Subsidiary Guarantor, as such, will have any
liability for any obligations of the Issuers and the Subsidiary Guarantors under
the Notes, the Subsidiary Guarantees, or the Indenture or for any claim based
on, in respect of, or by reason of, such obligations. Each holder of Notes by
accepting a Note waives and releases all such liability. The waiver and release
are part of the consideration for issuance of the Notes.

                                       35



          Section 1.18. Exhibits. All exhibits attached hereto are by this
reference made a part hereof with the same effect as if herein set forth in
full.

          Section 1.19. Counterparts. This Indenture may be executed in any
number of counterparts, each of which shall be an original; but such
counterparts shall together constitute but one and the same instrument.

                                    ARTICLE 2

                                   Note Forms

          Section 2.1. Forms Generally. The Notes and the Trustee's certificate
of authentication relating thereto shall be in substantially the forms set
forth, or referenced, in Exhibit A annexed hereto and in this Article 2. The
Notes may have such appropriate insertions, omissions, substitutions, notations,
legends, endorsements, identifications and other variations as are required or
permitted by law, stock exchange rule or depository rule or usage, the governing
instruments of either Issuer, agreements to which either Issuer is subject, if
any, or other customary usage, or as may consistently herewith be determined by
the Officers of the Issuers executing such Notes, as evidenced by such execution
(provided always that any such notation, legend, endorsement, identification or
variation is in a form acceptable to the Trustee and the Issuers). Each Note
shall be dated the date of its authentication.

          Initial Notes and any Additional Notes offered and sold in reliance on
Rule 144A under the Securities Act shall be issued initially in the form of one
or more permanent global Notes in substantially the form set forth in Exhibit A
and shall contain the legends set forth in Section 2.03(a) and (b) (the "U.S.
Global Notes"), registered in the name of the nominee of the Depositary,
deposited with the Trustee, as custodian for the Depositary or its nominee, duly
executed by each Issuer and authenticated by the Trustee as hereinafter
provided. The aggregate principal amount of the U.S. Global Notes may from time
to time be increased or decreased by adjustments made on the records of the
Trustee, as custodian for the Depositary or its nominee, as provided in Sections
3.13 and 3.14.

          Initial Notes and any Initial Additional Notes offered and sold in
offshore transactions in reliance on Regulation S under the Securities Act shall
be issued initially in the form of a single temporary global Note in
substantially the form set forth in Exhibit A and containing each of the legends
set forth in Section 2.03 (the "Temporary Offshore Global Note"), registered in
the name of the nominee of the Depositary, deposited with the Trustee, as
custodian for the Depositary or its nominee, duly executed by each Issuer and
authenticated by the Trustee as hereinafter provided. At any time following
termination of the Restricted Period (the "Offshore Note Exchange Date"), upon
receipt by the Trustee and the Issuers of a certificate substantially in the
form set forth in Exhibit C hereto, a single permanent global Note substantially
in the form of Exhibit A hereto and containing the legend set forth in Section
2.03(b) (the "Permanent Offshore Global Note," and together with the Temporary
Offshore Global Note, the "Offshore Global

                                       36



Note") duly executed by each Issuer and authenticated by the Trustee as
hereinafter provided shall be deposited with the Trustee, as custodian for the
Depositary, and the Registrar shall reflect on its books and records the date
and a decrease in the principal amount of the Temporary Offshore Global Note in
an amount equal to the principal amount of the beneficial interest in the
Temporary Offshore Global Note transferred. Prior to the Offshore Note Exchange
Date and receipt of the certificate referred to above, beneficial interests in a
Temporary Offshore Global Note may be held only through Euroclear or
Clearstream. The aggregate principal amount of the Offshore Global Note may from
time to time be increased or decreased by adjustments made on the records of the
Trustee, as custodian for the Depositary for the Offshore Global Note as
provided in Sections 3.13 and 3.14.

          Initial Notes and any Initial Additional Notes issued in exchange for
or upon transfer of beneficial interests in the U.S. Global Note or the
Permanent Offshore Global Note pursuant to Section 3.13 shall be in the form of
permanent certificated Notes in substantially the form set forth in Exhibit A
containing the Private Placement Legend as set forth in Section 2.03 (the "U.S.
Physical Notes"), or in the form of permanent certificated Notes substantially
in the form set forth in Exhibit A (the "Offshore Physical Notes"),
respectively, as hereinafter provided. No Offshore Physical Notes may be issued
until expiration of the applicable Restricted Period and receipt by the Issuers
and the Trustee from the (x) proposed transferor of a certificate substantially
in the form set forth in Exhibit D or (y) holder of a beneficial interest being
exchanged, of certification that such holder is a non-U.S. person (within the
meaning of Regulation S under the Securities Act) or a U.S. person who acquired
such interest in a transaction exempt from the registration requirements of the
Securities Act (in which case a U.S. Physical Note shall be issued).

          Initial Additional Notes offered and sold in reliance on any exemption
under the Securities Act other than Regulation S and Rule 144A thereunder shall
be issued in the form of U.S. Physical Notes and shall contain the Private
Placement Legend as set forth in Section 2.03.

          The Offshore Physical Notes and the U.S. Physical Notes, together with
any other certificated notes in registered form, are sometimes collectively
herein referred to as the "Physical Notes." The U.S. Global Note and the
Offshore Global Note, together with any other certificated notes in registered
global form, are sometimes collectively referred to as the "Global Notes."

          Exchange Notes shall be issued substantially in the form set forth in
Exhibit A and, subject to Section 3.13, shall be in the form of one or more
Global Notes.

          Additional Dividend Notes issued in respect of any Notes shall be
issued substantially in the form set forth in Exhibit A and shall be issued in
the same form as the Notes in respect of which they are issued. Additional
Dividend Notes shall bear the same legends, including the Private Placement
Legend, as the Notes in respect of which such Additional Dividend Notes are
issued. The Issuers shall take all required steps to ensure that any Additional
Dividend Notes issued in respect of Notes that are not Restricted Securities or
required by applicable law to bear the Private Placement Legend shall not,

                                       37



and shall not be required by applicable law to, be Restricted Securities or bear
the Private Placement Legend (including without limitation through the
maintenance of an effective shelf registration statement, if required).

          Section 2.2. Form of Trustee' Certificate of Authentication. The
Trustee's certificate of authentication shall be in substantially the following
form:

          This is one of the Notes referred to in the within-mentioned
Indenture.

                                    THE BANK OF NEW YORK,
                                       as Trustee


Dated:                              By:
       -----------                      ---------------------------
                                            Authorized Signatory

          If an appointment of an Authenticating Agent is made pursuant to
Section 7.15, the Notes may have endorsed thereon, in lieu of the Trustee's
certificate of authentication, an alternative certificate of authentication in
the following form:

          This is one of the Notes referred to in the within-mentioned
Indenture.

                                    THE BANK OF NEW YORK,
                                       As Trustee


                                           By
                                              ----------------------------------
                                              As Authenticating Agent


                                           By
                                              ----------------------------------
                                              Authorized Signatory

Dated:

          Section 2.3. Restrictive Legends. (a) Except as set forth in Section
3.14(l), unless and until (i) an Initial Note or any Initial Additional Note is
sold pursuant to an effective registration statement, whether pursuant to the
Registration Rights Agreement or otherwise or (ii) an Initial Note or any
Initial Additional Note is exchanged for an Exchange Note in an Exchange Offer
pursuant to an effective Exchange Offer Registration Statement, each U.S. Global
Note and U.S. Physical Note and each Temporary Offshore Global Note shall bear
the following legend set forth below (the "Private Placement Legend") on the
face thereof:

          THIS NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), AND MAY NOT BE OFFERED, SOLD, PLEDGED OR
OTHERWISE TRANSFERRED EXCEPT IN ACCORDANCE WITH THE FOLLOWING SENTENCE. BY ITS
ACQUISITION HEREOF OR OF A BENEFICIAL INTEREST HEREIN, THE ACQUIRER

                                       38



          (1) REPRESENTS THAT

                    (A) IT AND ANY ACCOUNT FOR WHICH IT IS ACTING IS A
          "QUALIFIED INSTITUTIONAL BUYER" (WITHIN THE MEANING OF RULE 144A UNDER
          THE SECURITIES ACT) AND THAT IT EXERCISES SOLE INVESTMENT DISCRETION
          WITH RESPECT TO EACH SUCH ACCOUNT,

                    (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (WITHIN THE
          MEANING OF RULE 501(a) (1), (2), (3) OR (7) UNDER THE SECURITIES ACT)
          (AN "INSTITUTIONAL ACCREDITED INVESTOR") OR

                    (C) IT IS NOT A U.S. PERSON (WITHIN THE MEANING OF
          REGULATION S UNDER THE SECURITIES ACT) AND

          (2) AGREES FOR THE BENEFIT OF THE COMPANY THAT IT WILL NOT OFFER,
SELL, PLEDGE OR OTHERWISE TRANSFER THIS NOTE OR ANY BENEFICIAL INTEREST HEREIN,
EXCEPT IN ACCORDANCE WITH THE SECURITIES ACT AND ANY APPLICABLE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES AND ONLY

                    (A) TO THE COMPANY,

                    (B) PURSUANT TO A REGISTRATION STATEMENT WHICH HAS BECOME
          EFFECTIVE UNDER THE SECURITIES ACT,

                    (C) TO A QUALIFIED INSTITUTIONAL BUYER IN COMPLIANCE WITH
          RULE 144A UNDER THE SECURITIES ACT,

                    (D) IN AN OFFSHORE TRANSACTION IN COMPLIANCE WITH RULE 904
          OF REGULATION S UNDER THE SECURITIES ACT,

                    (E) IN A PRINCIPAL AMOUNT OF NOT LESS THAN $100,000, TO AN
          INSTITUTIONAL ACCREDITED INVESTOR THAT, PRIOR TO SUCH TRANSFER, FORM
          DELIVERS TO THE TRUSTEE A DULY COMPLETED AND SIGNED CERTIFICATE (THE
          OF WHICH MAY BE OBTAINED FROM THE TRUSTEE) RELATING TO THE
          RESTRICTIONS ON TRANSFER OF THIS NOTE, OR

                    (F) PURSUANT TO AN EXEMPTION FROM REGISTRATION PROVIDED BY
          RULE 144 UNDER THE SECURITIES ACT OR ANY OTHER AVAILABLE EXEMPTION
          FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.

PRIOR TO THE REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH (2)(C) ABOVE OR
(2)(D) ABOVE, A DULY COMPLETED AND SIGNED CERTIFICATE (THE FORM OF WHICH MAY BE
OBTAINED FROM THE TRUSTEE) MUST BE DELIVERED TO THE TRUSTEE. PRIOR TO THE
REGISTRATION OF ANY TRANSFER IN ACCORDANCE WITH (2)(E) OR (F)

                                       39



ABOVE, THE COMPANY RESERVES THE RIGHT TO REQUIRE THE DELIVERY OF SUCH LEGAL
OPINIONS, CERTIFICATIONS OR OTHER EVIDENCE AS MAY REASONABLY BE REQUIRED IN
ORDER TO DETERMINE THAT THE PROPOSED TRANSFER IS BEING MADE IN COMPLIANCE WITH
THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. NO REPRESENTATION IS
MADE AS TO THE AVAILABILITY OF ANY RULE 144 EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT.

          (b) Each Global Note, whether or not an Initial Note or Additional
Note, shall also bear the following legend on the face thereof:

          UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE
OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE COMPANY
OR THEIR AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND ANY
CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME
AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE
TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.

          TRANSFERS OF THIS GLOBAL NOTE SHALL BE LIMITED TO TRANSFERS IN WHOLE,
BUT NOT IN PART, TO NOMINEES OF CEDE & CO. OR TO A SUCCESSOR THEREOF OR SUCH
SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL NOTE SHALL BE
LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN
SECTIONS 3.13 AND 3.14 OF THE INDENTURE.

          (c) Each Temporary Offshore Global Note shall bear the following
legend on the face thereof:

          THIS NOTE IS A TEMPORARY GLOBAL NOTE. PRIOR TO THE EXPIRATION OF THE
RESTRICTED PERIOD APPLICABLE HERETO, BENEFICIAL INTERESTS HEREIN MAY NOT BE HELD
BY ANY PERSON OTHER THAN (1) A NON-U.S. PERSON OR (2) A U.S. PERSON WHO
PURCHASED SUCH INTEREST IN A TRANSACTION EXEMPT FROM REGISTRATION UNDER THE U.S.
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT") PURSUANT TO RULE 144A
THEREUNDER. BENEFICIAL INTERESTS HEREIN ARE NOT EXCHANGEABLE FOR PHYSICAL NOTES
OTHER THAN A PERMANENT GLOBAL NOTE IN ACCORDANCE WITH THE TERMS OF THE
INDENTURE. TERMS IN THIS LEGEND ARE USED AS USED IN REGULATION S UNDER THE
SECURITIES ACT.

                                       40



                                    ARTICLE 3

                                    The Notes

          Section 3.1. Title and Terms. The aggregate principal amount of Notes
that may be authenticated and delivered and Outstanding under this Indenture is
initially limited to $450,000,000 (plus any Additional Dividend Notes issued in
respect thereof pursuant to Section 4.08), but may be increased, subject to
compliance with the covenants contained in Article 4 below and the conditions
set forth in Section 3.03. The Initial Notes will be issued in an aggregate
principal amount of $450,000,000 plus the aggregate amount of any Additional
Dividend Notes issued in respect thereof. All the Original Notes shall vote and
consent together on all matters as one class, and none of the Original Notes
will have the right to vote or consent as a class separate from one another on
any matter. Subject to the covenants contained in Article 4 below, the Issuers
may issue Additional Notes hereunder and the Issuers may be required to issue
Additional Dividend Notes from time to time. Initial Additional Notes (including
any Exchange Notes issued in exchange therefor) and Additional Dividend Notes
(including any Exchange Notes issued in exchange therefor) shall vote (or
consent) as a class with the other Notes and otherwise be treated as Notes for
all purposes of this Indenture.

          The Notes shall be known and designated as the "10_% Senior Notes Due
2011" of the Issuers. The final Stated Maturity of the Notes shall be May 1,
2011. Interest on the Outstanding principal amount of Notes will accrue, subject
to Section 3.11, at the rate of 10_% per annum and will be payable semiannually
in arrears on May 1 and November 1 in each year, commencing on November 1, 2003,
to Holders of record at the close of business on the immediately preceding April
15, and October 15, respectively (each such April 15 and October 15, a "Regular
Record Date"). Interest on the Original Notes will accrue from the most recent
date to which interest has been paid or duly provided for or, if no interest has
been paid, from April 22, 2003, and interest on any Additional Notes and
Additional Dividend Notes (and Exchange Notes issued in exchange therefor) will
accrue from the most recent date to which interest has been paid or duly
provided for or, if no interest has been paid, from April 22, 2003; provided
that if any Note is surrendered for exchange on or after a record date for an
Interest Payment Date that will occur on or after the date of such exchange,
interest on the Note received in exchange thereof will accrue from the date of
such Interest Payment Date. The Issuers will pay interest on overdue principal
and, to the extent lawful, on overdue installments of interest (including
interest to be paid in the form of Additional Dividend Notes) and overdue
amounts of Liquidated Damages, if any, at a rate of 1% per annum in excess of
the interest rate referred to above.

          The principal of, and premium, if any, and interest and Liquidated
Damages, if any, on the Notes shall be payable at the Corporate Trust Office or
at such other office or agency of the Issuers maintained for that purpose (each,
a "Place of Payment") in the manner provided in Section 4.01(b); provided,
however, that, under the circumstances set forth in Section 4.01(b), payment of
interest and Liquidated Damages on a Note may be made by wire transfer of
immediately available funds to the account specified by the Holder of a Global
Note or by check mailed to the address of the Person entitled thereto as such
address shall appear in the Register.

                                       41



          Section 3.2. Denominations. The Notes shall be issuable only in
registered form without coupons and only in denominations of $1,000 and any
integral multiple thereof.

          Section 3.3. Execution, Authentication and Delivery and Dating. The
Notes shall be executed on behalf of each Issuer by two Officers of such Issuer.
The signature of such Officers on the Notes may be manual or facsimile.

          Notes bearing the manual or facsimile signature of an individual who
was at any time a proper Officer of an Issuer shall bind such Issuer,
notwithstanding that such individual has ceased to hold such office prior to the
authentication and delivery of such Notes or did not hold such office at the
date of such Notes.

          At any time and from time to time after the execution and delivery of
this Indenture, the Issuers may deliver Notes executed by the Issuers to the
Trustee for authentication; and the Trustee shall authenticate and deliver (i)
Initial Notes (other than Additional Dividend Notes) for original issue in the
aggregate principal amount not to exceed $450,000,000 and (ii) Additional Notes
(other than Additional Dividend Notes) from time to time for original issue in
aggregate principal amounts specified by the Issuers, (iii) Exchange Notes from
time to time for issue in exchange for a like principal amount of Initial Notes
or Initial Additional Notes (including Additional Dividend Notes), and (iv) to
the extent required by Section 4.08, Additional Dividend Notes in respect
thereof from time to time for original issue in an aggregate principal amount
specified by the Issuers, in each case specified in clauses (i) through (iv)
above, upon a written order of the Issuers in the form of an Officers'
Certificate executed by two Officers of each Issuer (an "Authentication Order"),
and in the case of clause (ii), upon receipt by the Trustee of an Opinion of
Counsel confirming that the Holders of the Outstanding Notes will be subject to
federal income tax in the same amounts, in the same manner and at the same times
as would have been the case if such Additional Notes were not issued. Such
Officers' Certificates shall specify the amount of Notes to be authenticated and
the date on which the Notes are to be authenticated, whether the Notes are to be
Initial Notes, Additional Notes, Exchange Notes and/or Additional Dividend
Notes, that, in the case of Additional Notes, the issuance of such Notes does
not contravene any provision of Article 4 of this Indenture, whether the Notes
are to be issued as one or more Global Notes or Physical Notes, the name or
names of the Initial Holder or Holders and such other information as the Issuers
may include or the Trustee may reasonably request.

          All Notes shall be dated the date of their authentication.

          No Note shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Note a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by manual signature, and such certificate upon any Note
shall be conclusive evidence, and the only evidence, that such Note has been
duly authenticated and delivered hereunder.

          Section 3.4. Temporary Notes. Until definitive Notes are ready for
delivery, the Issuers may prepare and upon receipt of an Authentication Order
the Trustee shall authenticate temporary Notes. Temporary Notes shall be
substantially in the form of

                                       42



definitive Notes but may have variations that the Issuers consider appropriate
for temporary Notes. If temporary Notes are issued, the Issuers will cause
definitive Notes to be prepared without unreasonable delay. After the
preparation of definitive Notes, the temporary Notes shall be exchangeable for
definitive Notes upon surrender of the temporary Notes at the office or agency
of the Issuers in a Place of Payment, without charge to the Holder. Upon
surrender for cancellation of any one or more temporary Notes, the Issuers shall
execute and upon receipt of an Authentication Order the Trustee shall
authenticate and deliver in exchange therefor a like principal amount of
definitive Notes of authorized denominations. Until so exchanged the temporary
Notes shall in all respects be entitled to the same benefits under this
Indenture as definitive Notes of the same series and tenor.

          Section 3.5. Registration, Registration of Transfer and Exchange. The
Company shall cause to be kept at the Corporate Trust Office of the Trustee a
register (the register maintained in such office and in any other office or
agency of the Issuers in a Place of Payment being herein sometimes collectively
referred to as the "Register") in which, subject to such reasonable regulations
as it may prescribe, the Issuers shall provide for the registration of Notes and
of transfers of Notes. The Trustee is hereby appointed "Registrar" for the
purpose of registering Notes and transfers of Notes as herein provided.

          Upon surrender for transfer of any Note at the office or agency of the
Issuers in a Place of Payment, in compliance with all applicable requirements of
this Indenture and applicable law, the Issuers shall execute, and the Trustee
shall authenticate and deliver, in the name of the designated transferee or
transferees, one or more new Notes, of any authorized denominations and of a
like aggregate principal amount.

          At the option of the Holder, Notes may be exchanged for other Notes,
of any authorized denominations and of a like tenor and aggregate principal
amount, upon surrender of the Notes to be exchanged at such office or agency.
Whenever any Notes are so surrendered for exchange, the Issuers shall execute,
and the Trustee shall authenticate and deliver, the Notes that the Holder making
the exchange is entitled to receive; provided that no exchange of Initial Notes
or Initial Additional Notes for Exchange Notes shall occur until an Exchange
Offer Registration Statement shall have been declared effective by the SEC and
the Trustee shall have received an Officers' Certificate confirming that the
Exchange Offer Registration Statement has been declared effective by the SEC and
an Exchange Offer thereunder has been consummated. The Initial Notes or
Additional Notes to be exchanged for the Exchange Notes shall be canceled by the
Trustee.

          All Notes issued upon any registration of transfer or exchange of
Notes shall be the valid obligations of the Issuers, evidencing the same debt,
and entitled to the same benefits under this Indenture, as the Notes surrendered
upon such registration of transfer or exchange.

          Every Note presented or surrendered for registration of transfer or
exchange shall (if so required by the Issuers or the Registrar) be duly
endorsed, or be accompanied by a written instrument of transfer, in form
satisfactory to the Issuers and the Registrar duly executed, by the Holder
thereof or such Holder's attorney duly authorized in writing.

                                       43



          No service charge shall be made for any registration of transfer or
exchange or redemption of Notes, but the Issuers may require payment of a sum
sufficient to cover any tax or other governmental charge that may be imposed in
connection with any registration of transfer or exchange of Notes under this
Section 3.05.

          Section 3.6. Mutilated, Destroyed, Lost and Stolen Notes. If (a) any
mutilated Note is surrendered to the Trustee, or the Issuers and the Trustee
receive evidence to their satisfaction of the destruction, loss or theft of any
Note, and (b) there is delivered to the Issuers and the Trustee such security or
indemnity as may be required by them to save each of them harmless, then, in the
absence of notice to the Issuers or the Trustee that such Note has been acquired
by a bona fide purchaser, the Issuers shall execute and upon receipt of an
Authentication Order the Trustee shall authenticate and deliver, in exchange for
or in lieu of any such mutilated, destroyed, lost or stolen Note, a new Note of
like tenor and principal amount, bearing a number not contemporaneously
Outstanding.

          In case any such mutilated, destroyed, lost or stolen Note has become
or is about to become due and payable, the Issuers in their discretion may,
instead of issuing a new Note, pay such Note.

          Upon the issuance of any new Note under this Section 3.06, the Issuers
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses (including the fees and expenses of the Trustee) connected therewith.

          Every new Note issued pursuant to this Section 3.06 in lieu of any
mutilated, destroyed, lost or stolen Note shall constitute an original
additional contractual obligation of each Issuer, whether or not the mutilated,
destroyed, lost or stolen Note shall be at any time enforceable by anyone, and
shall be entitled to all the benefits of this Indenture equally and ratably with
any and all other Notes duly issued hereunder.

          The provisions of this Section 3.06 are exclusive and shall preclude
(to the extent lawful) all other rights and remedies with respect to the
replacement or payment of mutilated, destroyed, lost or stolen Notes.

          Section 3.7. Payment of Interest Rights Preserved. Interest and
Liquidated Damages on any Note that is payable, and is punctually paid or duly
provided for, on any Interest Payment Date shall be paid to the Person in whose
name that Note (or one or more Predecessor Notes) is registered at the close of
business on the Regular Record Date for such interest and Liquidated Damages
specified in Section 3.01; provided that interest payable in the form of
Additional Dividend Notes shall be paid to the Person in whose name that Note
(or one or more Predecessor Notes) is registered at the close of business on the
Notice Date for such interest specified in Section 4.08.

          Any interest and Liquidated Damages on any Note that is payable, but
is not punctually paid or duly provided for, on any Interest Payment Date
(herein called "Defaulted Interest") shall forthwith cease to be payable to the
registered Holder on the relevant Regular Record Date by virtue of having been
such Holder; and such Defaulted Interest shall be paid by the Issuers, as
provided in 3.07(a) or 3.07(b) below:

                                       44



          (a) The Issuers may elect to make payment of any Defaulted Interest to
the Persons in whose names the Notes (or their respective Predecessor Notes) are
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest, which shall be fixed in the following manner. The
Issuers shall notify the Trustee in writing of the amount of Defaulted Interest
proposed to be paid on each Note and the date of the proposed payment, and at
the same time the Issuers shall deposit with the Trustee an amount of money
equal to the aggregate amount proposed to be paid in respect of such Defaulted
Interest or shall make arrangements reasonably satisfactory to the Trustee for
such deposit prior to the date of the proposed payment, such money when
deposited to be held in trust for the benefit of the Persons entitled to such
Defaulted Interest as provided in this Section 3.07(a). Thereupon the Trustee
shall fix a Special Record Date for the payment of such Defaulted Interest which
shall be not more than 15 nor less than 10 days prior to the date of the
proposed payment and not less than 10 days after the receipt by the Trustee of
the notice of the proposed payment. The Trustee shall promptly notify the
Issuers of such Special Record Date and, in the name and at the expense of the
Issuers, shall cause notice of the proposed payment of such Defaulted Interest,
the amount thereof and the Special Record Date and payment date therefor to be
mailed, first class postage prepaid, to each Holder at such Holder's address as
it appears in the Register, not less than 10 days prior to such Special Record
Date. Notice of the proposed payment of such Defaulted Interest and the Special
Record Date therefor having been so mailed, such Defaulted Interest shall be
paid to the Persons in whose names the Notes (or their respective Predecessor
Notes) are registered on such Special Record Date and shall no longer be payable
pursuant to the following 3.07(b).

          (b) The Issuers may make payment of any Defaulted Interest in any
other lawful manner not inconsistent with the requirements of any securities
exchange on which the Notes may be listed, and upon such notice as may be
required by such exchange, if, after notice given by the Issuers to the Trustee
of the proposed payment pursuant to this clause (b), such payment shall be
deemed practicable by the Trustee.

          Subject to the foregoing provisions of this Section 3.07, each Note
delivered under this Indenture upon registration of transfer of or in exchange
for or in lieu of any other Note shall carry the rights to interest (including
any Liquidated Damages) accrued and unpaid, and to accrue, that were carried by
such other Note.

          Section 3.8. Persons Deemed Owners. Prior to due presentment of a Note
for registration of transfer, the Issuers, the Trustee and any agent of any
Issuer or the Trustee may treat the Person in whose name such Note is registered
as the owner of such Note for the purpose of receiving payment of principal of
(and premium, if any, on) and (subject to Section 3.07) interest and Liquidated
Damages, if any, on such Note and for all other purposes whatsoever, whether or
not such Note be overdue, and none of the Issuers, the Trustee or any agent of
any of them shall be affected by notice to the contrary.

          Section 3.9. Cancellation. All Notes surrendered for payment,
redemption, registration of transfer or exchange shall, if surrendered to any
Person other than the Trustee, be delivered to the Trustee and, if not already
canceled, shall be promptly canceled by it. The Issuers may at any time deliver
to the Trustee for cancellation any

                                       45



Notes previously authenticated and delivered hereunder that the Issuers may have
acquired in any manner whatsoever, and all Notes so delivered shall be promptly
canceled by the Trustee. No Notes shall be authenticated in lieu of or in
exchange for any Notes canceled as provided in this Section 3.09, except as
expressly permitted by this Indenture. All canceled Notes held by the Trustee
shall be disposed of in accordance with the Trustee's customary procedures.

          Section 3.10. Computation of Interest. Interest on the Notes shall be
computed on the basis of a 360-day year of twelve 30-day months.

          Section 3.11. Payment of Liquidated Damages. (a) Under certain
circumstances the Issuers will be obligated to pay certain Liquidated Damages to
the Holders of certain Initial Notes, as more particularly set forth in such
Initial Notes.

          (b) Under certain circumstances the Issuers may be obligated to pay
certain Liquidated Damages to the Holders of certain Initial Additional Notes,
as may be more particularly set forth in such Initial Additional Notes.

          Section 3.12. CUSIP Numbers. The Issuers in issuing the Notes may use
"CUSIP" or "CINS" numbers (if then generally in use) in addition to serial
numbers, and, if so, the Trustee shall use such "CUSIP" or "CINS" numbers in
addition to serial numbers in notices of redemption, repurchase or other notices
to Holders as a convenience to Holders; provided that any such notice may state
that no representation is made as to the correctness of such "CUSIP" or "CINS"
numbers either as printed on the Notes or as contained in any notice of a
redemption or repurchase and that reliance may be placed only on the serial or
other identification numbers printed on the Notes, and any such redemption or
repurchase shall not be affected by any defect in or omission of such numbers.
The Issuers will promptly notify the Trustee of any change in the "CUSIP" or
"CINS" numbers.

          Section 3.13. Book-entry Provisions for Global Notes.

          (a) Each Global Note initially shall (i) be registered in the name of
the Depositary for such Global Notes or the nominee of such Depositary, (ii) be
delivered to the Trustee as custodian for such Depositary and (iii) to the
extent relevant thereto, bear legends as set forth in Section 2.03. Neither
Issuer nor any of their agents shall have any responsibility or liability for
any aspect of the records relating to, or payments made on account of beneficial
ownership interests of, a Global Note, or for maintaining, supervising or
reviewing any records relating to such beneficial ownership interests.

          Members of, or participants in, the Depositary ("Agent Members") shall
have no rights under this Indenture with respect to any Global Note, and the
Depositary may be treated by the Issuers, the Trustee and any agent of the
Issuers or the Trustee as the absolute owner of such Global Note for all
purposes whatsoever. Notwithstanding the foregoing, nothing herein shall prevent
the Issuers, the Trustee or any agent of the Issuers or the Trustee from giving
effect to any written certification, proxy or other authorization furnished by
the Depositary or impair, as between the Depositary and its Agent Members, the
operation of customary practices governing the exercise of the rights of a
beneficial

                                       46



owner of any Note. The registered Holder of a Global Note may grant proxies and
otherwise authorize any person, including Agent Members and persons that may
hold interests through Agent Members, to take any action which a Holder is
entitled to take under this Indenture or the Notes.

          (b) Interests of beneficial owners in a Global Note may be transferred
in accordance with the applicable rules and procedures of the Depositary and the
provisions of Section 3.14. Transfers of a Global Note shall be limited to
transfers of such Global Note in whole, but not in part, to the Depositary, its
successors or their respective nominees, except (i) as required in connection
with transfers of interests therein pursuant to Section 3.14(b) or 3.14(g) or as
may be required by the Issuers or the Trustee in connection with transfers
pursuant to Section 3.14(i), and (ii) that U.S. Physical Notes or, subject to
Section 3.14(h), Offshore Physical Notes shall be transferred to all beneficial
owners in exchange for their beneficial interests in the U.S. Global Note or the
Offshore Global Note, respectively, in the event that (A) the Depositary
notifies the Issuers that it is unwilling or unable to continue as Depositary
for the applicable Global Note and a successor depositary is not appointed by
the Issuers within 90 days or (B) an Event of Default has occurred and is
continuing and the Registrar has received a request from the Depositary. In
addition, beneficial interests in a Global Note may be exchanged for Physical
Notes upon request but only upon at least 20 days' prior written notice given to
the Trustee by or on behalf of the Depository in accordance with customary
procedures. In connection with any transfer or exchange of a portion of the
beneficial interest in any Global Note to beneficial owners for Physical Notes
pursuant to this Section 3.13(b), the Registrar shall record on its books and
records (and make a notation on the Global Note of) the date and a decrease in
the principal amount of such Global Note in an amount equal to the beneficial
interest in the Global Note being transferred, and the Issuers shall execute,
and the Trustee shall authenticate and deliver, one or more Physical Notes of
like tenor and principal amount of authorized denominations. In connection with
a transfer of an entire Global Note to beneficial owners pursuant to this
paragraph (b), the applicable Global Note shall be deemed to be surrendered to
the Trustee for cancellation, and the Issuers shall execute, and the Trustee
shall authenticate and deliver, to each beneficial owner identified by the
Depositary in exchange for its beneficial interest in the applicable Global
Note, an equal aggregate principal amount at maturity of U.S. Physical Notes (in
the case of the U.S. Global Note) or Offshore Physical Notes (in the case of the
Offshore Global Note), as the case may be, of authorized denominations.

          (c) Any beneficial interest in one of the Global Notes that is
transferred to a person who takes delivery in the form of an interest in another
Global Note will, upon transfer, cease to be an interest in such Global Note and
become an interest in the other Global Note and, accordingly, will thereafter be
subject to all transfer restrictions, if any, and other procedures applicable to
beneficial interests in such other Global Note for as long as it remains such an
interest.

          (d) Each Issuer, any other obligor upon the Notes and the Trustee, in
the discretion of any of them, may treat as the Act of a Holder any instrument
or writing of any Person that is identified by the Depositary as the owner of a
beneficial interest in the

                                       47



Global Note; provided that the fact and date of the execution of such instrument
or writing is proved in accordance with Section 1.08(b).

          (e) Any U.S. Physical Note delivered in exchange for an interest in
the U.S. Global Note pursuant to paragraph (b) of this Section shall, except as
otherwise provided in Section 3.14, bear the Private Placement Legend.

          Section 3.14. Transfer Provisions. Unless and until (i) an Initial
Note or any Initial Additional Note is sold pursuant to an effective
registration statement, whether pursuant to the Registration Rights Agreement or
otherwise, (ii) an Initial Note or any Initial Additional Note is exchanged for
an Exchange Note in the Exchange Offer pursuant to an effective Registration
Statement, or (iii) the Resale Restriction Termination Date has occurred with
respect to an Initial Note or any Initial Additional Note and such Note is not
then held by an Affiliate of either Issuer, the following provisions shall apply
with respect to such Initial Note or Initial Additional Note:

          (a) General. The provisions of this Section 3.14 shall apply to all
transfers involving any Physical Note and any beneficial interest in any Global
Note. A Note that is a Restricted Security may not be transferred other than as
provided in this Section 3.14. A beneficial interest in a Global Note that is a
Restricted Security may not be exchanged for a beneficial interest in another
Global Note other than through a transfer in compliance with this Section 3.14.

          (b) Transfers to Non-QIB Institutional Accredited Investors. With
respect to the registration of any proposed transfer of a Note that is a
Restricted Security to any Institutional Accredited Investor that is not a QIB,

          (I) the Registrar shall register such transfer

                    (i) if it complies with all other applicable requirements of
          this Indenture (including Section 3.05 and Section 3.13); and

                    (ii) the proposed transferee has delivered to the Registrar
          a certificate substantially in the form of Exhibit E, and such
          transfer is in respect of an aggregate principal amount of Notes of
          not less than $100,000; and

                    (iii) if the proposed transferor is or is acting through an
          Agent Member holding a beneficial interest in a Global Note, upon
          receipt by the Registrar of written instructions given in accordance
          with the Depositary's and the Registrar's procedures; and

          (II) the Registrar shall (x) reflect on its books and records (and
make a notation on the relevant Global Note of) the date and a decrease in the
principal amount of the relevant Global Note in an amount equal to the principal
amount of the beneficial interest in the relevant Global Note to be transferred
or (y) cancel the Physical Note so transferred, and the Registrar shall deliver
to the transferee one or more Physical Notes of like tenor and amount.

                                       48



          Each of the Issuers and the Trustee may require additional opinions,
certifications or other evidence as may be reasonably required to confirm that
any such proposed transfer is being made in compliance with the Securities Act
and applicable state securities laws.

          (c) Transfers to QIBs. With respect to the registration of any
proposed transfer of a Note that is a Restricted Security to a QIB,

          (I) the Registrar shall register such transfer:

                    (i) if it complies with all other applicable requirements of
          this Indenture (including Section 3.05 and Section 3.13); and

                    (ii) the proposed transferor has checked the box provided
          for on the form of such Note stating, or has otherwise certified to
          the Issuers and the Registrar in writing, that the sale has been made
          in compliance with the provisions of Rule 144A to a transferee who has
          signed the certification provided for on the form of such Note
          stating, or has otherwise certified to the Issuers and the Registrar
          in writing, that it is purchasing such Note for its own account or an
          account with respect to which it exercises sole investment discretion
          and that it and any such account is a QIB within the meaning of Rule
          144A, and is aware that the sale to it is being made in reliance on
          Rule 144A and acknowledges that it has received such information
          regarding the Issuers as it has requested pursuant to Rule 144A or has
          determined not to request such information and that it is aware that
          the transferor is relying upon its foregoing representations in order
          to claim the exemption from registration provided by Rule 144A; and

                    (iii) if the proposed transferor or transferee is or is
          acting through an Agent Member, upon receipt by the Registrar of
          written instructions given in accordance with the Depositary's and the
          Registrar's procedures; and

          (II) the Registrar shall (a) cancel the Physical Note so transferred
or (b) reflect on its books and records (and make a notation on the relevant
Global Note of) the date and a decrease in the principal amount of such
transferor Global Note, as the case may be, and the Registrar shall (x) reflect
on its books and records (and make a notation on the relevant Global Note of)
the date and an increase in the principal amount of the transferee Global Note
or (y) deliver Physical Notes of like tenor and amount.

          (d) Transfers of Interests in the Temporary Offshore Global Notes.
With respect to registration of any proposed transfer of interests in any
Temporary Offshore Global Note,

          (I) the Registrar shall register the transfer of any interest in such
Note only

                    (i) if the proposed transferee is a Non-U.S. Person and the
          proposed transferor has delivered to the Registrar a certificate
          substantially in the form of Exhibit D hereto and will take delivery
          in the form of an interest in the Temporary Offshore Global Note; or

                                       49



                    (ii) if the proposed transferee is a QIB and the proposed
          transferor has checked the box provided for on the form of Note
          stating, or has otherwise certified to the Issuers and the Registrar
          in writing, that the sale has been made in compliance with provisions
          of Rule 144A to a transferee who has signed the certification provided
          for on the form of Note stating, or has otherwise advised the Issuers
          and the Registrar in writing, that it is purchasing the Note for its
          own account or an account with respect to which it exercises sole
          investment discretion and that it and any such account is a QIB within
          the meaning of Rule 144A, and is aware that the sale to it is being
          made in reliance on Rule 144A and acknowledges that it has received
          such information regarding the Issuers as it has requested pursuant to
          Rule 144A or has determined not to request such information and that
          it is aware that the transferor is relying upon its foregoing
          representations in order to claim the exemption from registration
          provided by Rule 144A; and

                    (iii) upon receipt by the Registrar of written instructions
          given in accordance with the Depositary's and the Registrar's
          procedures; and

          (II) the Registrar shall reflect on its books and records (and make a
notation on the relevant Global Note of) the date and an increase in the
principal amount of the transferee Global Note, in an amount equal to the
principal amount of the Temporary Offshore Global Note to be transferred, and
the Registrar shall reflect on its books and records (and make a notation on the
relevant Global Note of) the date and a decrease in the principal amount of the
transferor Temporary Offshore Global Note.

          (e) Transfers to Non-U.S. Persons. With respect to the registration of
any proposed transfer of a Note that is a Restricted Security to a Non-U.S.
Person (except for any transfer referred to in Section 3.14(d))

          (I) the Registrar shall register such transfer:

                    (i) if it complies with all other applicable requirements of
          this Indenture (including Section 3.05 and Section 3.13); and

                    (ii) if the proposed transfer is to be made prior to the end
          of the Restricted Period, upon receipt of a certificate substantially
          in the form of Exhibit D hereto from the proposed transferor; and

                    (iii) if the proposed transfer is to be made after the end
          of the Restricted Period and the Note to be transferred is a U.S.
          Certificated Note or an interest in the U.S. Global Note, only upon
          receipt of a certificate substantially in the form of Exhibit D from
          the proposed transferor; and

                    (iv) if the proposed transferor or transferee is or is
          acting through an Agent Member, upon receipt by the Registrar of
          written instructions in accordance with the Depositary's and the
          Registrar's procedures; and

          (II) the Registrar shall (a) reflect on its books and records (and
make a notation on the relevant Global Note of) the date and a decrease in the
principal amount of the

                                       50



transferor Global Note in an amount equal to the principal amount to be
transferred or (b) cancel the Physical Notes so transferred, as the case may be,
and the Registrar shall (x) reflect on its books and records (and make a
notation on the relevant Global Note of) the date and an increase in the
principal amount of the transferee Offshore Global Note or (y) deliver one or
more Physical Notes of like tenor and amount.

          (f) Transfers pursuant to Rule 144. With respect to the registration
of any proposed transfer of a Note that is a Restricted Security pursuant to the
exemption from registration under the Securities Act provided by Rule 144
thereunder,

          (I) the Registrar shall register such transfer

                    (A) if it complies with all other requirements of this
          Indenture (including Section 3.05 and Section 3.13); and

                    (B) if such transfer is being made by a proposed transferor
          who has checked the box provided for on the form of such Note stating,
          or has otherwise certified to the Issuers and the Registrar in
          writing, that the sale has been made in compliance with the provisions
          of Rule 144; and

                    (C) if the proposed transferor or transferee is or is acting
          through an Agent Member, upon receipt by the Registrar of written
          instructions given in accordance with the Depositary's and the
          Registrar's procedures; and

          (II) the Registrar shall (a) reflect on its books and records (and
make a notation on the relevant Global Note of) the date and a decrease in the
principal amount of such transferor Global Note in an amount equal to the
principal amount to be transferred or (b) cancel the Physical Note so
transferred and the Registrar shall (x) reflect on its books and records (and
make a notation on the relevant Global Note of) the date and an increase in the
principal amount of the transferee Global Note or (y) the Registrar shall
deliver Physical Notes in like tenor and amount.

          Each of the Issuers and the Trustee may require additional opinions,
certifications or other evidence as may be reasonably required to confirm that
any such proposed transfer is being made in compliance with the Securities Act
and applicable state securities laws.

          (g) Transfers to the Company. With respect to the registration of any
proposed transfer of a Note to the Company,

          (I) the Registrar shall register such transfer

                    (A) if it complies with all other requirements of this
          Indenture (including Section 3.05 and Section 3.13); and

                    (B) if such transfer is being made by a proposed transferor
          who has checked the box provided for on the form of such Note stating,
          or has otherwise certified to the Issuers and the Registrar in
          writing, that the sale has been made to the Company; and

                                       51



                    (C) if the proposed transferor is or is acting through an
          Agent Member, upon receipt by the Registrar of written instructions
          given in accordance with the Depositary's and the Registrar's
          procedures; and

          (II) the Registrar shall (x) reflect on its books and records (and
make a notation on the relevant Global Note of) the date and a decrease in the
principal amount of such transferor Global Note in an amount equal to the
principal amount to be transferred or (y) cancel the Physical Note so
transferred, as the case may be and the Registrar shall deliver Physical Notes
to the Company in like tenor and amount.

          (h) Interests in the Offshore Global Note prior to the Offshore Note
Exchange Date. Notwithstanding anything to the contrary contained in this
Indenture, until the Offshore Note Exchange Date occurs and appropriate
certification substantially in the form of Exhibit C is made as provided in
Section 2.01, beneficial interests in the Offshore Global Note may be held only
in or through accounts maintained at the Depositary by Euroclear or Clearstream,
and no person shall be entitled to effect any transfer or exchange that would
result in any such interest being held otherwise than in or through such an
account, and no Physical Notes may be issued in exchange therefor.

          (i) Other Transfers. The Registrar shall effect and register, upon
receipt of a written request from the Issuers to do so, a transfer not otherwise
permitted by this Section 3.14, such registration to be done in accordance with
the otherwise applicable provisions of this Section 3.14, upon the furnishing by
the proposed transferor or transferee of a written opinion of counsel (which
opinion and counsel are satisfactory to the Issuers and the Trustee) to the
effect that, and such other certifications or evidence as the Issuers may
require to confirm that, the proposed transfer is being made pursuant to an
exemption from, or in a transaction not subject to, the registration
requirements of the Securities Act and otherwise in compliance with applicable
state securities laws.

          (j) Limitation on Issuance of Physical Notes. No Physical Note shall
be exchanged for a beneficial interest in any Global Note, except in accordance
with Section 3.13 and this Section 3.14.

          (k) Execution, Authentication and Delivery of Physical Notes. In any
case in which the Registrar is required to deliver a Physical Note to a
transferee or transferor, the Issuers shall execute, and the Trustee shall
authenticate and make available for delivery, such Physical Note.

          (l) Private Placement Legend. Upon the transfer, exchange or
replacement of Notes not bearing the Private Placement Legend, the Registrar
shall deliver Notes that do not bear the Private Placement Legend. Upon the
transfer, exchange or replacement of Notes bearing the Private Placement Legend,
the Registrar shall deliver only Notes that bear the Private Placement Legend,
unless (i) the requested transfer is after the relevant Resale Restriction
Termination Date with respect to such Notes, (ii) upon written request of the
Issuers after there is delivered to the Registrar an opinion of counsel (which
opinion and counsel are satisfactory to the Issuers and the Trustee) to the
effect that neither such legend nor the related restrictions on transfer are
required in order to maintain compliance

                                       52



with the provisions of the Securities Act, (iii) with respect to an Offshore
Global Note, with the agreement of the Issuers on or after the Offshore Note
Exchange Date with respect to such Note, (iv) such Notes are sold or exchanged
pursuant to an effective registration statement under the Securities Act or (v)
such Notes are sold pursuant to Section 3.14(f).

          (m) General. By its acceptance of any Note bearing the Private
Placement Legend, each Holder of such a Note acknowledges the restrictions on
transfer of such Note set forth in this Indenture and in the Private Placement
Legend and agrees that it will transfer such Note only as provided in this
Indenture.

          The Registrar shall retain copies of all letters, notices and other
written communications received pursuant to Section 3.13 or this Section 3.14
(including all Notes received for transfer pursuant to this Section 3.14). Each
Issuer shall have the right to require the Registrar to deliver to such Issuer,
at such Issuer's expense, copies of all such letters, notices or other written
communications at any reasonable time upon the giving of reasonable written
notice to the Registrar.

          In connection with any transfer of any Note, the Trustee, the
Registrar and the Issuers shall be entitled to receive, shall be under no duty
to inquire into, may conclusively presume the correctness of, and shall be fully
protected in relying upon the certificates, opinions and other information
referred to herein (or in the forms provided herein, attached hereto or to the
Notes, or otherwise) received from any Holder and any transferee of any Note
regarding the validity, legality and due authorization of any such transfer, the
eligibility of the transferee to receive such Note and any other facts and
circumstances related to such transfer.

          (n) Certain Additional Terms Applicable to Physical Notes. Any
transferee entitled to receive a Physical Note may request that the principal
amount thereof be evidenced by one or more Physical Notes in any authorized
denomination or denominations and the Registrar shall comply with such request
if all other transfer restrictions are satisfied.

                                    ARTICLE 4

                                    Covenants

          Section 4.1. Payment of Principal, Premium and Interest. (a) The
Issuers will duly and punctually pay the principal of (and premium, if any) and
interest and Liquidated Damages, if any, on the Notes in accordance with the
terms of the Notes and this Indenture. An installment of principal (and premium,
if any) or interest and Liquidated Damages shall be considered paid on the date
it is due if the Trustee or Paying Agent or Paying Agents hold on that date
money (or, with respect to interest required to be paid pursuant to Section
4.08, Additional Dividend Notes in the requisite principal amount, duly issued,
authenticated and delivered in accordance with this Indenture) designated for
and sufficient to pay the installment.

                                       53



          (b) Other than payments in the form of Additional Dividend Notes,
payments (including principal, premium, if any, interest and Liquidated Damages,
if any) in respect of the Notes represented by the Global Notes, the Holder of
which has given wire transfer instructions on or prior to the relevant record
date, shall be made by wire transfer of immediately available funds to the
accounts specified by the Global Note Holder. With respect to Physical Notes,
the Issuers will make all payments of principal, premium, if any, interest and
Liquidated Damages, if any, at the office or agency maintained by the Issuers
referred to in Section 4.02 or, at the option of the Issuers, by mailing a check
to each such Holder's registered address. Additional Dividend Notes shall be
issued and delivered to each Holder at the Issuers' expense.

          Section 4.2. Maintenance of Office or Agency. The Issuers will
maintain an office or agency in the United States where Notes may be presented
or surrendered for payment, where Notes may be surrendered for transfer or
exchange and where notices and demands to or upon the Issuers in respect of the
Notes and this Indenture may be served. The Issuers will give prompt written
notice to the Trustee of the location, and of any change in the location, of
such office or agency. If at any time the Issuers shall fail to maintain such
office or agency or shall fail to furnish the Trustee with the address thereof,
such presentations, surrenders, notices and demands may be made or served at the
Corporate Trust Office of the Trustee. The Issuers hereby designates the
Corporate Trust Office as an initial Place of Payment and as such office of the
Issuers, and appoints the Trustee as its agent to receive all such
presentations, surrenders, notices and demands so long as such Corporate Trust
Office remains a Place of Payment.

          Section 4.3. Money for Payments to Be Held in Trust. If either Issuer
shall at any time act as the Paying Agent, the Issuers will, on or before each
due date of the principal of (and premium, if any) or interest and Liquidated
Damages, if any, on, any of the Notes, segregate and hold in trust for the
benefit of the Persons entitled thereto a sum sufficient to pay the principal
(and premium, if any) or interest and Liquidated Damages, if any, so becoming
due until such sums shall be paid to such Persons or otherwise disposed of as
herein provided, and will promptly notify the Trustee of their action or failure
so to act.

          If neither Issuer is acting as the Paying Agent, the Issuers will,
prior to each due date of the principal of (and premium, if any) or interest and
Liquidated Damages, if any, on, any Notes, deposit with a Paying Agent a sum
sufficient to pay the principal (and premium, if any) or interest and Liquidated
Damages, if any, so becoming due, such sum to be held in trust for the benefit
of the Persons entitled to such principal, premium or interest and Liquidated
Damages, and (unless such Paying Agent is the Trustee) the Issuers will promptly
notify the Trustee of their action or failure so to act.

          If neither Issuer is acting as the Paying Agent, the Issuers will
cause any Paying Agent other than the Trustee to execute and deliver to the
Trustee an instrument in which such Paying Agent shall agree with the Trustee,
subject to the provisions of this Section 4.03, that such Paying Agent will:

          (a) hold all sums held by it for the payment of principal of (and
premium, if any) or interest and Liquidated Damages, if any, on Notes in trust
for the benefit of the

                                       54



Persons entitled thereto until such sums shall be paid to such Persons or
otherwise disposed of as herein provided;

          (b) give the Trustee notice of any default by the Issuers (or any
other obligor upon the Notes) in the making of any such payment of principal
(and premium, if any) or interest and Liquidated Damages, if any;

          (c) at any time during the continuance of any such default, upon the
written request of the Trustee, forthwith pay to the Trustee all sums so held in
trust by such Paying Agent; and

          (d) acknowledge, accept and agree to comply in all respects with the
provisions of this Indenture and TIA relating to the duties, rights and
liabilities of such Paying Agent.

          The Issuers may at any time, for the purpose of obtaining the
satisfaction and discharge of this Indenture or for any other purpose, pay, or
by Issuer Order direct any Paying Agent to pay, to the Trustee all sums held in
trust by an Issuer or such Paying Agent, such sums to be held by the Trustee
upon the same trusts as those upon which such sums were held by such Issuer or
Paying Agent; and, upon such payment by any Paying Agent to the Trustee, such
Paying Agent shall be released from all further liability with respect to such
money.

          Any money deposited with the Trustee or any Paying Agent, or then held
by either Issuer, in trust for the payment of the principal of (and premium, if
any) or interest and Liquidated Damages, if any, on any Note and remaining
unclaimed for two years after such principal (and premium, if any) or interest
and Liquidated Damages, if any, has become due and payable shall be paid in the
appropriate proportion to the Issuers upon an Issuer Request, or (if then held
by an Issuer) shall be discharged from such trust; and the Holder of such Note
shall thereafter, as an unsecured general creditor, look only to the Issuers for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of the Issuers as trustee
thereof, shall thereupon cease.

          Section 4.4. SEC Reports. (a) Whether or not required by the rules and
regulations of the SEC, so long as any Notes issued hereunder are outstanding,
the Company will furnish to each Trustee and the Holders of Notes (i) all
quarterly and annual financial information that would be required to be
contained in a filing with the SEC on Forms 10-Q and 10-K if the Company were
required to file such Forms, including a "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and, with respect to the
annual information only, a report thereon by the Company's certified independent
accountants and (ii) all current reports that would be required to be filed with
the SEC on Form 8-K if the Company were required to file such reports. In
addition, whether or not required by the rules and regulations of the SEC, the
Company will file a copy of all such information and reports with the SEC for
public availability and make such information available to securities analysts
and prospective investors upon request.

                                       55



          (b) For so long as any Notes remain outstanding, the Issuers will
furnish to the Holders and to securities analysts and prospective investors,
upon their request, the information, if any, required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.

          (c) All obligors on the Notes will comply with Section 314(a) of the
TIA.

          (d) Each Issuer shall promptly mail copies of all such annual reports,
information, documents and other reports provided to the Trustee pursuant to
clauses (a) and (c) hereof to the Holders at their addresses appearing in the
Register maintained by the Registrar.

          (e) Delivery of such reports, information and documents to the Trustee
is for informational purposes only and the Trustee's receipt of such shall not
constitute constructive notice of any information contained therein or
determinable from information contained therein, including the Issuers'
compliance with any of the covenants hereunder (as to which the Trustee is
entitled to rely exclusively on Officers' Certificates).

          Section 4.5. Certificates to Trustee. (a) Each Issuer will deliver to
the Trustee within 120 days after the end of each fiscal year of the Company a
certificate from the principal executive, financial or accounting officer of
such Issuer stating that such officer has conducted or supervised a review of
the activities of the Company and its Restricted Subsidiaries and the Company's
and its Restricted Subsidiaries' performance under this Indenture and that,
based upon such review, to the best of such officers' knowledge, the Issuers
have fulfilled all obligations thereunder or, if there has been a default in the
fulfillment of any such obligation (determined without regard to any period of
grace or requirement of notice provided in this Indenture), specifying each such
default and the nature and status thereof.

          (b) Each Issuer will deliver to the Trustee, as soon as possible and
in any event within 30 days after such Issuer becomes aware of an Event of
Default or a Default, an Officers' Certificate setting forth the details of such
Event of Default or Default, and the action which such Issuer proposes to take
or has taken with respect thereto.

          (c) Each Issuer will deliver to the Trustee within 120 days after the
end of each fiscal year of the Company a written statement by such Issuer's
independent public accountants stating (i) that their audit examination has
included a review of the terms of this Indenture and the Notes as they relate to
accounting matters, and (ii) whether, in connection with their audit
examination, any Default has come to their attention and, if such a Default has
come to their attention, specifying the nature and period of the existence
thereof.

          Section 4.6. Limitation on Indebtedness. (a) On and after the Issue
Date, (x) the Company will not, and will not permit any of its Restricted
Subsidiaries to incur any Indebtedness (including Acquired Debt); (y) the
Company will not, and will not permit any of its Restricted Subsidiaries to,
issue any Disqualified Stock (including Acquired Disqualified Stock); and (z)
the Company will not permit any of its Restricted Subsidiaries

                                       56



that are not Subsidiary Guarantors to issue any shares of Preferred Stock
(including Acquired Preferred Stock); provided, however, that the Company and
the Subsidiary Guarantors may incur Indebtedness (including Acquired Debt) and
the Company and the Subsidiary Guarantors may issue shares of Disqualified Stock
(including Acquired Disqualified Stock) if the Fixed Charge Coverage Ratio for
the Company's most recently ended four full fiscal quarters for which financial
statements have been filed with the SEC pursuant to Section 4.04 immediately
preceding the date on which such additional Indebtedness is incurred or such
Disqualified Stock is issued would have been at least 2.0 to 1, determined on a
pro forma basis (including a pro forma application of the net proceeds
therefrom), as if the additional Indebtedness had been incurred or the
Disqualified Stock or Preferred Stock had been issued, as the case may be, at
the beginning of such four-quarter period, with any letters of credit and
bankers' acceptances being deemed to have an aggregate principal amount of
Indebtedness equal to the maximum amount available thereunder.

          The foregoing provisions will not apply to:

                    (i) the incurrence by the Company of Indebtedness pursuant
          to the Credit Facility in an aggregate principal amount at any time
          outstanding not to exceed an amount equal to $800 million less the
          aggregate principal amount of all mandatory repayments (other than
          mandatory prepayments triggered solely by the issuance of Indebtedness
          or Preferred Stock of a Finance Subsidiary to refinance the Credit
          Facility) applied after August 24, 2001 to (a) repay loans (other than
          revolving credit loans) outstanding thereunder or (b) permanently
          reduce the revolving credit commitments thereunder (and the incurrence
          by its Subsidiaries of Guarantees thereof); provided that, if the
          aggregate principal amount of Indebtedness pursuant to the Credit
          Facility permitted to be incurred hereby is reduced as a result of any
          mandatory repayment made in connection with the Company's entry into a
          Receivables Facility, then such aggregate principal amount permitted
          to be incurred shall be increased by the amount of such previous
          reduction if and when such Receivables Facility is terminated;

                    (ii) the incurrence by the Company and the Subsidiary
          Guarantors of Indebtedness represented by the Notes (including any
          Additional Dividend Notes but not any Additional Notes), and
          Subsidiary Guarantees thereof;

                    (iii) the incurrence by the Company and its Restricted
          Subsidiaries of Existing Indebtedness (other than Indebtedness of the
          type described in clauses (i), (ii), (v) through (xii) or (xiv) of
          this covenant);

                    (iv) the incurrence by the Company or any of its Restricted
          Subsidiaries of any Permitted Refinancing in exchange for, or the Net
          Proceeds of which are used to extend, refinance, renew, replace,
          defease or refund, Indebtedness that was permitted to be incurred
          under the Fixed Charge Coverage Ratio test set forth above or clauses
          (ii) or (iii) above or (xiii) below or this clause (iv);

                    (v) the incurrence by the Company or any of its Restricted
          Subsidiaries of intercompany Indebtedness between or among the Company
          and any of its

                                       57



          Restricted Subsidiaries; provided, however, that (1) if the Company or
          any Subsidiary Guarantor is the obligor on such Indebtedness, such
          Indebtedness is expressly subordinated by its terms to the prior
          payment in full in cash of all Obligations with respect to the Notes
          or the Subsidiary Guarantee, as the case may be, and (2)(A) any
          subsequent issuance or transfer of Equity Interests that results in
          any such Indebtedness being held by a Person other than the Company or
          a Restricted Subsidiary and (B) any sale or other transfer of any such
          Indebtedness to a Person that is not either the Company or a
          Restricted Subsidiary shall be deemed, in each case, to constitute an
          incurrence of such Indebtedness by the Company or such Restricted
          Subsidiary, as the case may be;

                    (vi) the incurrence by the Company or any Restricted
          Subsidiary of Hedging Obligations that are incurred for the purpose of
          (A) fixing or hedging interest rate or currency risk with respect to
          any fixed or floating rate Indebtedness that is permitted by the
          Indenture to be outstanding or any receivable or liability the payment
          of which is determined by reference to a foreign currency; provided
          that the notional principal amount of any such Hedging Obligation does
          not exceed the principal amount of the Indebtedness or any receivable
          or liability to which such Hedging Obligation relates or (B) managing
          fluctuations in the price or cost of raw materials, manufactured
          products or related commodities; provided that such obligations are
          entered into in the ordinary course of business to hedge or mitigate
          risks to which the Company or any Restricted Subsidiary is exposed in
          the conduct of its business or the management of its liabilities (as
          determined by the Company's or such Restricted Subsidiary's principal
          financial officer in the exercise of his or her good faith business
          judgment);

                    (vii) the issuance by any of the Company's Restricted
          Subsidiaries of shares of Preferred Stock to the Company or a Wholly
          Owned Restricted Subsidiary; provided that (A) any subsequent issuance
          or transfer of Equity Interests that results in such Preferred Stock
          being held by a Person other than the Company or a Wholly Owned
          Restricted Subsidiary or (B) the transfer or other disposition by the
          Company or a Wholly Owned Restricted Subsidiary of any such shares to
          a Person other than the Company or a Wholly Owned Restricted
          Subsidiary shall be deemed, in each case, to constitute an issuance of
          such Preferred Stock by such Subsidiary on such date that is not
          permitted by this clause (vii);

                    (viii) the incurrence by the Company or any of its
          Restricted Subsidiaries of Indebtedness represented by tender, bid,
          performance, government contract, surety or appeal bonds, standby
          letters of credit and warranty and contractual service obligations of
          like nature, trade letters of credit or documentary letters of credit,
          in each case to the extent incurred in the ordinary course of business
          of the Company or such Restricted Subsidiary;

                    (ix) the incurrence by any Restricted Subsidiary of the
          Company of Indebtedness or the issuance by any Restricted Subsidiary
          of Preferred Stock, the aggregate principal amount (or accreted value,
          as applicable) or liquidation preference of which, together with all
          other Indebtedness and Preferred Stock of

                                       58



          the Company's Restricted Subsidiaries at the time outstanding and
          incurred or issued in reliance upon this clause (ix), does not exceed
          $25 million;

                    (x) the issuance by any Finance Subsidiary of Preferred
          Stock with an aggregate liquidation preference not exceeding the
          amount of Indebtedness of the Company held by such Finance Subsidiary;
          provided that the Fixed Charge Coverage Ratio for the Company's most
          recently ended four full fiscal quarters for which financial
          statements have been filed with the SEC pursuant to Section 4.04
          immediately preceding the date on which such Preferred Stock is issued
          would have been at least 2.0 to 1, determined on a pro forma basis
          (including a pro forma application of the net proceeds therefrom) as
          if such Preferred Stock had been issued at the beginning of such
          four-quarter period;

                    (xi) the incurrence of Indebtedness by Foreign Subsidiaries
          in the aggregate principal amount (or accreted value, as applicable)
          of which, together with all other Indebtedness at the time outstanding
          and incurred in reliance upon this clause (xi), does not exceed $10
          million;

                    (xii) the Guarantee by the Company or any Restricted
          Subsidiary of Indebtedness of the Company or a Restricted Subsidiary
          that was permitted to be incurred by another provision of this
          covenant;

                    (xiii) Acquired Debt or Acquired Disqualified Stock;
          provided that such Indebtedness or Disqualified Stock was not incurred
          in connection with or in contemplation of such Person becoming a
          Restricted Subsidiary; and provided further that immediately after
          giving effect to such incurrence, the Fixed Charge Coverage Ratio for
          the Company's most recently ended four full fiscal quarters for which
          financial statements have been filed with the SEC pursuant to Section
          4.04 immediately preceding the date of such incurrence would have been
          at least 2.0 to 1, determined on a pro forma basis (including giving
          pro forma effect to the applicable transaction related thereto);

                    (xiv) the incurrence by Equistar Funding of Indebtedness as
          a co-issuer of Indebtedness of the Company that was permitted to be
          incurred by another provision of this covenant;

                    (xv) the incurrence of Indebtedness represented by
          industrial revenue bonds to finance capital expenditures incurred to
          reduce NOx emissions in the Houston/Galveston region pursuant to a
          Texas Natural Resource Conservation Commission plan; and

                    (xvi) the incurrence by the Company or any Subsidiary
          Guarantor of Indebtedness or the incurrence of Disqualified Stock, the
          aggregate principal amount (or accreted value, as applicable) or
          liquidation preference of which, together with all other Indebtedness
          and Disqualified Stock at the time outstanding and incurred in
          reliance on this clause (xvi), does not exceed $100 million.

                                       59



          (b) For purposes of determining compliance with this covenant, in the
event that an item of Indebtedness or Preferred Stock meets the criteria of more
than one of the categories of permitted Indebtedness described in clauses (i)
through (xvi) above or is entitled to be incurred pursuant to the first
paragraph of this covenant, the Company shall, in its sole discretion, classify
such item of Indebtedness or Preferred Stock in any matter that complies with
this covenant and such Indebtedness or Preferred Stock will be treated as having
been incurred pursuant to the clauses or the first paragraph hereof, as the case
may be, designated by the Company. The amount of Indebtedness issued at a price
which is less than the principal amount thereof shall be equal to the amount of
the liability in respect thereof determined in accordance with GAAP.

          (c) The amount of Indebtedness outstanding under the Credit Facility
for purposes of clause (i) of the second paragraph of Section 4.06(a) shall
exclude any amounts paid as interest-in-kind in connection with a Permitted
Dividend.

          Section 4.7. Limitation on Restricted Payments. The Company will not,
and will not permit any of its Restricted Subsidiaries to, directly or
indirectly:

          (1)  declare or pay any dividend or make any distribution on account
               of the Company's or any of its Restricted Subsidiaries' Equity
               Interests, other than:

                    (x) dividends or distributions payable in Qualified Equity
          Interests of the Company,

                    (y) dividends or distributions payable to the Company or any
          Restricted Subsidiary of the Company, and

                    (z) Permitted Dividends;

          (2)  purchase, redeem or otherwise acquire or retire for value any
               Equity Interests of the Company or any Affiliate of the Company
               that controls the Company, other than any such Equity Interests
               owned by the Company or any of its Restricted Subsidiaries;

          (3)  make any principal payment on, or purchase, redeem, defease or
               otherwise acquire or retire for value any Indebtedness
               ("Subordinated Debt") of the Company or any Restricted Subsidiary
               that is subordinated by its terms to the Notes or the Subsidiary
               Guarantees, as applicable, other than Indebtedness owed to the
               Company or any Restricted Subsidiary or to Lyondell, except, in
               each case, payment of interest or principal at Stated Maturity;
               or

          (4)  make any Restricted Investment;

(all such payments and other actions set forth in clauses (1) through (4) above
being collectively referred to as "Restricted Payments"), unless, at the time of
and after giving effect to such Restricted Payment (the amount of any such
Restricted Payment, if other than cash, shall be the fair market value (as
conclusively evidenced by a resolution of the

                                       60



Partnership Governance Committee) of the asset(s) proposed to be transferred by
the Company or such Restricted Subsidiary, as the case may be, pursuant to such
Restricted Payment):

                    (a) no Default or Event of Default shall have occurred and
          be continuing after giving effect thereto; and

                    (b) the Company would, at the time of such Restricted
          Payment and after giving pro forma effect thereto as if such
          Restricted Payment had been made at the beginning of the most recently
          ended four full fiscal quarters for which financial statements have
          been filed with the SEC pursuant to Section 4.04 immediately preceding
          the date of such Restricted Payment, have been permitted to incur at
          least $1.00 of additional Indebtedness pursuant to the Fixed Charge
          Coverage Ratio test set forth in the first paragraph of Section
          4.06(a) and

                    (c) such Restricted Payment, together with the aggregate of
          all other Restricted Payments and Permitted Dividends made by the
          Company and its Restricted Subsidiaries on or after August 24, 2001
          (excluding Restricted Payments permitted by clauses (b) (to the extent
          paid to the Company or any of its Restricted Subsidiaries or to the
          extent such distributions are deducted as a minority interest in
          calculating Consolidated Net Income), (c), (d), (e), (g) and (h) of
          the next succeeding paragraph) and 50% of any Restricted Payments
          permitted by clause (f) of the next succeeding paragraph, is less than
          the sum, without duplication, of:

                         (i) 50% of the Consolidated Net Income of the Company
               for the period (taken as one accounting period) from the
               beginning of the first fiscal quarter commencing on October 1,
               2001, to the end of the Company's most recently ended fiscal
               quarter for which financial statements have been filed with the
               SEC pursuant to Section 4.04 at the time of such Restricted
               Payment (or, if such Consolidated Net Income for such period is a
               deficit, less 100% of such deficit), plus

                         (ii) 100% of the aggregate net cash proceeds received
               by the Company or any of its Restricted Subsidiaries from the
               issue or sale (other than to a Subsidiary or Joint Venture of the
               Company or if the proceeds are used to make a Permitted
               Investment of the type described in clause (e) of the definition
               thereof) after August 24, 2001 of Qualified Equity Interests of
               the Company or of debt securities of the Company or any of its
               Restricted Subsidiaries that have been converted into or
               exchanged for such Qualified Equity Interests of the Company,
               plus

                         (iii) to the extent that any Restricted Investment,
               other than a Restricted Investment permitted to be made pursuant
               to clause (f) or (i) below, that was made after August 24, 2001
               is sold for cash or otherwise liquidated, repaid or otherwise
               reduced, including by way of dividend or distribution (to the
               extent not included in calculating Consolidated Net Income), for
               cash, the lesser of (A) the cash return with respect to such
               Restricted Investment (less

                                       61



               the cost of disposition, if any) and (B) the initial amount of
               such Restricted Investment, plus

                         (iv) an amount equal to the sum of (A) the net
               reduction in Investments in Unrestricted Subsidiaries resulting
               from dividends, repayments of loans or other transfers of assets
               (to the extent not included in calculating Consolidated Net
               Income), in each case to the Company or any Restricted Subsidiary
               from Unrestricted Subsidiaries and (B) the portion (proportionate
               to the Company's equity interest in such Subsidiary) of the fair
               market value of the net assets of an Unrestricted Subsidiary at
               the time such Unrestricted Subsidiary is designated a Restricted
               Subsidiary; provided, however, that the foregoing sum shall not
               exceed, in the case of any Unrestricted Subsidiary, the amount of
               Restricted Investments, other than a Restricted Investment
               permitted to be made pursuant to clause (f) or (i) below,
               previously made after August 24, 2001 by the Company or any
               Restricted Subsidiary in such Unrestricted Subsidiary.

     The foregoing provisions will not prohibit the following Restricted
Payments set forth below:

                    (a) the payment of any dividend within 60 days after the
          date of declaration thereof, if at said date of declaration such
          payment would have complied with the provisions of the Indenture;

                    (b) dividends or distributions by any Restricted Subsidiary
          of the Company payable (x) to all holders of a class of Capital Stock
          of such Restricted Subsidiary on a pro rata basis or on a basis that
          is more favorable to the Company; provided that at least 50% of such
          class of Capital Stock is held by the Company and/or one or more of
          its Restricted Subsidiaries or (y) to all holders of a class of
          Preferred Stock of a Restricted Subsidiary that is not a Subsidiary
          Guarantor issued after August 24, 2001 in compliance with Section
          4.06;

                    (c) the payment of cash dividends on any series of
          Disqualified Stock issued after August 24, 2001 in an aggregate amount
          not to exceed the cash received by the Company since August 24, 2001
          upon issuance of such Disqualified Stock;

                    (d) the redemption, repurchase, retirement or other
          acquisition of any Equity Interests of the Company, any Affiliate of
          the Company, or any Joint Venture (or the acquisition of any
          outstanding Equity Interests of any Person the majority of whose
          assets are Equity Interests in the Company or a Joint Venture), in
          exchange for, or out of the net cash proceeds of the substantially
          concurrent sale (other than to a Subsidiary or Joint Venture of the
          Company) of, Qualified Equity Interests of the Company; provided that
          the amount of any such net cash proceeds that are utilized for any
          such redemption, repurchase, retirement or other acquisition shall be
          excluded from clause (c)(ii) of the preceding paragraph;

                                       62



                    (e) the defeasance, redemption or repurchase of Subordinated
          Debt with the net cash proceeds from an incurrence of Permitted
          Refinancing or in exchange for or out of the net cash proceeds from
          the substantially concurrent sale (other than to a Subsidiary or Joint
          Venture of the Company) of Qualified Equity Interests of the Company;
          provided that the amount of any such net cash proceeds that are
          utilized for any such redemption, repurchase, retirement or other
          acquisition shall be excluded from clause (c)(ii) of the preceding
          paragraph;

                    (f) Restricted Investments in any Joint Venture made during
          any fiscal year of the Company or within 45 days after the end of such
          fiscal year in amounts that, together with all other Restricted
          Investments made in such Joint Venture in respect of such fiscal year
          in reliance on this clause (f) during such fiscal year or within 45
          days after the end of such fiscal year, do not exceed the amount of
          dividends or distributions previously paid in respect of such fiscal
          year to the Company or any Restricted Subsidiary by such Joint
          Venture; provided that no Default or Event of Default shall have
          occurred and be continuing after giving effect to such Restricted
          Payment;

                    (g) distributions or payments of Receivables Fees;

                    (h) distributions by any Restricted Subsidiary or Joint
          Venture of chemicals to a holder of Capital Stock of such Restricted
          Subsidiary or Joint Venture if such distributions are made pursuant to
          a provision in a joint venture agreement or other arrangement entered
          into a connection with the establishment of such Joint Venture or
          Restricted Subsidiary that requires such holder to pay a price for
          such chemicals equal to that which would be paid in a comparable
          transaction negotiated on an arms-length basis (or pursuant to a
          provision that imposes a substantially equivalent requirement);

                    (i) any other Restricted Payment which, together with all
          other Restricted Payments made pursuant to this clause (i) on or after
          August 24, 2001, does not exceed $25 million (after giving effect to
          any reductions in the aggregate amount of such Investments made
          pursuant to this clause (i) as a result of the disposition thereof,
          including through liquidation, repayment or other reduction, including
          by way of dividend or distribution, for cash, as set forth in clause
          (c)(iii) above, the aggregate amount of such reductions not to exceed
          the aggregate amount of such Investments outstanding and previously
          made pursuant to this clause (i)), provided that no Default or Event
          of Default shall have occurred and be continuing after giving effect
          to such Restricted Payment; and

                    (j) the repurchase of any Subordinated Debt at a purchase
          price not greater than 101% of the principal amount thereof in the
          event of (x) a change of control pursuant to a provision no more
          favorable to the holders thereof than Section 4.13 or (y) an Asset
          Sale (pursuant to a provision no more favorable to the holders thereof
          than Section 4.10); provided that, (1) in each case, prior to such
          repurchase the Company has made a Change of Control Offer or Asset
          Sale Offer, as applicable, and repurchased all Notes that were validly
          tendered for payment in connection with such Change of Control Offer
          or Asset Sale Offer and (2) no

                                       63



          Default or Event of Default shall have occurred and be continuing
          after giving effect to such Restricted Payment.

          The Partnership Governance Committee of the Company may designate any
Restricted Subsidiary to be an Unrestricted Subsidiary if such designation would
not cause a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries in the Subsidiary so
designated will be deemed to be Restricted Payments at the time of such
designation and will reduce the amount available for Restricted Payments under
the first paragraph of this covenant (except to the extent such Investments were
repaid in cash). All such outstanding Investments will be deemed to constitute
Investments in an amount equal to the fair market value of such Investments at
the time of such designation, as conclusively determined by the Partnership
Governance Committee. Such designation will only be permitted if any such
Restricted Payment would be permitted at such time and if such Restricted
Subsidiary otherwise meets the definition of an Unrestricted Subsidiary. In the
case of any designation by the Company of a Person as an Unrestricted Subsidiary
on the first day that such Person is a Subsidiary of the Company in accordance
with the provisions of the Indenture, such designation shall be deemed to have
occurred for all purposes of the Indenture simultaneously with, and
automatically upon, such Person becoming a Subsidiary.

          For the purposes of this Section 4.07, any payment made on or after
August 24, 2001 but prior to the Issue Date, shall be deemed to be a "Restricted
Payment" to the extent such payment would have been a Restricted Payment had the
Indenture been in effect at the time of such payment (and, to the extent that
any such Restricted Payment was permitted by clauses 4.07(a) through (j) above,
such Restricted Payment may be deemed by the Company to have been made pursuant
to such clause.

          Section 4.8. Additional Interest upon Payment of Permitted Dividends.
(a) The Company shall provide public notice of its intent to pay a Permitted
Dividend which would require the issuance of Additional Dividend Notes by means
of a press release on a date that is not more than twenty-one days or less than
fourteen days prior to the date of any scheduled payment of any such Permitted
Dividend (a "Notice Date"). Such notice shall provide the date of the Permitted
Dividend and the amount of additional interest that will be paid on such date
pursuant to clause (b) below.

          (b) If the Company makes a Permitted Dividend and the Company's Fixed
Charge Coverage Ratio calculated (on a pro forma basis as described in the
following sentence) on the Dividend Payment Date would have been less than 1.75
to 1, then the Issuers shall, on the date when the Company makes such Permitted
Dividend (the "Dividend Payment Date"), pay each Holder of record on the Notice
Date immediately prior to the date of such payment, as additional interest, an
amount equal to the Additional Interest Amount. For this purpose, the
calculation shall give pro forma effect to any Indebtedness, Disqualified Stock
or Preferred Stock incurred or contemplated to be incurred or any asset sold or
contemplated to be sold, in each case to finance such Permitted Dividend as if
such incurrence or sale had been made at the beginning of the most recently
ended four full fiscal quarters for which financial statements have been filed
with the SEC pursuant to Section 4.04 immediately preceding the Dividend Payment
Date.

                                       64



          (c) Notwithstanding the foregoing, the Issuers shall not be required
to make any additional interest payment with respect to a Permitted Dividend
made on any Dividend Payment Date (the "current date") if the Company has made
an additional interest payment with respect to another Permitted Dividend on a
Dividend Payment Date that occurred within 90 days prior to the current date.

          (d) Any such interest payable pursuant to this Section shall be paid
by the Issuers in the form of additional Notes ("Additional Dividend Notes")
that are identical in all respects to the Notes with respect to which such
Additional Dividend Notes are issued. Interest on such Additional Dividend Notes
shall accrue from the most recent interest payment date prior to the Dividend
Payment Date or, if no interest has been paid on the Notes, from the Issue Date.
The Additional Dividend Notes shall be issued in an aggregate principal amount
that, together with accrued interest thereon through the Dividend Payment Date,
as determined pursuant to the foregoing sentence, will be equal to the
Additional Interest Amount required to be paid on the applicable Dividend
Payment Date as set out in clause (b) above; provided that the Issuers shall, to
the extent necessary, round up the principal amount of any Additional Dividend
Note so that the principal amount of each such Note is $1,000 or a higher $1,000
increment thereof.

          Section 4.9. Limitation on Dividend and other Payment Restrictions
affecting Restricted Subsidiaries. The Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any restriction on the ability of
any Restricted Subsidiary to:

          (i) (a) pay dividends or make any other distributions to the Company
or any of its Restricted Subsidiaries:

                    (1) on its Capital Stock, or

                    (2) with respect to any other interest or participation in,
          or measured by, its profits, or

               (b) pay any Indebtedness owed to the Company or any of its
     Restricted Subsidiaries;

          (ii) make loans or advances to the Company or any of its Restricted
Subsidiaries; or

          (iii) transfer any of its properties or assets to the Company or any
of its Restricted Subsidiaries;

except for such restrictions existing under or by reason of:

               (a) existing agreements as in effect on the Issue Date;

               (b) Indebtedness permitted by the Indenture to be incurred
     containing restrictions on the ability of Restricted Subsidiaries to
     consummate transactions of the

                                       65



     types described in clauses (i), (ii) or (iii) above not materially more
     restrictive than those contained in the Indenture;

               (c) the Indenture;

               (d) applicable law;

               (e) existing restrictions with respect to a Person acquired by
     the Company or any of its Restricted Subsidiaries (except to the extent
     such restrictions were put in place in connection with or in contemplation
     of such acquisition), which restrictions are not applicable to any Person,
     or the properties or assets of any Person, other than the Person, or the
     property or assets of the Person, so acquired;

               (f) customary non-assignment provisions in leases and other
     agreements entered into in the ordinary course of business;

               (g) construction loans and purchase money obligations (including
     Capital Lease Obligations) for property acquired in the ordinary course of
     business that impose restrictions of the nature described in clause (iii)
     above on the property so constructed or acquired;

               (h) in the case of clause (iii) above, restrictions contained in
     security agreements or mortgages securing Indebtedness of a Restricted
     Subsidiary to the extent such restrictions restrict the transfer of the
     property subject to such security agreements or mortgages;

               (i) a Permitted Refinancing, provided that the restrictions
     contained in the agreements governing such Permitted Refinancing are not
     materially more restrictive, taken as a whole, than those contained in the
     agreements governing the Indebtedness being refinanced (as conclusively
     evidenced by a resolution of the Partnership Governance Committee);

               (j) customary restrictions on a Finance Subsidiary imposed in
     such Finance Subsidiary's organizational documents or by the terms of its
     Preferred Stock;

               (k) any restriction with respect to shares of Capital Stock of a
     Restricted Subsidiary imposed pursuant to an agreement entered into for the
     sale or disposition of such shares of Capital Stock or any restriction with
     respect to the assets of a Restricted Subsidiary imposed pursuant to an
     agreement entered into for the sale or disposition of such assets or all or
     substantially all the Capital Stock of such Restricted Subsidiary pending
     the closing of such sale or disposition;

               (l) in the case of any Restricted Subsidiary that is a Joint
     Venture, customary restrictions on such Restricted Subsidiary contained in
     its joint venture agreement, which restrictions are consistent with the
     past practice of the Company and its Restricted Subsidiaries (as
     conclusively evidenced by a resolution of the Partnership Governance
     Committee); and

                                       66



               (m) the Credit Facility and related documentation as the same is
     in effect on the Issue Date and as amended, modified, extended, renewed,
     refunded, refinanced, restated or replaced from time to time; provided that
     the Credit Facility and related documentation as so amended, modified,
     extended, reviewed, refunded, refinanced, restated or replaced is not
     materially more restrictive, taken as a whole, as to the matters enumerated
     above than the Credit Facility and related documentation as in effect on
     the Issue Date (as conclusively evidenced by a resolution of the
     Partnership Governance Committee).

          For purposes of determining compliance with this covenant, in the
event that a restriction meets the criteria of more than one of the categories
of permitted restrictions described in clauses (a) through (m) above, the
Company shall, in its sole discretion, classify such restriction in any matter
that complies with this covenant and such restriction will be treated as
existing pursuant to the clauses designated by the Company.

          Section 4.10. Limitation on Sales of Assets. The Company will not, and
will not permit any of its Restricted Subsidiaries to, consummate an Asset Sale
unless (i) the Company and/or the Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value (as conclusively evidenced by a resolution of the Partnership
Governance Committee of the Company set forth in an Officers' Certificate
delivered to the Trustee) of the assets or Equity Interests issued or sold or
otherwise disposed of; and (ii) at least 75% of the consideration therefor
received by the Company and/or such Restricted Subsidiary is in the form of cash
or Cash Equivalents, or a controlling interest or a joint venture interest (to
the extent otherwise permitted by the Indenture) in a business engaged in a
Permitted Business or long-term property or assets that are used or useful in a
Permitted Business; provided that the amount of (x) any liabilities (as shown on
the Company's or such Restricted Subsidiary's most recent balance sheet) of the
Company or any Restricted Subsidiary (other than contingent liabilities and
liabilities that are by their terms subordinated to the Notes or any guarantee
thereof) that are assumed by the transferee of any such assets pursuant to a
customary novation agreement that releases the Company or such Restricted
Subsidiary from further liability and (y) any securities, notes or other
obligations received by the Company or any such Restricted Subsidiary from such
transferee to the extent they are promptly converted or monetized by the Company
or such Restricted Subsidiary into cash (to the extent of the cash received),
shall be deemed to be cash for purposes of this provision.

          Within 360 days after the receipt of any Net Proceeds from an Asset
Sale, the Company may apply such Net Proceeds, at its option, (a) to permanently
repay Indebtedness outstanding on the Issue Date (other than any Indebtedness
subordinated by its terms to the Notes) with a Stated Maturity prior to the
maturity of the Notes (and to correspondingly reduce commitments with respect
thereto in the case of revolving borrowings) of the Company or any Restricted
Subsidiary that is a Subsidiary Guarantor or Indebtedness (and to
correspondingly reduce commitments with respect thereto in the case of revolving
borrowings) of any Restricted Subsidiary that is not a Subsidiary Guarantor; or
(b) to the acquisition of Additional Assets (to the extent otherwise permitted
by the Indenture) or the making of a capital expenditure, in each case, in a
Permitted Business (or enter into a binding commitment for any such acquisition
or expenditure); provided that such binding commitment shall be treated as a
permitted application of Net

                                       67



Proceeds from the date of such commitment until and only until the earlier of
(x) the date on which such expenditure or acquisition is consummated and (y) the
180th day following the expiration of the aforementioned 360 day period. If the
acquisition or expenditure contemplated by such binding commitment is not
consummated on or before such 180th day and the Company shall not have applied
such Net Proceeds pursuant to clause (a) above on or before such 180th day, such
commitment shall be deemed not to have been a permitted application of Net
Proceeds at any time.

          Pending the final application of any such Net Proceeds, the Company
may temporarily reduce the revolving Indebtedness under the Credit Facility or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds under the
Indenture exceeds $25 million, the Issuers will be required to make an offer to
all holders of Notes issued under the Indenture (an "Asset Sale Offer") to
purchase the maximum principal amount of Notes and, if the Issuers are required
to do so under the terms of any other Indebtedness ranking pari passu with such
Notes, such other Indebtedness on a pro rata basis with the Notes, that may be
purchased out of the Excess Proceeds, at a purchase price in cash in an amount
equal to 100% of the principal amount thereof plus accrued and unpaid interest
and Liquidated Damages, if any, thereon, to the date of purchase in accordance
with the procedures set out in the Indenture. To the extent that the aggregate
amount of Notes (and any other pari passu Indebtedness subject to such Asset
Sale Offer) tendered pursuant to such Asset Sale Offers is less than the Excess
Proceeds, the Issuers may, subject to the other terms of the Indenture, use any
remaining Excess Proceeds for general corporate purposes. If the aggregate
principal amount of Notes surrendered by holders thereof in connection with any
Asset Sale Offer exceeds the amount of Excess Proceeds, the Trustee shall select
the Notes to be purchased on a pro rata basis. Upon completion of the offer to
purchase made under the Indenture, the amount of Excess Proceeds under the
Indenture shall be reset at zero.

          Section 4.11. Limitation on Affiliate Transactions. The Company will
not, and will not permit any of its Restricted Subsidiaries to, sell, lease,
transfer or otherwise dispose of any of its properties or assets to, or purchase
any property or assets from, or enter into or make any contract, agreement,
understanding, loan, advance or Guarantee with, or for the benefit of, any
Affiliate, any Partner or any Affiliate of any Partner (each of the foregoing,
an "Affiliate Transaction"), unless (1) the terms of such Affiliate Transaction
are no less favorable to the Company or such Restricted Subsidiary, as the case
may be, than those that could be obtained in a comparable arm's-length
transaction with a Person that is not an Affiliate of the Company and (2) the
Company delivers to the Trustee (a) with respect to any Affiliate Transaction
involving aggregate consideration in excess of $10 million, a resolution of the
Partnership Governance Committee set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (1) above and
that such Affiliate Transaction has been approved by a majority of the
disinterested members of the Partnership Governance Committee and (b) with
respect to any Affiliate Transaction involving aggregate consideration in excess
of $25 million, an opinion as to the fairness to the Company or such Restricted
Subsidiary of such Affiliate

                                       68



Transaction from a financial point of view issued by an investment banking firm
of national standing; provided that:

                    (i) transactions or payments pursuant to any employment
          arrangements or employee, officer or director benefit plans or
          arrangements entered into by the Company or any of its Restricted
          Subsidiaries in the ordinary course of business;

                    (ii) transactions between or among the Company and/or its
          Restricted Subsidiaries;

                    (iii) customary loans, advances, fees and compensation paid
          to, and indemnity provided on behalf of, officers, directors,
          employees or consultants of the Company or any of its Restricted
          Subsidiaries;

                    (iv) transactions in the ordinary course of business between
          the Company or any of its Restricted Subsidiaries and any Partner or
          Affiliate of any Partner, provided that, with respect to any such
          Affiliate Transaction involving aggregate consideration in excess of
          $25 million, such Affiliate Transaction complies with clause (1) above
          and has been approved by the Partnership Governance Committee,
          including a majority of the disinterested members (if any);

                    (v) sales (including a sale in exchange for a promissory
          Note of or equity interest in such Accounts Receivable Subsidiary) of
          accounts receivable, related assets and the provision of billing,
          collection and other services in connection therewith, in each case,
          to an Accounts Receivable Subsidiary in connection with any
          Receivables Facility;

                    (vi) transactions pursuant to any contract or agreement in
          effect on the Issue Date, as the same may be amended, modified or
          replaced from time to time, so long as any such contract or agreement
          as so amended, modified or replaced is, taken as a whole, no less
          favorable to the Company and its Restricted Subsidiaries in any
          material respect than the contract or agreement as in effect on the
          Issue Date (as conclusively evidenced by a resolution of the
          Partnership Governance Committee);

                    (vii) any transaction or series of transactions between the
          Company or any Restricted Subsidiary and any of their Joint Ventures,
          provided that (A) such transaction or series of transactions is in the
          ordinary course of business between the Company or such Restricted
          Subsidiary and such Joint Venture, and (B) with respect to any such
          Affiliate Transaction involving aggregate consideration in excess of
          $25 million, such Affiliate Transaction complies with clause (1) above
          and such Affiliate Transaction has been approved by the Partnership
          Governance Committee, including a majority of the disinterested
          members (if any); and

                    (viii) any Restricted Payment of the type described in
          clause (1) or (2) of the first paragraph of Section 4.07 and any
          Permitted Dividend;

                                       69



in each case, shall not be deemed to be Affiliate Transactions and therefore
(except as otherwise specified in such clauses) not subject to the requirements
of clauses (1) and (2) of the initial paragraph above.

          Section 4.12. Limitation on Liens. The Company will not, and will not
permit any of its Restricted Subsidiaries to, directly or indirectly, create,
incur, assume or suffer to exist any Lien, except Permitted Liens, on any asset
now owned or hereafter acquired, or any income or profits therefrom, unless all
payments due under the Indenture and the Notes are secured on an equal and
ratable basis with the obligations so secured (or, if such obligations are
subordinated by their terms to the Notes or the Subsidiary Guarantees, prior to
the obligations so secured) until such time as such obligations are no longer
secured by a Lien.

          Section 4.13. Repurchase of Notes upon a Change in Control. (a) Upon
the occurrence of a Change of Control, each Holder will have the right to
require the Issuers to repurchase all or any part (equal to $1,000 or an
integral multiple thereof) of such Holder's Notes pursuant to the offer
described below (the "Change of Control Offer") at an offer price in cash equal
to 101% of the aggregate principal amount thereof plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the date of purchase (the
"Change of Control Payment") on a date that is not more than 90 days after the
occurrence of such Change of Control (the "Change of Control Payment Date").
Within 30 days following any Change of Control, the Issuers will mail, or at the
Issuers' request the Trustee will mail, a notice to each Holder offering to
repurchase the Notes held by such Holder pursuant to the procedures specified in
such notice.

          (b) The Issuers will comply with the requirements of Rule 14e-1 under
the Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of the Notes as a result of a Change of Control.

          (c) On the Change of Control Payment Date, the Issuers will, to the
extent lawful, (1) accept for payment all Notes or portions thereof properly
tendered and not withdrawn pursuant to the Change of Control Offer, (2) deposit
with the applicable Paying Agent an amount equal to the Change of Control
Payment in respect of all Notes or portions thereof so tendered, and (3) deliver
or cause to be delivered to the Trustee the Notes so accepted together with an
Officers' Certificate stating the aggregate principal amount of Notes or
portions thereof being purchased by the Issuers.

          The Paying Agent will promptly mail to each Holder of Notes so
tendered the Change of Control Payment for such Notes, and the Trustee will
promptly authenticate and mail (or cause to be transferred by book entry) to
each Holder a Note equal in principal amount to any unpurchased portion of the
Notes surrendered, if any; provided that each such Note will be in a principal
amount of $1,000 or an integral multiple thereof.

          (d) The Issuers will not be required to make a Change of Control Offer
upon a Change of Control if a third party makes the Change of Control Offer at
the same or a higher purchase price, at the same times and otherwise in
substantial compliance with the requirements applicable to a Change of Control
Offer otherwise required to be made by

                                       70



the Issuers and purchases all Notes validly tendered and not withdrawn under
such Change of Control Offer.

          Section 4.14. Limitation on Sale and Leaseback Transactions. The
Company will not, and will not permit any of its Restricted Subsidiaries to,
enter into any Sale and Lease-Back Transaction; provided that the Company or any
Restricted Subsidiary may enter into a Sale and Lease-Back Transaction if:

          (a) the Company or such Restricted Subsidiary, as the case may be,
could have:

                    (i) incurred Indebtedness in an amount equal to the
          Attributable Debt relating to such Sale and Lease-Back Transaction
          pursuant to Section 4.06 (whether or not such covenant has ceased to
          be otherwise in effect pursuant to Section 4.18), and

                    (ii) incurred a Lien to secure such Indebtedness pursuant to
          Section 4.12 without securing the Notes; and

          (b) the gross cash proceeds of such Sale and Lease-Back Transaction
are at least equal to the fair market value (as conclusively determined by the
Partnership Governance Committee) of the property that is the subject of such
Sale and Lease-Back Transaction.

          Section 4.15. Limitation on Line of Business. The Company will not,
and will not permit any of its Restricted Subsidiaries to, engage in any
business other than Permitted Businesses, except to such extent as would not be
material to the Company and its Subsidiaries taken as a whole.

          Section 4.16. Limitation on Accounts Receivable Facilities. The
Company may, and any of its Restricted Subsidiaries may, sell (including a sale
in exchange for a promissory note of or Equity Interest in such Accounts
Receivable Subsidiary) at any time and from time to time, accounts receivable
and related assets to any Accounts Receivable Subsidiary; provided that the
aggregate consideration received in each such sale is at least equal to the
aggregate fair market value of the receivables sold.

          Section 4.17. Limitation on Business Activities by Equistar Funding.
Equistar Funding may not hold any assets, become liable for any obligations or
engage in any business activities; provided that it may be a co-obligor with
respect to the Notes or any other Indebtedness issued by the Company, and may
engage in any activities directly related thereto or necessary in connection
therewith. Equistar Funding shall be a Wholly Owned Restricted Subsidiary of the
Company at all times.

          Section 4.18. Limited Applicability of Covenants when Notes are rated
Investment-Grade. Notwithstanding the foregoing, the Company's and its
Restricted Subsidiaries' obligations to comply with the provisions of Sections
4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.15, 4.16 and 4.22 will terminate and cease
to have any further effect from and after the first date when the Notes are
rated Investment Grade.

                                       71



          Section 4.19. Existence. Subject to Articles 4 and 5 of this
Indenture, the Company will do or cause to be done all things necessary to
preserve and keep in full force and effect its existence and the existence of
each of its Restricted Subsidiaries in accordance with the respective
organizational documents of each such Subsidiary and the rights (whether
pursuant to charter, partnership certificate, agreement, statute or otherwise),
material licenses and franchises of the Company and each such Subsidiary;
provided that the Company shall not be required by this Section 4.19 to preserve
any such right, license or franchise, or the existence of any Restricted
Subsidiary (other than Equistar Funding), if the Company shall determine that
the maintenance or preservation thereof is no longer desirable in the conduct of
the business of the Company and its Restricted Subsidiaries taken as a whole.

          Section 4.20. Payment of Taxes and Other Claims. The Company will pay
or discharge and shall cause each of its Restricted Subsidiaries to pay or
discharge, or cause to be paid or discharged, before the same shall become
delinquent (a) all material taxes, assessments and governmental charges levied
or imposed upon (i) the Company or any such Subsidiary, (ii) the income or
profits of any such Subsidiary which is a corporation or (iii) the property of
the Company or any such Subsidiary and (b) all material lawful claims for labor
materials and supplies that, if unpaid, might by law become a lien upon the
property of the Company or any such Subsidiary; provided that the Company shall
not be required to pay or discharge, or cause to be paid or discharged, any such
tax, assessment, charge or claim the amount, applicability or validity of which
is being contested in good faith by appropriate proceedings and for which
adequate reserves have been established in accordance with GAAP.

          Section 4.21. Maintenance of Properties and Insurance. The Company
will cause all material assets necessary in the conduct of its business or the
business of any of its Restricted Subsidiaries, to be maintained and kept in
good condition, repair and working order (ordinary wear and tear excepted) and
will cause to be made all necessary repairs, renewals and replacements thereof,
all as in the judgment of the Company may be necessary so that the business
carried on in connection therewith may be properly conducted at all times;
provided that nothing in this Section 4.21 shall prevent the Company or any such
Subsidiary from discontinuing the use, operation or maintenance of any of such
assets or disposing or abandoning of any of them, if such discontinuance,
disposal or abandonment is, in the judgment of the Company, desirable in the
conduct of the business of the Company or such Subsidiary.

          The Company will maintain, and will cause each of its Restricted
Subsidiaries to maintain (either in the Company's name or in such Subsidiary's
own name) insurance on all their respective properties consistent with the
insurance maintained on the Issue Date or otherwise in at least such amounts
(with no materially greater risk retention) and against at least such risks as
are usually maintained, retained or insured against in the same general area by
companies of established repute owning similar properties in such area and
engaged in the same or a similar business, in either case, to the extent
available to the Company and its Restricted Subsidiaries on commercially
reasonable terms.

          Section 4.22. Limitation on Issuance of Guarantees by Restricted
Subsidiaries . (a) The Company will not permit any Restricted Subsidiary that is
not a Subsidiary

                                       72



Guarantor, directly or indirectly, to Guarantee or secure the payment of any
other Indebtedness ("Guaranteed Indebtedness") of the Company or any of its
Restricted Subsidiaries (except Indebtedness of such Restricted Subsidiary or a
Restricted Subsidiary of such Restricted Subsidiary) unless (i) such Restricted
Subsidiary simultaneously executes and delivers a supplemental indenture in the
form of Exhibit B hereto providing for the Guarantee of the payment of the Notes
by such Restricted Subsidiary and shall deliver an Opinion of Counsel to the
Trustee pursuant to paragraph (b) below; provided that this paragraph shall not
be applicable to (x) any Guarantee of any Restricted Subsidiary that existed at
the time such Person became a Restricted Subsidiary and was not incurred in
connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary, (y) Guarantees of Indebtedness of a Restricted Subsidiary that is a
Foreign Subsidiary by a Restricted Subsidiary that is a Foreign Subsidiary or
(z) Equistar Funding. If the Guaranteed Indebtedness is subordinated in right of
payment to the Notes or any Subsidiary Guarantee, as applicable, pursuant to a
written agreement to that effect, the Guarantee of such Guaranteed Indebtedness
must be subordinated in right of payment to the Subsidiary Guarantee to at least
the extent that the Guaranteed Indebtedness is subordinated to the Notes.

          (b) The Opinion of Counsel described above shall be to the effect that
such supplemental indenture has been duly authorized, executed and delivered by
such Subsidiary and constitutes a valid and binding obligation of such
Subsidiary, enforceable against such Subsidiary in accordance with its terms
(subject to customary exceptions).

          Section 4.23. Payments for Consents. Neither the Company nor any of
its Subsidiaries or Affiliates will, directly or indirectly, pay or cause to be
paid any consideration, whether by way of interest, fee or otherwise, to any
Holder of any Notes for or as an inducement to any consent, waiver or amendment
of any of the terms or provisions of the Indenture or the Notes unless such
consideration is offered to be paid or agreed to be paid to all Holders of the
Notes that consent, waive or agree to amend such term or provision in the time
frame set forth in the solicitation documents relating to such consent, waiver
or agreement.

                                    ARTICLE 5

                     Consolidation, Merger or Sale of Assets

          Section 5.1. Consolidation, Merger or Sale of Assets by the Company.
(a) The Company may not consolidate with or merge into, or sell, assign,
transfer, convey or otherwise dispose of all or substantially all of its assets
in one or more related transactions to, any Person, or permit any Person to
merge with or into it unless each of the following conditions is satisfied:

                    (i) immediately after giving effect to such transaction and
          any related incurrence of Indebtedness or issuance of Disqualified
          Stock, no Default or Event of Default shall have occurred and be
          continuing;

                                       73



                    (ii) either (A) the Company shall be the continuing Person,
          or (ii) the entity formed by such consolidation or into which the
          Company is merged, or the Person to which such properties and assets
          will have been conveyed or transferred, assumes the Company's
          obligation as to the due and punctual payment of the principal of (and
          premium, if any, on) and interest, if any, on the Notes and the
          performance and observance of every covenant to be performed by the
          Company under the Indenture, the Notes and the Registration Rights
          Agreement; any such entity will be organized under the laws of the
          United States, one of the States thereof or the District of Columbia;

                    (iii) the Company or the entity or the Person formed by or
          surviving any such consolidation or merger (if other than the
          Company), or to which such sale, assignment, transfer, conveyance or
          other disposition shall have been made,

                         (A) except in the case of a merger or consolidation
               with, or a sale, assignment, transfer, conveyance or other
               disposition to, a Permitted Holder, will have a Consolidated Net
               Worth immediately after the transaction equal to or greater than
               the Consolidated Net Worth of the Company immediately preceding
               the transaction; and

                         (B) except with respect to a consolidation or merger of
               the Company with or into a Person that has no outstanding
               Indebtedness, will, at the time of such transaction and after
               giving pro forma effect thereto as if such transaction had
               occurred at the beginning of the applicable four-quarter period,
               (i) have a Fixed Charge Coverage Ratio of at least 2.0 to 1 or
               (ii) have a greater Fixed Charge Coverage Ratio than the
               Company's Fixed Charge Coverage Ratio immediately before the
               transaction; and

                    (iv) each of the Issuers has delivered to the Trustee an
          Officers' Certificate and Opinion of Counsel stating that the
          transaction complies with these conditions.

          (b) The foregoing shall not prohibit the merger or consolidation of a
Wholly Owned Restricted Subsidiary with the Company; provided that, in
connection with any such merger or consolidation, no consideration, other than
Qualified Equity Interests in the surviving Person or the Company, shall be
issued or distributed to the holders of Equity Interests of the Company.

          (c) The Company will not lease all or substantially all its assets in
one or more related transactions to another Person.

          Section 5.2. Successor Company Substituted. (a) Except as provided in
Section 5.02(b), upon any consolidation or merger, or any sale, assignment,
transfer, conveyance or other disposition of all or substantially all the assets
of the Company in accordance with Section 5.01 hereof, the successor Person
formed by such consolidation or into or with which the Company is merged or to
which such sale, assignment, transfer, conveyance or other disposition is made
shall succeed to, and be substituted for (so that from and after the date of
such consolidation, merger, sale, assignment, transfer, conveyance or other

                                       74



disposition, the provisions of this Indenture referring to the "Company" shall
refer instead to the successor Person), and may exercise every right and power
of, the Company under this Indenture with the same effect as if such successor
Person had been named as the Company herein, and the predecessor Company shall
be released from all its obligations hereunder and under the Notes.

          (b) The sale, assignment, transfer, lease, conveyance or other
disposition by the Company of all or substantially all its property or assets
taken as a whole to one or more of the Company's Subsidiaries shall not relieve
the Company from its obligations under the Indenture and the Notes.

          Section 5.3. Consolidation, Merger or Sale of Assets by Equistar
Funding . (a) Equistar Funding shall not consolidate with, merge into, sell,
assign, convey, transfer, lease or otherwise dispose of all or substantially all
of its property and assets to, any Person, or permit any Person to merge with or
into Equistar Funding unless:

                    (i) concurrently therewith, a corporate Wholly Owned
          Restricted Subsidiary of Equistar organized and validly existing under
          the laws of the United States of America or any jurisdiction thereof
          (which may be the continuing Person as a result of such transaction)
          shall expressly assume, by a supplemental Indenture, executed and
          delivered to the Trustee and in form and substance satisfactory to the
          Trustee, all of the obligations of an Issuer under the Notes, the
          Indenture and the Registration Rights Agreement; or

                    (ii) after giving effect thereto, at least one obligor on
          the Notes shall be a corporation organized and validly existing under
          the laws of the United States of America or any jurisdiction thereof;
          and

                    (iii) immediately after such transaction, no Default or
          Event of Default shall have occurred and be continuing.

          (b) Upon any assumption of the obligations of Equistar Funding by any
successors as set forth above, the successor shall succeed to, and be
substituted for (so that from and after the date of such assumption, the
provisions of this Indenture referring to "Equistar Funding" shall refer instead
to the successor corporation), and may exercise every right and power of,
Equistar Funding under this Indenture with the same effect as if such successor
Person had been named as Equistar Funding herein, and the predecessor Equistar
Funding shall be released from all its obligations hereunder and under the
Notes. If, as a result of any such transaction, the Company becomes the
successor to Equistar Funding pursuant to Section 5.03(a)(ii), Section 4.17
shall cease to be in effect with respect to the Company, but Section 5.03(a)
shall continue to remain in effect with respect to the Company.

          Section 5.4. Opinion of Counsel to Trustee. The Trustee, subject to
the provisions of Sections 7.01 and 7.03, may receive an Opinion of Counsel as
conclusive evidence that any such consolidation, merger, conveyance, sale,
transfer, lease, exchange or other disposition referred to in Section 5.01 or
5.03 complies with the applicable provisions of this Indenture.

                                       75



                                    ARTICLE 6

                                    Remedies

          Section 6.1. Events of Default. Each of the following constitutes an
"Event of Default":

                    (1) default for 30 days in the payment when due of interest
          (including the issuance of Additional Dividend Notes) or Liquidated
          Damages on the Notes;

                    (2) default in payment when due of the principal of or
          premium, if any, on the Notes at maturity or otherwise;

                    (3) failure by the Issuers to comply with Section 4.10, 4.13
          or Article 5;

                    (4) failure by the Issuers for 60 days after notice by the
          Trustee or Holders of at least 25% in principal amount of the then
          outstanding Notes issued thereunder to comply with any of the other
          agreements in the Indenture or the Notes;

                    (5) any default occurs under any mortgage, indenture or
          instrument under which there may be issued or by which there may be
          secured or evidenced any Indebtedness for money borrowed by the
          Company or any of its Significant Subsidiaries (or any Indebtedness
          for money borrowed Guaranteed by the Company or any of its Significant
          Subsidiaries if the Company or a Significant Subsidiary does not
          perform its payment obligations under such Guarantee within any grace
          period provided for in the documentation governing such Guarantee),
          whether such Indebtedness or Guarantee exists on the Issue Date or is
          thereafter created, which default (a) constitutes a Payment Default or
          (b) results in the acceleration of such Indebtedness prior to its
          Stated Maturity, and in each case, the principal amount of any such
          Indebtedness, together with the principal amount of any other such
          Indebtedness under which there has been a Payment Default or that has
          been so accelerated, aggregates $50 million or more;

                    (6) failure by the Company or any of its Significant
          Subsidiaries to pay a final judgment or final judgments aggregating in
          excess of $50 million, which judgment or judgments are not paid,
          discharged or stayed, for a period of 60 days;

                    (7) a court having jurisdiction in the premises enters a
          decree or order for relief (i) in respect of the Company or any
          Significant Subsidiary in an involuntary case under any applicable
          bankruptcy, insolvency or other similar law now or hereafter in
          effect, (ii) appointment of a receiver, liquidator, assignee,
          custodian, trustee, sequestrator or similar official of the Company or
          any Significant Subsidiary or for all or substantially all the
          property and assets of the Company or any Significant Subsidiary or
          (iii) the winding up or liquidation of

                                       76



          the affairs of the Company or any Significant Subsidiary and, in each
          case, such decree or order shall remain unstayed and in effect for a
          period of 60 consecutive days;

                    (8) the Company or any Significant Subsidiary (i) commences
          a voluntary case under any applicable bankruptcy, insolvency or other
          similar law now or hereafter in effect, or consents to the entry of an
          order for relief in an involuntary case under any such law, (ii)
          consents to the appointment of or taking possession by a receiver,
          liquidator, assignee, custodian, trustee, sequestrator or similar
          official of the Company or any Significant Subsidiary or for all or
          substantially all the property and assets of the Company or any
          Significant Subsidiary or (iii) effects any general assignment for the
          benefit of creditors; and

                    (9) except as permitted by the Indenture, any Subsidiary
          Guarantee shall be held in any judicial proceeding to be unenforceable
          or invalid or shall cease for any reason to be in full force and
          effect or any Subsidiary Guarantor, or any Person acting on behalf of
          any Subsidiary Guarantor, shall deny or disaffirm its obligations
          under the Subsidiary Guarantees.

          Section 6.2. Acceleration. If an Event of Default (other than an Event
of Default specified in clause (7) or (8) of Section 6.01 that occurs with
respect to any Issuer or Subsidiary Guarantor) occurs and is continuing under
this Indenture, the Trustee or the Holders of at least 25% in aggregate
principal amount of the Notes then Outstanding, by written notice to the Issuers
(and to the Trustee if such notice is given by the Holders) may, and the Trustee
at the request of such Holders shall, declare the principal of, premium, if any,
and accrued but unpaid interest and Liquidated Damages, if any, on all the Notes
to be due and payable. Upon a declaration of acceleration, such principal,
premium, if any, and accrued interest and Liquidated Damages, if any, shall be
immediately due and payable. If an Event of Default specified in clause (7) or
(8) of Section 6.01 occurs with respect to any Issuer or any Subsidiary
Guarantor, the principal of, premium, if any, accrued interest and Liquidated
Damages, if any, on the Notes then Outstanding shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Holder.

          Section 6.3. Other Remedies. If an Event of Default occurs and is
continuing, the Trustee may pursue any available remedy to collect the payment
of principal or interest and Liquidated Damages on the Notes or to enforce the
performance of any provision of the Notes or this Indenture.

          The Trustee may maintain a proceeding even if it does not possess any
of the Notes or does not produce any of them in the proceeding. A delay or
omission by the Trustee or any Holder in exercising any right or remedy accruing
upon an Event of Default shall not impair the right or remedy or constitute a
waiver of or acquiescence in the Event of Default. All remedies are cumulative
to the extent permitted by law.

          Section 6.4. Waiver of Past Defaults. The Holders of at least a
majority in principal amount of the Outstanding Notes, by written notice to the
Issuers and to the Trustee, may waive all past defaults and rescind and annul a
declaration of acceleration

                                       77



and its consequences under the Notes, if (i) all existing Events of Default,
other than the nonpayment of the principal of and premium, if any, and interest
and Liquidated Damages, if any, on such Notes that have become due solely by
such declaration of acceleration, have been cured or waived and (ii) the
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. Upon any such waiver, such Default shall cease to exist,
and any Event of Default arising therefrom shall be deemed to have been cured
for every purpose of this Indenture; but no such waiver shall extend to any
subsequent or other Default or impair any right consequent thereon.

          Section 6.5. Control by Majority. The Holders of at least a majority
in aggregate principal amount of the Outstanding Notes may direct the time,
method and place of conducting any proceeding for any remedy available to the
Trustee or exercising any trust or power conferred on the Trustee. However, the
Trustee may refuse to follow any direction that conflicts with law or this
Indenture, that may involve the Trustee in personal liability, or that the
Trustee determines in good faith may be unduly prejudicial to the rights of
Holders not joining in the giving of such direction and may take any other
action it deems proper that is not inconsistent with any such direction received
from the Holders.

          Section 6.6. Limitation on Suits. A Holder may not pursue any remedy
with respect to this Indenture or the Notes unless:

          (a) the Holder gives the Trustee written notice of a continuing Event
of Default;

          (b) the Holders of at least 25% in aggregate principal amount of
Outstanding Notes make a written request to the Trustee to pursue the remedy;

          (c) such Holder or Holders offer the Trustee security or indemnity
satisfactory to it against any loss, liability or expense;

          (d) the Trustee does not comply with the request within 60 days after
receipt thereof and the offer of security or indemnity; and

          (e) during such 60 day period, the Holders of at least a majority in
aggregate principal amount of the Outstanding Notes do not give the Trustee a
direction inconsistent with the request.

          Section 6.7. Rights of Holders to Receive Payment. Notwithstanding any
other provision of this Indenture, the right of any Holder to receive payment of
principal, premium, if any, interest and Liquidated Damages, if any, on the
Note, on or after the respective due dates expressed in the Note, or to bring
suit for the enforcement of any such payment on or after such respective dates,
shall not be impaired or affected without the consent of the Holder.

          Section 6.8. Collection Suit by Trustee. If an Event of Default
specified in Section 6.01(1) or (2) hereof occurs and is continuing, the Trustee
is authorized to recover judgment in its own name and as trustee of an express
trust against the Issuers or any other

                                       78



obligor for the whole amount of principal, premium, if any, and interest and
Liquidated Damages, if any, remaining unpaid on the Notes and interest on
overdue principal and, to the extent lawful, interest and Liquidated Damages, if
any, and such further amount as shall be sufficient to cover amounts due the
Trustee under Section 7.08, including the costs and expenses of collection,
including the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel.

          Section 6.9. Trustee May File Proofs of Claim. The Trustee is
authorized to file such proofs of claim and other papers or documents as may be
necessary or advisable in order to have the claims of the Trustee (including any
claim for the reasonable compensation, expenses, disbursements and advances of
the Trustee, its agents and counsel) and the Holders allowed in any judicial
proceedings relative to the Issuers (or any other obligor upon the Notes), its
creditors or its property and shall be entitled and empowered to collect,
receive and distribute any money or other property payable or deliverable on any
such claims and any custodian in any such judicial proceeding is hereby
authorized by each Holder to make such payments to the Trustee, and in the event
that the Trustee shall consent to the making of such payments directly to the
Holders, to pay to the Trustee any amount due to it for the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel, and any other amounts due the Trustee under Section 7.08. To the
extent that the payment of any such compensation, expenses, disbursements and
advances of the Trustee, its agents and counsel, and any other amounts due the
Trustee under Section 7.08 out of the estate in any such proceeding, shall be
denied for any reason, payment of the same shall be secured by a Lien on, and
shall be paid out of, any and all distributions, dividends, money, securities
and other properties which the Holders may be entitled to receive in such
proceeding whether in liquidation or under any plan of reorganization or
arrangement or otherwise. Nothing herein contained shall be deemed to authorize
the Trustee to authorize or consent to or accept or adopt on behalf of any
Holder any plan of reorganization, arrangement, adjustment or composition
affecting the Notes or the rights of any Holder thereof, or to authorize the
Trustee to vote in respect of the claim of any Holder in any such proceeding.

          Section 6.10. Priorities. If the Trustee collects any money pursuant
to this Article, it shall pay out the money in the following order:

          First: to the Trustee, its agents and attorneys for amounts due under
Section 7.08, including payment of all compensation, expense and liabilities
incurred, and all advances made, by the Trustee and the costs and expenses of
collection;

          Second: to Holders for amounts due and unpaid on the Notes for
principal, premium, if any, interest and Liquidated Damages, if any, ratably,
without preference or priority of any kind, according to the amounts due and
payable on the Notes for principal, premium, if any, interest and Liquidated
Damages, respectively; and

          Third: to the Issuers or to such party as a court of competent
jurisdiction shall direct.

          The Trustee may fix a record date and payment date for any payment to
Holders pursuant to this Section 6.10 upon five Business Days prior notice to
the Issuers.

                                       79



          Section 6.11. Undertaking for Costs. In any suit for the enforcement
of any right or remedy under this Indenture or in any suit against the Trustee
for any action taken or omitted by it as a Trustee, a court in its discretion
may require the filing by any party litigant in the suit of an undertaking to
pay the costs of the suit, and the court in its discretion may assess reasonable
costs, including reasonable attorneys' fees and expenses, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section does not apply to a
suit by the Trustee, a suit by a Holder pursuant to Section 6.06, or a suit by
Holders of more than 10% in aggregate principal amount of the then Outstanding
Notes.

          Section 6.12. Restoration of Rights and Remedies. If the Trustee or
any Holder has instituted any proceeding to enforce any right or remedy under
this Indenture or any Note and such proceeding has been discontinued or
abandoned for any reason, or has been determined adversely to the Trustee or to
such Holder, then and in every such case each Issuer, any other obligor upon the
Notes, the Trustee and the Holders shall, subject to any determination in such
proceeding, be restored severally and respectively to their former positions
hereunder, and thereafter all rights and remedies of the Trustee and the Holders
shall continue as though no such proceeding had been instituted.

          Section 6.13. Rights and Remedies Cumulative. No right or remedy
herein conferred upon or reserved to the Trustee or to the Holders is intended
to be exclusive of any other right or remedy, and every right and remedy shall,
to the extent permitted by law, be cumulative and in addition to every other
right and remedy given hereunder or now or hereafter existing at law or in
equity or otherwise. The assertion or employment of any right or remedy
hereunder, or otherwise, shall not prevent the concurrent assertion or
employment of any other appropriate right or remedy.

          Section 6.14. Waiver of Stay, Extension or Usury Laws. Each Issuer
covenants (to the extent that it may lawfully do so) that it will not at any
time insist upon, or plead, or in any manner whatsoever claim or take the
benefit or advantage of, any stay or extension law or any usury or other similar
law wherever enacted, now or at any time hereafter in force, that would prohibit
or forgive such Issuer from paying all or any portion of the principal of (or
premium, if any), interest or Liquidated Damages, if any, on the Notes
contemplated herein or in the Notes or that may affect the covenants or the
performance of this Indenture; and such Issuer (to the extent that it may
lawfully do so) hereby expressly waives all benefit or advantage of any such
law, and covenant that it will not hinder, delay or impede the execution of any
power herein granted to the Trustee, but will suffer and permit the execution of
every such power as though no such law had been enacted.

                                    ARTICLE 7

                                   The Trustee

          Section 7.1. Certain Duties and Responsibilities. (a) Except during
the continuance of an Event of Default,

                                       80



                    (i) the Trustee need perform only those duties that are
          specifically set forth in this Indenture and no others, and no implied
          covenants or obligations shall be read into this Indenture against the
          Trustee; and

                    (ii) in the absence of bad faith on its part, the Trustee
          may conclusively rely, as to the truth of the statements and the
          correctness of the opinions expressed therein, upon certificates or
          opinions furnished to the Trustee and conforming to the requirements
          of this Indenture. However, in the case of any such certificates or
          opinions which by any provision hereof are specifically required to be
          furnished to the Trustee, the Trustee shall examine the certificates
          and opinions to determine whether or not they conform to the
          requirements of this Indenture (but need not confirm or investigate
          the accuracy of mathematical calculations or other facts stated
          therein).

          (b) In case an Event of Default has occurred and is continuing, the
Trustee shall exercise such of the rights and powers vested in it by this
Indenture, and use the same degree of care and skill in their exercise, as a
prudent person would exercise or use under the circumstances in the conduct of
such person's own affairs.

          (c) No provision of this Indenture shall be construed to relieve the
Trustee from liability for its own negligent action, its own negligent failure
to act, or its own willful misconduct, except that (i) this paragraph does not
limit the effect of Section 7.01(a); (ii) the Trustee shall not be liable for
any error of judgment made in good faith by a Responsible Officer, unless it is
proved that the Trustee was negligent in ascertaining the pertinent facts; and
(iii) the Trustee shall not be liable with respect to any action it takes or
omits to take in good faith in accordance with a direction received by it
pursuant to Section 6.06.

          (d) The Trustee may refuse to perform any duty or exercise any right
or power or expend or risk its own funds or otherwise incur any financial
liability unless it receives indemnity satisfactory to it against any loss,
liability or expense.

          (e) Whether or not therein expressly so provided, every provision of
this Indenture relating to the conduct or affecting the liability of or
affording protection to the Trustee shall be subject to the provisions of
Sections 7.01 and 7.03.

          Section 7.2. Notice of Defaults. (a) Within 90 days after the
occurrence of any Default, the Trustee shall transmit by mail to all Holders, as
their names and addresses appear in the Register, notice of such Default
hereunder actually known to the Trustee unless such Default shall have been
cured or waived; provided, however, that, except in the case of a Default in the
payment of the principal of, premium (if any) or interest and Liquidated
Damages, if any, on, any Note, the Trustee may withhold such notice if and so
long as the board of directors, the executive committee or a trust committee of
Responsible Officers of the Trustee determines that the withholding of such
notice is not opposed to the interests of the Holders.

          (b) The Trustee shall not be required to take notice or be deemed to
have notice or knowledge of any event or of any Default (except default in the
payment of

                                       81



monies to the Trustee which are required to be paid to the Trustee on or before
a specified date or within a specified time after receipt by the Trustee of a
notice or a certificate which was in fact received), unless the Trustee shall
receive from either Issuer or a Holder a notice stating that the same has
occurred and is continuing, and specifying the same, and in the absence of such
notice the Trustee may conclusively assume that the same does not exist, except
as aforesaid.

          Section 7.3. Certain Rights of Trustees. Subject to the provisions of
Section 7.01:

                    (i) the Trustee may conclusively rely and shall be protected
          in acting or refraining from acting upon any resolution, certificate,
          statement, instrument, opinion, report, notice, request, direction,
          consent, order, bond, note, other evidence of indebtedness or other
          paper or document believed by it to be genuine and to have been signed
          or presented by the proper party or parties;

                    (ii) any request or direction of either Issuer mentioned
          herein shall be sufficiently evidenced by an Issuer Request or an
          Issuer Order thereof, and any resolution of any Person's board of
          directors (or any committee thereof) shall be sufficiently evidenced
          if certified by an Officer of such Person as having been duly adopted
          and being in full force and effect on the date of such certificate;

                    (iii) whenever in the administration of this Indenture the
          Trustee shall deem it desirable that a matter be proved or established
          prior to taking, suffering or omitting any action hereunder, the
          Trustee (unless other evidence be herein specifically prescribed) may,
          in the absence of bad faith on its part, rely upon the Officers'
          Certificates of the Issuers;

                    (iv) the Trustee may consult with counsel of its selection
          and the advice of such counsel or any Opinion of Counsel shall be full
          and complete authorization and protection in respect of any action
          taken, suffered or omitted by it hereunder in good faith and in
          reliance thereon;

                    (v) in case an Event of Default occurs and is continuing,
          the Trustee shall be under no obligation to exercise any of the rights
          or powers vested in it by this Indenture at the request or direction
          of any of the Holders pursuant to this Indenture, unless such Holders
          shall have offered to the Trustee security or indemnity satisfactory
          to it against any loss, liability or expense which might be incurred
          by it in compliance with such request or direction;

                    (vi) the Trustee shall not be bound to make any
          investigation into the facts or matters stated in any resolution,
          certificate, statement, instrument, opinion, report, notice, request,
          direction, consent, order, bond, note, other evidence of indebtedness
          or other paper or document, but the Trustee, in its discretion, may
          make such further inquiry or investigation into such facts or matters
          as it may see fit, and, if the Trustee shall determine to make such
          further inquiry or investigation, it shall be entitled to examine the
          books, records and premises of each Issuer, personally or by agent or
          attorney at the sole cost of such Issuer and

                                       82



          shall incur no liability or additional liability of any kind by reason
          of such inquiry or investigation;

                    (vii) the Trustee may execute any of the trusts or powers
          hereunder or perform any duties hereunder either directly or by or
          through agents or attorneys and the Trustee shall not be responsible
          for any misconduct or negligence on the part of any agent or attorney
          appointed with due care by it hereunder;

                    (viii) the rights, privileges, protections, immunities and
          benefits given to the Trustee, including, without limitation, its
          right to be indemnified, are extended to, and shall be enforceable by,
          the Trustee in each of its capacities hereunder, and to each agent,
          custodian and other Person employed to act hereunder; and

                    (ix) the Trustee may request that each Issuer deliver an
          Officers' Certificate setting forth the names of the individuals
          and/or titles of officers authorized at such time to take specified
          actions pursuant to this Indenture, which Officers' Certificate may be
          signed by any person authorized to sign an Officers' Certificate,
          including any person as so authorized in any such certificate
          previously delivered and not superseded.

          Section 7.4. Not Responsible for Recitals or Issuance of Notes. The
recitals contained herein and in the Notes, except the Trustee's certificates of
authentication, shall be taken as the statements of the Issuers, and neither the
Trustee nor any Authenticating Agent assumes any responsibility for their
correctness. The Trustee makes no representations as to the validity or
sufficiency of this Indenture or of the Notes, except that the Trustee
represents that it is duly authorized to execute and deliver this Indenture,
authenticate the Notes and perform its obligations hereunder and that the
statements made by it in a Statement of Eligibility on Form T-1 supplied to the
Issuers in connection with the registration of any Notes issued hereunder will
be true and accurate subject to the qualifications set forth therein. Neither
the Trustee nor any Authenticating Agent shall be accountable for the use or
application by the Issuers of the Notes or the proceeds thereof.

          Section 7.5. Trustee's Disclaimer. The Trustee makes no representation
as to the validity or adequacy of this Indenture or the Notes, it shall not be
accountable for the Issuers' use of the proceeds from the Notes, it shall not be
responsible for any statement in the offering memorandum for the Notes or in the
Indenture or the Notes (other than its certificate of authentication), the acts
of a prior Trustee hereunder, or the determination as to which beneficial owners
are entitled to receive any notices hereunder.

          Section 7.6. May Hold Notes. The Trustee, any Authenticating Agent,
any Paying Agent, any Registrar or any other agent of the Issuers, in its
individual or any other capacity, may become the owner or pledgee of Notes and,
subject to Section 7.09 and Section 7.14, may otherwise deal with the Issuers
and their Affiliates with the same rights it would have if it were not Trustee,
Authenticating Agent, Paying Agent, Registrar or such other agent.

          Section 7.7. Money Held in Trust. Money held by the Trustee in trust
hereunder need not be segregated from other funds except to the extent required
by law. The Trustee

                                       83



shall be under no liability for interest on any money received by it hereunder
except as otherwise agreed in writing with the Issuers.

          Section 7.8. Compensation and Reimbursement. Each Issuer, jointly and
severally, agrees:

          (a) to pay to the Trustee from time to time such compensation as the
Issuers and the Trustee shall from time to time agree in writing for all
services rendered by it hereunder (which compensation shall not be limited by
any provision of law in regard to the compensation of a trustee of an express
trust);

          (b) to reimburse the Trustee upon its request for all reasonable
expenses, disbursements and advances incurred or made by the Trustee in
accordance with any provision of this Indenture (including the reasonable
compensation and the expenses, advances and disbursements of its agents and
counsel), except any such expense, disbursement or advance as may be
attributable to its negligence or bad faith; and

          (c) to indemnify the Trustee and any predecessor Trustee for, and to
hold it harmless against, any loss, damage, claims, liability or expense
(including taxes, other than taxes based on the income of the Trustee) incurred
without negligence or bad faith on its part, arising out of or in connection
with the acceptance or administration of this trust, including the reasonable
costs and expenses of defending itself against any claim (whether asserted by
either Issuer, a Holder or any other person) or liability in connection with the
exercise or performance of any of its powers or duties hereunder.

          The Issuers' payment obligations pursuant to this Section 7.08 shall
survive the discharge of this Indenture. When the Trustee incurs expenses after
the occurrence of a Default specified in Section 6.01(7) or 6.01(8), the
expenses are intended to constitute expenses of administration under any
Bankruptcy Law.

          The Trustee shall have a lien prior to the Notes as to all property
and funds held by it hereunder for any amount owing it or any predecessor
Trustee pursuant to this Section 7.08, except with respect to funds held in
trust for the benefit of the Holders of particular Notes.

          Section 7.9. Conflicting Interests. If the Trustee has or shall
acquire a conflicting interest within the meaning of the TIA, within 90 days the
Trustee shall either eliminate such conflicting interest, apply to the SEC for
permission to continue as Trustee with such conflicting interest, or resign, to
the extent and in the manner provided by, and subject to the provisions of, the
TIA and this Indenture. To the extent permitted by such Act, the Trustee shall
not be deemed to have a conflicting interest by virtue of being a trustee under
this Indenture with respect to Original Notes and Additional Notes, or a trustee
under any other indenture between any Issuer and the Trustee.

          Section 7.10. Corporate Trustee Required; Eligibility. (a) There shall
at all times be one (and only one) Trustee hereunder. The Trustee shall be a
Person that is eligible pursuant to the TIA to act as such and has a combined
capital and surplus of at least $50,000,000. If any such Person publishes
reports of condition at least annually,

                                       84



pursuant to law or to the requirements of its supervising or examining
authority, then for the purposes of this Section 7.10 and to the extent
permitted by the TIA, the combined capital and surplus of such Person shall be
deemed to be its combined capital and surplus as set forth in its most recent
report of condition so published. If at any time the Trustee shall cease to be
eligible in accordance with the provisions of this Section 7.10, it shall resign
immediately in the manner and with the effect hereinafter specified in this
Article.

          Section 7.11. Resignation and Removal; Appointment of Successor. (a)
No resignation or removal of the Trustee and no appointment of a successor
Trustee pursuant to this Article shall become effective until the acceptance of
appointment by the successor Trustee in accordance with the applicable
requirements of Section 7.12.

          (b) The Trustee may resign at any time by giving written notice
thereof to the Issuers. If the instrument of acceptance by a successor Trustee
required by Section 7.12 shall not have been delivered to the Trustee within 30
days after the giving of such notice of resignation, the resigning Trustee may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.

          (c) The Trustee may be removed at any time by Act of the Holders of a
majority in principal amount of the Outstanding Notes, delivered to the Trustee
and to the Issuers. If the instrument of acceptance by a successor Trustee
required by Section 7.12 shall not have been delivered to the Trustee within 30
days after the giving of such notice of removal, the Trustee being removed may
petition any court of competent jurisdiction for the appointment of a successor
Trustee.

          If at any time:

                    (i) the Trustee shall fail to comply with Section 7.09 after
          written request therefor by the Issuers or by any Holder who has been
          a bona fide Holder for at least six months, or

                    (ii) the Trustee shall cease to be eligible under Section
          7.10 and shall fail to resign after written request therefor by the
          Issuers or by any such Holder, or

                    (iii) the Trustee shall become incapable of acting or shall
          be adjudged bankrupt or insolvent or a receiver of the Trustee or of
          its property shall be appointed or any public officer shall take
          charge or control of the Trustee or of its property or affairs for the
          purpose of rehabilitation, conservation or liquidation,

then, in any such case, (A) the Issuers may remove the Trustee, or (B) subject
to Section 6.11, any Holder who has been a bona fide Holder for at least six
months may, on behalf of itself and all others similarly situated, petition any
court of competent jurisdiction for the removal of the Trustee and the
appointment of a successor Trustee or Trustees.

          (d) If the Trustee shall resign, be removed or become incapable of
acting, or if a vacancy shall occur in the office of Trustee for any cause, the
Issuers shall promptly appoint a successor Trustee and shall comply with the
applicable requirements of Section 7.12. If, within one year after such
resignation, removal or incapability, or the occurrence

                                       85



of such vacancy, a successor Trustee shall be appointed by Act of the Holders of
a majority in principal amount of the Outstanding Notes delivered to the Issuers
and the retiring Trustee, the successor Trustee so appointed shall, forthwith
upon its acceptance of such appointment in accordance with the applicable
requirements of Section 7.12, become the successor Trustee and to that extent
supersede the successor Trustee appointed by the Issuers. If no successor
Trustee shall have been so appointed by the Issuers or the Holders and accepted
appointment in the manner required by Section 7.12, then, subject to Section
6.11, any Holder who has been a bona fide Holder for at least six months may, on
behalf of itself and all others similarly situated, petition any court of
competent jurisdiction for the appointment of a successor Trustee.

          (e) The Issuers shall give notice of each resignation and each removal
of the Trustee and each appointment of a successor Trustee to all Holders in the
manner provided in Section 1.10. Each notice shall include the name of the
successor Trustee and the address of its Corporate Trust Office.

          Section 7.12. Acceptance of Appointment by Successor. (a) In case of
the appointment hereunder of a successor Trustee, every such successor Trustee
so appointed shall execute, acknowledge and deliver to the Issuers and to the
retiring Trustee an instrument accepting such appointment, and thereupon the
resignation or removal of the retiring Trustee shall become effective and such
successor Trustee, without any further act, deed or conveyance, shall become
vested with all the rights, powers, trusts and duties of the retiring Trustee;
but, on the request of the Issuers or the successor Trustee, such retiring
Trustee shall, upon payment of its charges, execute and deliver an instrument
transferring to such successor Trustee all the rights, powers and trusts of the
retiring Trustee and shall duly assign, transfer and deliver to such successor
Trustee all property and money held by such retiring Trustee hereunder.

          (b) Upon request of any such successor Trustee, the Issuers shall
execute any and all instruments for more fully and certainly vesting in and
confirming to such successor Trustee all such rights, powers and trusts referred
to above.

          (c) No successor Trustee shall accept its appointment unless at the
time of such acceptance such successor Trustee shall be qualified and eligible
under this Article 7.

          Section 7.13. Merger, Conversion, Consolidation or Succession to
Business . (a) Any corporation into which the Trustee may be merged or converted
or with which it may be consolidated, or any corporation resulting from any
merger, conversion or consolidation to which the Trustee shall be a party, or
any corporation succeeding to all or substantially all the corporate trust
business of the Trustee, shall be the successor of the Trustee hereunder,
provided such corporation shall be otherwise qualified and eligible under this
Article 7, without the execution or filing of any paper or any further act on
the part of any of the parties hereto. In case any Notes shall have been
authenticated, but not delivered, by the Trustee then in office, any successor
by merger, conversion or consolidation to such authenticating Trustee may adopt
such authentication and deliver the Notes so authenticated with the same effect
as if such successor Trustee had itself authenticated such Notes.

                                       86



          Section 7.14. Preferential Collection of Claims Against the Issuers.
(a) If and when the Trustee shall be or become a creditor of either Issuer (or
any other obligor upon the Notes), the Trustee shall be subject to the
provisions of the TIA regarding the collection of claims against such Issuer (or
any such other obligor).

          Section 7.15. Appointment of Authenticating Agent. The Trustee may
appoint an Authenticating Agent acceptable to the Issuers to authenticate the
Notes. Any such appointment shall be evidenced by an instrument in writing
signed by a Responsible Officer, a copy of which instrument shall be promptly
furnished to the Issuers. Unless limited by the terms of such appointment, an
Authenticating Agent may authenticate Notes whenever the Trustee may do so. Each
reference in this Indenture to authentication (or execution of a certificate of
authentication) by the Trustee includes authentication (or execution of a
certificate of authentication) by such Authenticating Agent. An Authenticating
Agent has the same rights as any Registrar, Paying Agent or agent for service of
notices and demands.

                                    ARTICLE 8

              Holders' List and Reports by Trustee and the Issuers

          Section 8.1. The Issuers to Furnish Trustee Names and Addresses of
Holders; Stock Exchange Listing. (a) The Issuers will furnish or cause to be
furnished to the Trustee

                    (i) semi-annually, not more than 15 days after each Regular
          Record Date, a list, in such form as the Trustee may reasonably
          require, of the names and addresses of the Holders as of such Regular
          Record Date, and

                    (ii) at such other times as the Trustee may request in
          writing, within 30 days after the receipt by the Issuers of any such
          request, a list of similar form and content as of a date not more than
          15 days prior to the time such list is furnished;

provided, however, that if and so long as the Trustee shall be the Registrar, no
such list need be furnished pursuant to this Section 8.01.

          (b) The Issuers will promptly notify the Trustee when any Notes are
listed on any stock exchange and of any delisting thereof.

          Section 8.2. Preservation of Information; Communications to Holders.
(a) The Trustee shall preserve, in as current a form as is reasonably
practicable, the names and addresses of Holders contained in the most recent
list, if any, furnished to the Trustee as provided in Section 8.01 and the names
and addresses of Holders received by the Trustee in its capacity as Registrar;
provided, however, that if and so long as the Trustee shall be the Registrar,
the Register shall satisfy the requirements relating to such list. None of the
Issuers, the Trustee or any other Person shall be under any responsibility with
regard to the

                                       87



accuracy of such list. The Trustee may destroy any list furnished to it as
provided in Section 8.01 upon receipt of a new list so furnished.

          (b) The rights of Holders to communicate with other Holders with
respect to their rights under this Indenture or under the Notes, and the
corresponding rights and privileges of the Trustee, shall be as provided by the
TIA.

          (c) Every Holder, by receiving and holding the same, agrees with the
Issuers and the Trustee that neither the Issuers nor the Trustee nor any agent
of either of them shall be held accountable by reason of any disclosure of
information as to names and addresses of Holders made pursuant to the TIA.

          Section 8.3. Reports by Trustee. The Trustee shall transmit to Holders
such reports concerning the Trustee and its actions under this Indenture as may
be required pursuant to the TIA at the times and in the manner provided pursuant
thereto. If required by Section 313(a) of the TIA, the Trustee shall, within 60
days after each May 15, following the date of this Indenture deliver to Holders
a brief report, dated as of such May 15, which complies with the provisions of
such Section 313(a). A copy of each such report shall, at the time of such
transmission to Holders, be filed by the Trustee with each stock exchange, if
any, upon which any Notes are listed, with the SEC and with the Issuers.

                                    ARTICLE 9

                         Amendment, Supplement or Waiver

          Section 9.1. Without Consent of the Holders. (a) Without the consent
of any Holder, the Issuers and the Trustee may enter into one or more indentures
supplemental hereto, for any of the following purposes:

                    (i) to cure any ambiguity, omission, defect or inconsistency
          in the Indenture,

                    (ii) to provide for the assumption by a successor of an
          Issuer of the obligations of such Issuer under this Indenture,

                    (iii) to provide for uncertificated Notes in addition to or
          in place of certificated Notes; provided that the uncertificated Notes
          are issued in registered form for purposes of Section 163(f) of the
          Code, or in a manner such that the uncertificated Notes are described
          in Section 163(f)(2)(B) of the Code,

                    (iv) to add Subsidiary Guarantees with respect to the Notes,
          to grant a Lien under this Indenture to the Trustee as security for
          the Notes, to confirm and evidence the release, termination or
          discharge of any Subsidiary Guarantee or any such Lien with respect to
          or securing the Notes when such release, termination or discharge is
          permitted under this Indenture,

                                       88



                    (v) to add to the covenants of the Issuers for the benefit
          of the Holders or to surrender any right or power conferred upon the
          Issuers,

                    (vi) to provide for or confirm the issuance of Additional
          Notes or Additional Dividend Notes in accordance with the terms of the
          Indenture,

                    (vii) to make any change that does not adversely affect the
          rights of any Holder under the Notes or this Indenture, or

                    (viii) to comply with any requirement of the SEC in
          connection with the qualification of this Indenture under the TIA or
          otherwise.

          Section 9.2. With Consent of Holders. (a) Subject to Section 6.07, the
Issuers and the Trustee may amend or supplement this Indenture or the Notes with
the written consent of the Holders of not less than a majority in aggregate
principal amount of the Outstanding Notes, and any past Default or compliance
with any provisions may also be waived with the written consent of the Holders
of not less than a majority in aggregate principal amount of the Outstanding
Notes.

          (b) Notwithstanding the provisions of this Section 9.02, without the
consent of each Holder affected, an amendment or waiver, including a waiver
pursuant to Section 6.04, may not (with respect to any Notes held by a
non-consenting Holder):

                    (i) change the Stated Maturity of the principal of, or any
          installment of interest on, any Note (including any modification of
          Section 4.08 with respect to Additional Dividend Notes),

                    (ii) reduce the principal amount of or premium, if any, or
          interest or Liquidated Damages, if any, on any Note (including any
          modification of Section 4.08 with respect to Additional Dividend
          Notes),

                    (iii) reduce any amount payable on redemption of the Notes
          or upon the occurrence of an Event of Default or reduce the Change of
          Control Payment or the amount to be paid in connection with an Asset
          Sale Offer,

                    (iv) change the place or currency of payment of principal of
          or premium, if any, or interest or Liquidated Damages, if any, on any
          Note,

                    (v) impair the right to institute suit for the enforcement
          of any payment on or after the Stated Maturity (or, in the case of a
          redemption, on or after the Redemption Date) of any Note,

                    (vi) reduce the above-stated percentage of outstanding Notes
          the consent of whose Holders is necessary to modify or amend the
          Indenture,

                    (vii) waive a default in the payment of principal of or
          premium, if any, or interest or Liquidated Damages, if any, on the
          Notes (except as set forth in Section 6.04),

                                       89



                    (viii) reduce the percentage or aggregate principal amount
          of outstanding Notes the consent of whose Holders is necessary for
          waiver of compliance with provisions of the Indenture or for waiver of
          Defaults,

                    (ix) modify or change any provision of the Indenture
          affecting the ranking of the Notes or the Subsidiary Guarantees in a
          manner adverse to the Holders of the Notes, or

                    (x) release any Subsidiary Guarantor from any of its
          obligations under its Subsidiary Guarantee or the Indenture other than
          in accordance with the provisions of the Indenture, or amend or modify
          any provision relating to such release.

          (c) It shall not be necessary for the consent of the Holders under
this Section 9.02 to approve the particular form of any proposed amendment,
supplement or waiver, but it shall be sufficient if such consent approves the
substance thereof.

          (d) After an amendment, supplement or waiver under this Section 9.02
becomes effective, the Issuers shall mail to the Holders of each Note affected
thereby, with a copy to the Trustee, a notice briefly describing the amendment,
supplement or waiver. Any failure of the Issuers to mail such notice, or any
defect therein, shall not, however, in any way impair or affect the validity of
any supplemental indenture or the effectiveness of any such amendment,
supplement or waiver.

          Section 9.3. Execution of Amendments, Supplements or Waivers. The
Trustee shall sign any amendment, supplement or waiver authorized pursuant to
this Article 9 if the amendment, supplement or waiver does not adversely affect
the rights, duties, liabilities or immunities of the Trustee. If it does, the
Trustee may, but need not, sign it. In signing or refusing to sign such
amendment, supplement or waiver, the Trustee shall be entitled to receive, and
shall be fully protected in relying upon, an Officers' Certificate and an
Opinion of Counsel to the effect that the execution of such amendment,
supplement or waiver has been duly authorized, executed and delivered by each
Issuer and that such amendment, supplement or waiver is a valid and binding
agreement of each Issuer, enforceable against it in accordance with its terms
(subject to customary exceptions).

          Section 9.4. Revocation and Effect of Consents. (a) Until an
amendment, supplement or waiver becomes effective, a consent to it by a Holder
is a continuing consent by the Holder and every subsequent Holder of that Note
or any Note that evidences all or any part of the same debt as the consenting
Holder's Note, even if notation of the consent is not made on any Note. Subject
to the following paragraph of this Section 9.04, any such Holder or subsequent
Holder may revoke the consent as to such Holder's Note by notice to the Trustee
or the Issuers received by the Trustee or the Issuers, as the case may be,
before the date on which the Trustee receives an Officers' Certificate
certifying that the Holders of the requisite principal amount of Notes have
consented (and not theretofore revoked such consent) to the amendment,
supplement or waiver. The Issuers may, but shall not be obligated to, fix a
record date for the purpose of determining the Holders entitled to consent to
any amendment, supplement or waiver as set forth in Section 1.08.

                                       90



          (b) After an amendment, supplement or waiver becomes effective, it
shall bind every Holder, unless it makes a change described in any of clauses
(i) through (x) of Section 9.02(b). In that case, the amendment, supplement or
waiver shall bind each Holder of a Note who has consented to it and every
subsequent Holder of such Note or any Note that evidences all or any part of the
same debt as the consenting Holder's Note.

          Section 9.5. Conformity with TIA. Every amendment or supplemental
indenture executed pursuant to this Article shall conform to the requirements of
the TIA as then in effect.

          Section 9.6. Notation on or Exchange of Notes. If an amendment,
supplement or waiver changes the terms of a Note, the Trustee shall (if required
by the Issuers and in accordance with the specific direction of the Issuers)
request the Holder to deliver its Note to the Trustee. The Trustee shall (if
required by the Issuers and in accordance with the specific written direction of
the Issuers) place an appropriate notation on the Note about the changed terms
and return it to the Holder. Alternatively, if the Issuers or the Trustee so
determine, the Issuers in exchange for the Note shall issue and the Trustee
shall authenticate a new Note that reflects the changed terms. Failure to make
the appropriate notation or issue a new Note shall not affect the validity and
effect of such amendment, supplement or waiver.

                                   ARTICLE 10

                               Redemption of Notes

          Section 10.1. Right of Redemption. (a) Prior to May 1, 2007 the Notes
will be redeemable, in whole, at any time, or in part, from time to time, at the
option of the Issuers upon not less than 30 nor more than 60 days' notice at a
redemption price equal to the sum of:

                    (1) 100% of the principal amount thereof, plus accrued and
          unpaid interest and Liquidated Damages, if any, thereon to the
          redemption date; plus

                    (2) the Make-Whole Amount, if any.

          (b) On or after May 1, 2007, the Notes will be redeemable in whole, at
any time or in part, from time to time, at the option of the Issuers upon not
less than 30 nor more than 60 days' notice, at the redemption prices (expressed
as percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption date, if
redeemed during the twelve-month period beginning on May 1, of the following
years:

                                       91



Year                                                         Percentage
- ----                                                         ----------

2007                                                          105.313%
2008                                                          102.656%
2009 and thereafter                                           100.000%

          Section 10.2. Applicability of Article. Redemption or purchase of
Notes as permitted by Section 10.01 shall be made in accordance with this
Article 10.

          Section 10.3. Election to Redeem; Notice to Trustee. In case of any
redemption at the election of the Issuers of the Notes, the Issuers shall, at
least 45 days prior to the Redemption Date initially fixed by the Issuers
(unless a shorter notice shall be satisfactory to the Trustee), notify the
Trustee of such Redemption Date and of the principal amount of Notes to be
redeemed.

          Section 10.4. Selection by Trustee of Notes to Be Redeemed. In the
case of any partial redemption, selection of the Notes for redemption will be
made not more than 60 days prior to the Redemption Date by the Trustee in
compliance with the requirements of the principal national securities exchange,
if any, on which the Notes are listed or, if the Notes are not so listed, on a
pro rata basis, by lot or by such method as the applicable Trustee shall deem
fair and appropriate; provided that no Notes of $1,000 or less shall be redeemed
in part.

          (a) The Trustee shall promptly notify the Issuers in writing of the
Notes selected for redemption and, in the case of any Note selected for partial
redemption, the portion of the principal amount thereof to be redeemed. On and
after the Redemption Date, interest and Liquidated Damages will cease to accrue
on Notes or portions thereof called for redemption.

          (b) For all purposes of this Indenture, unless the context otherwise
requires, all provisions relating to the redemption of Notes shall relate, in
the case of any Note redeemed or to be redeemed only in part, to the portion of
the principal of such Note that has been or is to be redeemed.

          Section 10.5. Notice of Redemption. (a) Notice of redemption or
purchase as provided in Section 10.01 shall be deemed to have been given upon
the mailing by first class mail, postage prepaid, of such notice to each Holder
of Notes to be redeemed, at its registered address as recorded in the Register,
not later than 30 nor more than 60 days prior to the Redemption Date.

          Any such notice shall state:

                    (i) the expected Redemption Date,

                    (ii) the Redemption Price,

                                       92



                    (iii) if less than all Outstanding Notes are to be redeemed,
          the identification (and, in the case of partial redemption, the
          respective principal amounts) of the particular Notes to be redeemed,

                    (iv) that on the Redemption Date the Redemption Price will
          become due and payable upon each such Note to be redeemed, and that,
          unless the Issuers default in making such redemption payment or any
          Paying Agent is prohibited from making such payment pursuant to the
          terms of this Indenture, interest and Liquidated Damages thereon shall
          cease to accrue from and after said date,

                    (v) the place or places where such Notes are to be
          surrendered for payment of the Redemption Price and the name and
          address of the Paying Agent or Paying Agents,

                    (vi) the CUSIP and other security identification numbers, if
          any, subject to Section 3.12 hereof, and

                    (vii) the section of this Indenture pursuant to which the
          Notes are to be redeemed.

          Notices of redemption may not be conditional.

          (b) Notice of such redemption or purchase of Notes to be so redeemed
or purchased at the election of the Issuers shall be given by the Issuers or, at
the written request of the Issuers delivered at least five Business Days prior
to the date proposed for the mailing of such notice, by the Trustee in the name
and at the expense of the Issuers; provided that such notice to the Trustee may
be revoked by the Issuers by written notice delivered to the Trustee prior to
the date proposed for the mailing of the notice of such redemption to the
Holders.

          (c) The notice if mailed in the manner herein provided shall be
conclusively presumed to have been given, whether or not the Holder receives
such notice. In any case, failure to give such notice by mail or any defect in
the notice to the Holder of any Note designated for redemption as a whole or in
part shall not affect the validity of the proceedings for the redemption of any
other Note.

          Section 10.6. Deposit of Redemption Price. (a) On or prior to 10:00
a.m., New York City time on any Redemption Date, the Issuers shall deposit with
the Trustee or with a Paying Agent (or, if an Issuer is acting as the Paying
Agent, such Issuer shall segregate and hold in trust as provided in Section
4.03) an amount of money sufficient to pay the Redemption Price of, and any
accrued and unpaid interest and Liquidated Damages, if any, on, all the Notes or
portions thereof which are to be redeemed on that date.

          Section 10.7. Notes Payable on Redemption Date. (a) Notice of
redemption having been given as provided in this Article 10, the Notes so to be
redeemed shall, on the Redemption Date, become due and payable at the Redemption
Price herein specified and from and after such date (unless the Issuers shall
default in the payment of the Redemption Price or any Paying Agent is prohibited
from paying the Redemption Price pursuant to the

                                       93



terms of this Indenture) such Notes shall cease to bear interest and Liquidated
Damages. Upon surrender of such Notes for redemption in accordance with such
notice, such Notes shall be paid by the Issuers at the Redemption Price.
Installments of interest and Liquidated Damages, if any, whose Interest Payment
Date is on or prior to the Redemption Date shall be payable to the Holders of
such Notes registered as such on the relevant Regular Record Dates according to
their terms and the provisions of Section 3.07.

          (b) On and after any Redemption Date, if money sufficient to pay the
Redemption Price of and any accrued and unpaid interest and Liquidated Damages
on Notes called for redemption shall have been made available in accordance with
Section 10.06, the Notes (or the portions thereof) called for redemption will
cease to accrue interest and Liquidated Damages and the only right of the
Holders of such Notes (or portions thereof) will be to receive payment of the
Redemption Price of, and subject to the last sentence of Section 10.07(a), any
accrued and unpaid interest and Liquidated Damages, if any, on such Notes (or
portions thereof) to the Redemption Date. If any Note (or portion thereof)
called for redemption shall not be so paid upon surrender thereof for
redemption, the principal (and premium, if any) shall, until paid, bear interest
and Liquidated Damages from the Redemption Date at the rate borne by the Note
(or portion thereof).

          Section 10.8. Notes Redeemed in Part. Any Note that is to be redeemed
only in part shall be surrendered at a Place of Payment (with, if the Issuers or
the Trustee so requires, due endorsement by, or a written instrument of transfer
in form satisfactory to the Issuers and the Trustee duly executed by, the Holder
thereof or such Holder's attorney duly authorized in writing) and each Issuer
shall execute and the Trustee shall authenticate and deliver to the Holder of
such Note without service charge, a new Note or Notes, of any authorized
denomination as requested by such Holder in aggregate principal amount equal to
and in exchange for the unredeemed portion of the principal of the Note so
surrendered.

                                   ARTICLE 11

                           Satisfaction and Discharge

          Section 11.1. Satisfaction and Discharges of Indenture. (a) This
Indenture shall cease to be of further effect (except as to any surviving rights
of transfer or exchange of Notes herein provided for), and the Trustee, on
demand of and at the expense of the Issuers, shall execute proper instruments
acknowledging satisfaction and discharge of this Indenture, and each Subsidiary
Guarantor's obligations under its Subsidiary Guarantee will terminate when

          (i) either

                    (A) all Notes theretofore authenticated and delivered (other
          than (x) Notes that have been destroyed, lost or stolen and that have
          been replaced or

                                       94



          paid as provided in Section 3.06, and (y) Notes for whose payment
          money has theretofore been deposited in trust or segregated and held
          in trust by an Issuer and thereafter repaid to such Issuer or
          discharged from such trust, as provided in Section 4.03) have been
          delivered to the Trustee canceled or for cancellation; or

                    (B) all such Notes not theretofore delivered to the Trustee
          canceled or for cancellation

                    (x) have become due and payable, or

                    (y) will become due and payable

                    (z) are to be called for redemption within one year under
          arrangements reasonably satisfactory to the Trustee for the giving of
          notice of redemption by the Trustee in the name, and at the expense,
          of the Issuers,

          (ii) the Issuers have irrevocably deposited or caused to be deposited
with the Trustee an amount in United States dollars, U.S. Government
Obligations, or a combination thereof, sufficient to pay and discharge the
entire Indebtedness on such Notes not theretofore delivered to the Trustee
canceled or for cancellation, for principal (and premium, if any) and interest
and Liquidated Damages to the date of such deposit (in the case of Notes that
have become due and payable), or to the Stated Maturity or Redemption Date, as
the case may be;

          (iii) the Issuers have paid or caused to be paid all other sums then
payable hereunder by the Issuers; and

          (iv) each Issuer has delivered to the Trustee an Officers' Certificate
and an Opinion of Counsel each to the effect that all conditions precedent
provided for in this Section 11.01 relating to the satisfaction and discharge of
this Indenture have been complied with; provided that any such counsel may rely
on any Officers' Certificate as to matters of fact (including as to compliance
with the foregoing clauses (i), (ii) and (iii)).

          (b) Notwithstanding the satisfaction and discharge of this Indenture,
the obligations of the Issuers to the Trustee under Section 7.08 and, if money
shall have been deposited with the Trustee pursuant to clause (ii) of Section
11.01(a), the obligations of the Trustee under Section 11.02, shall survive.

          Section 11.2. Application of Trust Money. Subject to the provisions of
the last paragraph of Section 4.03, all money deposited with the Trustee
pursuant to Section 11.01 shall be held in trust and applied by it, in
accordance with the provisions of the Notes and this Indenture, to the payment,
either directly or through any Paying Agent (including either Issuer acting as
Paying Agent) as the Trustee may determine, to the Persons entitled thereto, of
the principal (and premium, if any) and interest and Liquidated Damages on the
Notes; but such money need not be segregated from other funds except to the
extent required by law.

                                       95



                                   ARTICLE 12

                       Defeasance and Covenant Defeasance

          Section 12.1. Option of the Issuers to Effect Defeasance or Covenant
Defeasance. The Issuers may at their option by a Board Resolution adopted by
each Issuer, at any time, elect to have either Section 12.02 or Section 12.03
applied to the Outstanding Notes upon compliance with the conditions set forth
below in this Article 12.

          Section 12.2. Legal Defeasance and Discharge. Upon the exercise by the
Issuers under Section 12.01 of the option applicable to this Section 12.02, the
Issuers shall be deemed to have been discharged from any and all Obligations
with respect to all Outstanding Notes (and any Subsidiary Guarantor will be
discharged from any and all Obligations in respect of its Subsidiary Guarantee)
on the date which is the 123rd day after the deposit referred to in Section
12.04(a); provided that all of the conditions set forth below are satisfied
(hereinafter, "Legal Defeasance"). For this purpose, such Legal Defeasance means
that the Issuers shall be deemed to have paid and discharged the entire
Indebtedness represented by the Outstanding Notes, which shall thereafter be
deemed to be "outstanding" only for the purposes of Section 12.05 hereof and the
other Sections of this Indenture referred to in clauses (i) and (ii) of this
Section 12.02, and to have satisfied all its other obligations under such Notes
and this Indenture (and the Trustee, on demand of and at the expense of the
Issuers, shall execute proper instruments acknowledging the same), except for
the following provisions which shall survive until otherwise terminated or
discharged hereunder: (i) the rights of Holders of Outstanding Notes to receive
solely from the trust fund described in Section 12.04 hereof, and as more fully
set forth in such Section, payments in respect of the principal of, premium, if
any, and interest and Liquidated Damages on such Notes when such payments are
due, (ii) the obligations of the Issuers with respect to such Notes under
Sections 1.06, 2.03, 3.03, 3.04, 3.05, 3.06, 3.13, 3.14, 4.01, 4.02, 4.03 and
12.05 hereof, (iii) the rights, powers, trusts, duties and immunities of the
Trustee hereunder, including, without limitation, the Trustee's rights under
Section 7.08 hereof, and the obligations of the Issuers in connection therewith
and with this Article 12. Subject to compliance with this Article 12, the
Issuers may exercise their option under this Section 12.02 notwithstanding the
prior exercise of their option under Section 12.03 hereof with respect to the
Notes.

          Section 12.3. Covenant Defeasance. Upon the exercise by the Issuers
under Section 12.01 of the option applicable to this Section 12.03, the Issuers
shall be released from their obligations under the covenants contained in
Sections 4.06 through Section 4.17, Section 4.22 and Section 5.01(a)(iii) hereof
with respect to the Outstanding Notes, no Default under Section 6.01(5), (6) and
(9) shall thereafter constitute a Default or Event of Default and each
Subsidiary Guarantor's obligations under its Subsidiary Guarantee will terminate
on the date which is the 123rd day after the deposit referred to in Section
12.04(a); provided that all of the conditions set forth below are satisfied
(hereinafter, "Covenant Defeasance"), and the Notes shall thereafter be deemed
not Outstanding for the purposes of any direction, waiver, consent or
declaration or act of Holders (and the

                                       96



consequences of any thereof) in connection with such covenants, but shall
continue to be deemed Outstanding for all other purposes hereunder. For this
purpose, such Covenant Defeasance means that, with respect to the Outstanding
Notes, the Issuers may omit to comply with and shall have no liability in
respect of any term, condition or limitation set forth in any such covenant,
whether directly or indirectly, by reason of any reference elsewhere herein to
any such covenant or by reason of any reference in any such covenant to any
other provision herein or in any other document and such omission to comply
shall not constitute a Default or an Event of Default under Section 6.01(3) or
(4), but, except as specified above, the remainder of this Indenture and such
Notes shall be unaffected thereby.

          Section 12.4. Conditions to Legal or Covenant Defeasance. The
following shall be the conditions to application of either Section 12.02 or
Section 12.03 to the Outstanding Notes:

          (a) the Issuers have deposited with the Trustee, in trust, money
and/or U.S. Government Obligations that through the payment of interest and
principal in respect thereof in accordance with their terms will provide money
in an amount sufficient, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee, to pay (i) the principal of, premium, if any, and
accrued interest and Liquidated Damages, if any, on the Notes when such payments
are due in accordance with the terms of this Indenture and the Notes or (ii) in
the case of Legal Defeasance, accrued interest and Liquidated Damages, if any,
on the Notes through a scheduled redemption date and the principal of, and
premium on the Notes on such redemption date; provided that, at the time of
deposit, the Issuers irrevocably authorize the Trustee to issue a timely notice
of redemption and to take such other steps reasonably requested by the Trustee
to ensure that such redemption will be effectuated;

          (b) in the case of an election under Section 12.02, each Issuer will
have delivered to the Trustee (i) either (x) an Opinion of Counsel to the effect
that Holders will not recognize income, gain or loss for Federal income tax
purposes as a result of the exercise by the Issuers of its option under this
Article 12 and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit, defeasance and discharge had not occurred, which Opinion of Counsel
must be based upon (and accompanied by a copy of) a ruling of the Internal
Revenue Service to the same effect unless there has been a change in applicable
Federal income tax law after the date of this Indenture such that a ruling is no
longer required or (y) a ruling directed to the Trustee received from the
Internal Revenue Service to the same effect as the aforementioned Opinion of
Counsel and (ii) an Opinion of Counsel to the effect that, as a result of the
creation of the defeasance trust, such Issuer will not be required to register
under the Investment Company Act of 1940 and after the passage of 123 days
following the deposit, the trust fund will not be subject to the effect of
Section 547 of the United States Bankruptcy Code or Section 15 of the New York
Debtor and Creditor Law or any comparable provision of applicable law;

                                       97



          (c) in the case of an election under Section 12.03, the delivery by
each Issuer to the Trustee of (i) an Opinion of Counsel to the effect that,
among other things, the Holders will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the same times as would have been the case if such deposit and defeasance had
not occurred and (ii) an Opinion of Counsel to the effect that, as a result of
the creation of the defeasance trust, such Issuer will not be required to
register under the Investment Company Act of 1940 and after the passage of 123
days following the deposit, the trust fund will not be subject to the effect of
Section 547 of the United States Bankruptcy Code or Section 15 of the New York
Debtor and Creditor Law or any comparable provision of applicable law;

          (d) immediately after giving effect to such deposit on a pro forma
basis, no Event of Default, or event that after the giving of notice or lapse of
time or both would become an Event of Default, shall have occurred and be
continuing on the date of such deposit or during the period ending on the 123rd
day after the date of such deposit, and such deposit shall not result in a
breach or violation of, or constitute a default under, any other agreement or
instrument to which either Issuer is a party or by which either Issuer is bound;

          (e) if at such time the Notes are listed on a national securities
exchange, the Issuers have delivered to the Trustee an Opinion of Counsel to the
effect that the Notes will not be delisted as a result of such deposit,
defeasance and discharge;

          (f) each Issuer shall have delivered to the Trustee an Officers'
Certificate stating that the deposit made by the Issuers pursuant to their
election under Sections 12.02 or 12.03 was not made by the Issuers with the
intent of preferring the Holders over the other creditors of either Issuer with
the intent of defeating, hindering, delaying or defrauding creditors of either
Issuer or others; and

          (g) each Issuer shall have delivered to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent provided for relating to either the Legal Defeasance under Section
12.02 or the Covenant Defeasance under Section 12.03 (as the case may be) have
been complied with as contemplated by this Section 12.04.

          Section 12.5. Deposited Money and Government Securities to Be Held in
Trust; Other Miscellaneous Provisions. Subject to Section 12.06, all money and
U.S. Government Obligations (including the proceeds thereof) deposited with the
Trustee pursuant to Section 12.04 in respect of the Outstanding Notes shall be
held in trust and applied by the Trustee, in accordance with the provisions of
such Notes and this Indenture, to the payment, either directly or through any
Paying Agent (including either Issuer acting as Paying Agent) as the Trustee may
determine, to the Holders of such Notes of all sums due and to become due
thereon in respect of principal of, premium, if any, and interest and Liquidated
Damages, but such money need not be segregated from other funds except to the
extent required by law.

                                       98



          The Issuers shall pay and indemnify the Trustee against any tax, fee
or other charge imposed on or assessed against the money or U.S. Government
Obligations deposited pursuant to Section 12.04 hereof or the principal and
interest received in respect thereof other than any such tax, fee or other
charge which by law is for the account of the Holders of the Outstanding Notes.

          Anything in this Article 12 to the contrary notwithstanding, the
Trustee shall deliver or pay to the Issuers from time to time upon the request
of the Issuers any money or U.S. Government Obligations held by it as provided
in Section 12.04 hereof which, in the opinion of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee (which may be the opinion delivered under Section
12.04(a) hereof), are in excess of the amount thereof which would then be
required to be deposited to effect an equivalent Legal Defeasance or Covenant
Defeasance.

          Section 12.6. Repayment to Issuers. Any money deposited with the
Trustee or any Paying Agent, or then held by either Issuer, in trust for the
payment of the principal of, premium, if any, or interest and Liquidated Damages
on any Note and remaining unclaimed for two years after such principal, premium,
if any, or interest and Liquidated Damages has become due and payable shall be
paid to the Issuers on its written request or (if then held by either Issuer)
shall be discharged from such trust; and the Holder of such Note shall
thereafter, as an unsecured general creditor, look only to the Issuers for
payment thereof, and all liability of the Trustee or such Paying Agent with
respect to such trust money, and all liability of either Issuer as trustee
thereof, shall thereupon cease; provided, however, that the Trustee or such
Paying Agent, before being required to make any such repayment, shall at the
expense of the Issuers cause to be published once, in The New York Times and The
Wall Street Journal (national edition), notice that such money remains unclaimed
and that, after a date specified therein, which shall not be less than 30 days
from the date of such notification or publication, any unclaimed balance of such
money then remaining will be repaid to the Issuers.

          Section 12.7. Reinstatement. If the Trustee or Paying Agent is unable
to apply any money or U.S. Government Obligations in accordance with Section
12.02 or 12.03, as the case may be, by reason of any order or judgment of any
court or governmental authority enjoining, restraining or otherwise prohibiting
such application, then the obligations of the Issuers under this Indenture and
the Notes shall be revived and reinstated as though no deposit had occurred
pursuant to Section 12.02 or 12.03 until such time as the Trustee or Paying
Agent is permitted to apply all such amounts in accordance with Section 12.02 or
12.03 hereof, as the case may be; provided, however, that, if either Issuer
makes any payment of principal of, premium, if any, or interest and Liquidated
Damages on any Note following the reinstatement of its Obligations, such Issuer
shall be subrogated to the rights of the Holder of such Note to receive such
payment from the amounts held by the Trustee or Paying Agent.

                                       99



                                   ARTICLE 13

                              Subsidiary Guarantees

          Section 13.1. The Guarantees. Subject to the provisions of this
Article 13, each Subsidiary Guarantor by execution of a supplemental indenture
in the form of Exhibit B hereto hereby irrevocably and unconditionally
guarantees, jointly and severally, the full and punctual payment (whether at
Stated Maturity, upon acceleration, optional redemption, upon repurchase
following a Change of Control Offer or an Asset Sale Offer or otherwise) of the
principal of and premium, if any, and interest and Liquidated Damages, if any,
on, and all other amounts payable under, each Note provided for under this
Indenture, and the full and punctual payment of all other amounts payable by the
Issuers under this Indenture. Upon failure by the Issuers to pay punctually any
such amount, each Subsidiary Guarantor shall forthwith on demand pay the amount
not so paid at the place and in the manner specified in this Indenture.

          Section 13.2. Guarantee Unconditional. The obligations of the
Subsidiary Guarantors hereunder shall be unconditional and absolute and, without
limiting the generality of the foregoing, shall, to the fullest extent permitted
by law, not be released, discharged or otherwise affected by:

          (a) any extension, renewal, settlement, compromise, waiver or release
in respect of any obligation of the Issuers under this Indenture or any Note, by
operation of law or otherwise;

          (b) any modification or amendment of or supplement to this Indenture
or any Note;

          (c) any release, impairment, non-perfection or invalidity of any
direct or indirect security for any obligation of any Issuer or any Subsidiary
Guarantor hereunder;

          (d) any change in the corporate existence, structure or ownership of
either Issuers, or any insolvency, bankruptcy, reorganization or other similar
proceeding affecting either Issuer or its assets or any resulting release or
discharge of any obligation of either Issuer contained in this Indenture or any
Note;

          (e) the existence of any claim, set-off or other rights which the
Subsidiary Guarantors may have at any time against either Issuer, the Trustee or
any other Person, whether in connection with this Indenture or any unrelated
transactions, provided that nothing herein shall prevent the assertion of any
such claim by separate suit or compulsory counterclaim;

          (f) any invalidity or unenforceability relating to or against either
Issuer for any reason of this Indenture or any Note, or any provision of
applicable law or regulation purporting to prohibit the payment by either Issuer
of the principal of or interest and Liquidated Damages on any Note or any other
amount payable by either Issuer under this Indenture; or

                                      100



          (g) any other act or omission to act or delay of any kind by either
Issuer, the Trustee or any other Person or any other circumstance whatsoever
which might, but for the provisions of this paragraph, constitute a legal or
equitable discharge of or defense to such Subsidiary Guarantor's obligations
hereunder.

          Section 13.3. Discharge; Reinstatement. The Subsidiary Guarantors'
obligations hereunder shall remain in full force and effect until the principal
of, premium, if any, and interest and Liquidated Damages, if any, on the Notes
and all other amounts payable by the Issuers under this Indenture shall have
been paid in full. If at any time any payment of the principal of, premium, if
any, or interest and Liquidated Damages, if any, on any Note or any other amount
payable by the Issuers under this Indenture is rescinded or must be otherwise
restored or returned upon the insolvency, bankruptcy or reorganization of either
Issuer or otherwise, the Subsidiary Guarantors' obligations hereunder with
respect to such payment shall be reinstated as though such payment had been due
but not made at such time.

          Section 13.4. Waiver by the Subsidiary Guarantors. The Subsidiary
Guarantors irrevocably waive acceptance hereof, presentment, demand, protest and
any notice not provided for herein, as well as any requirement that at any time
any action be taken by any Person against either Issuer or any other Person.

          Section 13.5. Subrogation and Contribution. Upon making any payment
with respect to any obligation of the Issuers under this Article 13, the
Subsidiary Guarantor making such payment shall be subrogated to the rights of
the payee against the Issuers with respect to such obligation; provided that
such Subsidiary Guarantor shall not enforce either (i) any right to receive
payment by way of subrogation against the Issuers or against any direct or
indirect security for such obligation, or any other right to be reimbursed,
indemnified or exonerated by or for the account of the Issuers in respect
thereof or (ii) any right to receive payment, in the nature of contribution or
for any other reason, from any other Subsidiary Guarantor with respect to such
payment, in each case so long as any amount payable by the Issuers hereunder or
under the Notes remains unpaid.

          Section 13.6. Stay of Acceleration. If acceleration of the time for
payment of any amount payable by either Issuer under this Indenture or the Notes
is stayed upon the insolvency, bankruptcy or reorganization of such Issuer, all
such amounts otherwise subject to acceleration under the terms of this Indenture
shall nonetheless be payable by the other Issuer and the Subsidiary Guarantors
hereunder forthwith on demand by the Trustee or the Holders.

          Section 13.7. Limits of Guarantees. Notwithstanding anything to the
contrary in this Article 13, each Subsidiary Guarantor, and by its acceptance of
Notes, each Holder, hereby confirms that it is the intention of all such parties
that the Subsidiary Guarantee of such Guarantor not constitute a fraudulent
conveyance under applicable fraudulent conveyance provisions of the United
States Bankruptcy Code or any comparable provision of state law. To effectuate
the foregoing intention, the Trustee, the Holders and the Subsidiary Guarantors
hereby irrevocably agree that the obligations of such Subsidiary Guarantor under
its Subsidiary Guarantee and this Article 13 shall be limited to the

                                      101



maximum amount that would not render such Subsidiary Guarantor's obligations
subject to avoidance under applicable fraudulent conveyance provisions of the
United States Bankruptcy Code or any comparable provision of state law.

          Section 13.8. Execution and Delivery of Subsidiary Guarantee. To
evidence its Subsidiary Guarantee set forth in Section 13.01, each Subsidiary
Guarantor hereby agrees that a supplemental indenture in the form of Exhibit B
hereto shall be executed on behalf of such Subsidiary Guarantor by one of its
Officers.

          The signature of an Officer of a Subsidiary Guarantor on such
supplemental indenture shall bind such Subsidiary Guarantor, notwithstanding
that such individual has ceased to hold such office prior to the authentication
and delivery of any Note or did not hold such office at the date of such Note.

          The delivery of any Note by the Trustee, after the authentication
thereof hereunder, shall constitute due delivery of the Subsidiary Guarantee set
forth in this Indenture on behalf of the Subsidiary Guarantors.

          Section 13.9. Release of Guarantee. The Subsidiary Guarantee of a
Subsidiary Guarantor will terminate upon

                    (1) a sale or other disposition (including by way of
          consolidation or merger) of the Subsidiary Guarantor or the sale or
          disposition of all or substantially all the assets of the Subsidiary
          Guarantor (in each case other than to the Company or a Restricted
          Subsidiary) otherwise permitted by the Indenture,

                    (2) the cessation of the circumstances requiring the
          Subsidiary Guarantee,

                    (3) the designation in accordance with the Indenture of the
          Subsidiary Guarantor as an Unrestricted Subsidiary, or

                    (4) defeasance or discharge of the Notes, as provided in
          Article 11 or Article 12.

          Upon delivery by the Issuers to the Trustee of an Officers'
Certificate and an Opinion of Counsel to the foregoing effect, the Trustee will
execute any documents reasonably required in order to evidence the release of
the Subsidiary Guarantor from its obligations under its Subsidiary Guarantee.

          Section 13.10. Consolidation, Merger or Sale of Assets by a Subsidiary
Guarantor. No Subsidiary Guarantor may

                    (i) consolidate with or merge with or into any Person, or

                    (ii) sell, convey, transfer or dispose of, all or
          substantially all its assets as an entirety or substantially as an
          entirety, in one transaction or a series of related transactions, to
          any Person, or

                                      102



                    (iii) permit any Person to merge with or into the Subsidiary
          Guarantor

          unless

                         (A) the other Person is the Company or any Wholly
               Owned Restricted Subsidiary of the Company that is a
               Subsidiary Guarantor or becomes a Subsidiary Guarantor
               concurrently with the transaction; or

                    (B) (1) either (x) the Subsidiary Guarantor is the
                    continuing Person or (y) the resulting, surviving or
                    transferee Person expressly assumes by supplemental
                    indenture all of the obligations of the Subsidiary Guarantor
                    under its Subsidiary Guarantee; and

                         (2) immediately after giving effect to the transaction,
                    no Default has occurred and is continuing; or

                         (C) the transaction constitutes a sale or other
               disposition (including by way of consolidation or merger) of
               the Subsidiary Guarantor or the sale or disposition of all
               or substantially all the assets of the Subsidiary Guarantor
               (in each case other than to the Company or a Restricted
               Subsidiary) otherwise permitted by the Indenture.

                                      103



          IN WITNESS WHEREOF, the parties hereto have caused this Indenture to
be duly executed, all as of the date first written above.

                                        EQUISTAR CHEMICALS, LP


                                        By: /s/ Karen A. Twitchell
                                            ------------------------------------
                                            Name: Karen A. Twitchell
                                            Title: Principal Financial Officer


                                        EQUISTAR FUNDING CORPORATION


                                        By: /s/ Charles L. Hall
                                            ------------------------------------
                                            Name: Charles L. Hall
                                            Title: Vice President and Controller


                                            THE BANK OF NEW YORK,
                                            as Trustee


                                            By: /s/ Van K. Brown
                                                --------------------------------
                                                Name: Van K. Brown
                                                Title: Vice President



                                                                       EXHIBIT A

                                 [FORM OF NOTE]

                             EQUISTAR CHEMICALS, LP.

                          EQUISTAR FUNDING CORPORATION

                            10 % Senior Note due 2011
                              -
No.                                                         CUSIP No.
   --------                                                           ----------

                                                                   $
                                                                    ------------

     EQUISTAR CHEMICALS, LP, a Delaware limited partnership (the "Company",
which term includes any successor Persons under the Indenture hereinafter
referred to) and EQUISTAR FUNDING CORPORATION, a Delaware corporation ("Equistar
Funding", which term includes any successor Persons under the Indenture, and,
together with the Company, the "Issuers"), for value received jointly and
severally promise to pay to            , or its registered assigns, the
                            -----------
principal sum of                                    Dollars ($___________) [or
                 ----------------------------------
such other amount as indicated on the Schedule of Exchanges of Securities
attached hereto]1, on [ ], 2011.

Interest Rate:            10 % per annum.
                            -

Interest Payment Dates:   May 1 and November 1 of each year commencing November
                          1, 2003.

Regular Record Dates:     April 15 and October 15 of each year.

     Reference is hereby made to the further provisions of this Note set forth
on the reverse hereof, which further provisions shall for all purposes have the
same effect as if set forth at this place.

- ----------
/1/  To be included in any Global Note

                                      A-1



         IN WITNESS WHEREOF, each Issuer has caused this Note to be signed
manually or by facsimile by its duly authorized officers.

                                            EQUISTAR CHEMICALS, LP


By:
   -----------------------------------
                                               Name:

                                               Title:


                                            By:
                                               ---------------------------------
                                               Name:

                                               Title:


                                            EQUISTAR FUNDING CORPORATION


By:
   -----------------------------------

                                               Name:

                                               Title:


                                            By:
                                               ---------------------------------
                                               Name:

                                               Title:

                                      A-2



                (Form of Trustee's Certificate of Authentication)

     This is one of the 10 % Senior Notes due 2011 referred to in the
                          -
within-mentioned Indenture.

                                            THE BANK OF NEW YORK,
                                            as Trustee


Dated:                                      By:
       ---------------------                   ---------------------------------
                                               Authorized Signatory

                                      A-3



                             [REVERSE SIDE OF NOTE]

                             EQUISTAR CHEMICALS, LP

                          EQUISTAR FUNDING CORPORATION

                            10 % Senior Note due 2011
                              -

     (1) Principal and Interest. The Issuers, jointly and severally, agree to
pay the principal of this Note on May 1, 2011.

     The Issuers jointly and severally agree to pay interest on the principal
amount of this Note on each Interest Payment Date, as set forth below, at the
rate of 101/8% per annum.

     Interest will be payable semi-annually (to the Holders of record of the
Notes (or any predecessor Notes) at the close of business on the Regular Record
Date immediately preceding the Interest Payment Date) on each Interest Payment
Date, commencing November 1, 2003.

     [The Holder of this Note is entitled to the benefits of the Registration
Rights Agreement, dated April 22, 2003, among the Issuers and the Initial
Purchasers named therein (the "Registration Rights Agreement"). Generally, in
the event that (i) the Issuers fail to file an Exchange Offer Registration
Statement with the SEC on or prior to the 90th day after the Issue Date, (ii) if
the Exchange Offer Registration Statement is not declared effective by the SEC
on or prior to the 210th day after the Issue Date, (iii) if the Exchange Offer
is not consummated on or before the 30th business day after the Exchange Offer
Registration Statement is declared effective, (iv) the Issuers are obligated to
file the Shelf Registration Statement and fail to file the Shelf Registration
Statement with the SEC on or prior to the 90th day after such filing obligation
arises, (v) the Issuers are obligated to file a Shelf Registration Statement and
the Shelf Registration Statement is not declared effective on or prior to the
120th day after the deadline to file a Shelf Registration Statement pursuant to
clause (iv) above, or (vi) if the Exchange Offer Registration Statement or the
Shelf Registration Statement, as the case may be, is declared effective but
thereafter ceases to be effective or useable in connection with resales of the
Notes during the periods specified in the Registration Rights Agreement, for
such time of non-effectiveness or non-usability (each, a "Registration
Default"), the Issuers, jointly and severally, agree to pay to the Holder of
this Note, if affected thereby, liquidated damages ("Liquidated Damages") in an
amount equal to $0.05 per week per $1,000 in principal amount of this Note for
each week or portion thereof that the Registration Default continues for the
first 90 day period immediately following the occurrence of such Registration
Default. The amount of the Liquidated Damages shall increase by an additional
$0.05 per week per $1,000 in principal amount of Notes with respect to each
subsequent 90 day period until all Registration Defaults have been cured, up to
a maximum amount of Liquidated Damages of $0.25 per week per $1,000 in principal
amount of Notes. The Issuers shall not be required to pay Liquidated Damages for
more

                                      A-4



than one Registration Default at any given time. Following the cure of all
Registration Defaults, the accrual of Liquidated Damages will cease. All
Liquidated Damages shall be paid in the same manner and at the same time as the
payment of interest thereon].2

     Interest on this Note will accrue from the most recent date to which
interest has been paid on this Note [or the Note surrendered in exchange
herefor] or, if no interest has been paid, from April 22, 2003; provided that,
if there is no existing default in the payment of interest and if this Note is
authenticated between a Regular Record Date referred to on the face hereof and
the next succeeding Interest Payment Date, interest shall accrue from such
Interest Payment Date. Interest will be computed on the basis of a 360-day year
of twelve 30-day months.

     Under certain circumstances set forth in the Indenture, if the Company
makes any Permitted Dividend, the Issuers will be required to pay additional
interest on this Note to the holder of record on the applicable Notice Date.
Such interest shall be payable on the date of such Permitted Dividend and in an
amount equal to the Additional Interest Amount, and shall be payable in the form
of an additional note (an "Additional Dividend Note") that is identical in all
respects to this Note.

     The Issuers shall pay interest on overdue principal and premium, if any,
and interest on overdue installments of interest (including interest paid in the
form of Additional Dividend Notes) and Liquidated Damages, to the extent lawful,
at a rate per annum equal to 1% per annum in excess of the rate of interest
applicable to the Notes.

     (2) Method of Payment. The Issuers will pay interest (except defaulted
interest) on the principal amount of the Notes on each May 1 and November 1 to
the Persons who are Holders (as reflected in the Register at the close of
business on the April 15 and October 15 immediately preceding the Interest
Payment Date), in each case, even if the Note is canceled on registration of
transfer or registration of exchange after such Regular Record Date; provided
that, with respect to the payment of principal, the Issuers will make payment to
the Holder that surrenders this Note to any Paying Agent on or after May, 2011.

     The Issuers will pay principal, premium, if any, and interest and
Liquidated Damages, if any, in money of the United States that at the time of
payment is legal tender for payment of public and private debts (other than
interest payable in the form of Additional Dividend Notes). Payments (including
principal, premium, if any, and interest and Liquidated Damages, if any) in
respect of the Notes represented by the Global Notes, the Holders of which have
given wire transfer instructions on or prior to the relevant record date, shall
be made by wire transfer of immediately available funds to the accounts
specified by the Global Note Holder. With respect to Physical Notes, the Issuers
will make all payments of principal, premium, if any, and interest and
Liquidated Damages, if any, at

- ----------
     /2/  Include only for Initial Note(and Additional Dividend Notes issued in
          respect thereof).

                                      A-5



the office or agency maintained by the Issuers for such purposes in The City of
New York or, at the Issuers's option, by mailing a check to each such Holder's
registered address. If a payment date is a date other than a Business Day,
payment may be made at that place on the next succeeding day that is a Business
Day and no interest shall accrue on such accrued interest for the intervening
period.

     (3) Paying Agent and Registrar. Initially, the Trustee will act as Paying
Agent and Registrar. The Issuers may change any Paying Agent or Registrar upon
written notice thereto. The Company, Equistar Funding or any Affiliate of any of
them may act as Paying Agent, Registrar or co-registrar.

     (4) Indenture; Limitations. The Issuers issued the Notes under an Indenture
dated as of April 22, 2003 (the "Indenture"), among the Issuers and The Bank of
New York, as trustee (the "Trustee"). Capitalized terms herein are used as
defined in the Indenture unless otherwise indicated. The terms of the Notes
include those stated in the Indenture and those made part of the Indenture by
reference to the Trust Indenture Act of 1939 (the "TIA"). The Notes are subject
to all such terms, and Holders are referred to the Indenture and the TIA for a
statement of all such terms. To the extent permitted by applicable law, in the
event of any inconsistency between the terms of this Note and the terms of the
Indenture, the terms of the Indenture shall control.

     The Notes are senior unsecured obligations of the Issuers. The Indenture
limits the initial aggregate principal amount of the Notes to $450,000,000 but
permits the issuance of Additional Notes and Additional Dividend Notes subject
to compliance with the covenants contained in the Indenture.

     (5) Optional Redemption. Prior to May 1, 2007, the Notes will be
redeemable, in whole, at any time, or in part, from time to time, at the option
of the Issuers upon not less than 30 nor more than 60 days' notice at a
redemption price equal to the sum of 100% of the principal amount thereof, plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
redemption date and the Make-Whole Amount (as defined in the Indenture).

     On or after May 1, 2007, the Notes will be redeemable in whole, at any time
or in part, from time to time, at the option of the Issuers upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued and unpaid
interest and Liquidated Damages, if any, thereon to the redemption date, if
redeemed during the twelve-month period beginning on May 1, of the following
years:

Year                  Percentage
- -------------------   ----------

2007                   105.313%
2008                   102.656%
2009 and thereafter    100.000%

     If less than all the Notes are to be redeemed at any time, selection of
Notes for redemption will be made by the Trustee in compliance with the
requirements of the

                                      A-6



principal national securities exchange, if any, on which the Notes are listed
or, if the Notes are not so listed, on a pro rata basis, by lot or by such
method as the Trustee shall deem fair and appropriate; provided that no Notes of
$1,000 or less shall be redeemed in part.

     Notices of redemption shall be mailed by first class mail at least 30 but
not more than 60 days before the redemption date to each Holder of Notes to be
redeemed at its registered address. Notices of redemption may not be
conditional. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. Notes called for redemption become due on the
date fixed for redemption. On and after the redemption date, interest and
Liquidated Damages, if any, cease to accrue on Notes or portions of them called
for redemption (unless the Issuers fail to redeem such Notes).

     (6) Repurchase upon a Change in Control and Sale of Assets. Upon the
occurrence of (a) a Change in Control, each Holder shall have the right to
require that the Issuers repurchase such Holder's Notes at a purchase price in
cash equal to 101% of the principal amount thereof on the date of purchase, plus
accrued and unpaid interest and Liquidated Damages, if any, to the date of
purchase and (b) an Asset Sale, the Issuers may be obligated to make an offer to
purchase on a pro rata basis from the Holders the Notes with the Excess Proceeds
of such Asset Sales at a purchase price equal to 100% of the principal amount of
such Notes plus accrued interest and Liquidated Damages, if any, to the date of
purchase.

     (7) Denominations; Transfer; Exchange. The Notes are in fully registered
form without coupons, in denominations of $1,000 and any integral multiples of
$1,000. A Holder may register the transfer or exchange of Notes in accordance
with the Indenture. The Registrar may require a Holder, among other things, to
furnish appropriate endorsements and transfer documents and to pay any taxes and
fees required by law or permitted by the Indenture.

     (8) Persons Deemed Owners. A Holder may be treated as the owner of a Note
for all purposes.

     (9) Unclaimed Money. If money for the payment of principal, premium, if
any, or interest and Liquidated Damages, if any, remains unclaimed for two
years, the Trustee and the Paying Agent will pay the money back to the Issuers
at their written request. After that, Holders entitled to the money must look to
the Issuers for payment, unless an abandoned property law designates another
Person, and all liability of the Trustee and such Paying Agent with respect to
such money shall cease.

     (10) Discharge Prior to Redemption or Maturity. If either Issuer
irrevocably deposits, or causes to be deposited, with the Trustee money or U.S.
Government Obligations sufficient to pay the then outstanding principal of and
premium, if any, and accrued interest and Liquidated Damages on the Notes (a) to
redemption or maturity, the Issuers will be discharged from the Indenture and
the Notes, except in certain

                                      A-7



circumstances for certain sections thereof, or (b) to redemption or maturity,
the Issuers will be discharged from certain covenants set forth in the
Indenture.

     (11) Amendment; Supplement; Waiver. Subject to certain exceptions, the
Indenture or the Notes may be amended or supplemented with the consent of the
Holders of at least a majority in aggregate principal amount of the Notes then
Outstanding, and any existing Default or compliance with any provision may be
waived with the consent of the Holders of a majority in aggregate principal
amount of the Notes then Outstanding. Without notice to or the consent of any
Holder, the parties thereto may amend the Indenture or the Notes to the extent
set forth in the Indenture.

     (12) Restrictive Covenants. The Indenture contains certain restrictive
covenants. Within 120 days after the end of each fiscal year, the Issuers must
report to the Trustee on compliance with such limitations.

     (13) Events of Default. If an Event of Default, as defined in the
Indenture, occurs and is continuing, the Trustee or the Holders of at least 25%
in principal amount of the Notes may declare all the Notes to be due and
payable. If a bankruptcy or insolvency default with respect to either Issuer or
any Significant Subsidiary that is a Subsidiary Guarantor occurs and is
continuing, the Notes automatically become due and payable. Holders may not
enforce the Indenture or the Notes except as provided in the Indenture. The
Trustee may require indemnity satisfactory to it before it enforces the
Indenture or the Notes. Subject to certain limitations, Holders of a majority in
principal amount of the Notes then outstanding may direct the Trustee in its
exercise of remedies.

     (14) Additional Subsidiary Guarantees. If any of the Company's Restricted
Subsidiaries shall Guarantee or secure the payment of any other Indebtedness of
the Company or any of its Restricted Subsidiaries, then, subject to certain
exceptions specified in the Indenture, such Restricted Subsidiary shall become a
Subsidiary Guarantor by executing a supplemental indenture. Each Subsidiary
Guarantor will irrevocably and unconditionally guarantee, jointly and severally,
on a senior basis, the full and punctual payment (whether at Stated Maturity,
upon acceleration, optional redemption, upon repurchase following a Change of
Control Offer or an Asset Sale Offer or otherwise) of the principal of, premium,
if any, and interest and Liquidated Damages, if any, on, and all other amounts
payable under, this Note provided for under this Indenture, and the full and
punctual payment of all other amounts payable by the Issuers under the
Indenture; provided that, notwithstanding anything to the contrary herein, the
aggregate amount of the Obligations guaranteed under the Indenture by any
Subsidiary Guarantor shall be limited in amount to the maximum amount that would
not render such Subsidiary Guarantor's obligations subject to avoidance under
the applicable fraudulent conveyance provisions of the United States Bankruptcy
Code or any comparable provision of any applicable state law.

     (15) Trustee Dealings with Issuer. The Trustee under the Indenture, in its
individual or any other capacity, may become the owner or pledgee of Notes and
may make loans to, accept deposits from, perform services for, and otherwise
deal with, each Issuer and its Affiliates as if it were not the Trustee.

                                      A-8



     (16) Authentication. This Note shall not be valid until the Trustee signs
the certificate of authentication on this Note.

     (17) Abbreviations. Customary abbreviations may be used in the name of a
Holder or an assignee, such as: TEN COM (= tenants in common), TEN ENT (=
tenants by the entireties), JT TEN (= joint tenants with right of survivorship
and not as tenants in common), CUST (= Custodian) and U/G/M/A (= Uniform Gifts
to Minors Act).

     (18) Governing Law. This Note shall be governed by and construed in
accordance with the internal laws of the State of New York, without giving
effect to any principles of conflict of laws to the extent that the application
of the law of another jurisdiction is required thereby.

     The Issuers will furnish to any Holder upon written request and without
charge a copy of the Indenture. Requests may be made to the Issuers, One Houston
Center, Suite 700, 1221 McKinney, Houston, Texas 77010; Attention: General
Counsel.

                                      A-9



                            [FORM OF TRANSFER NOTICE]

     FOR VALUE RECEIVED the undersigned registered holder hereby sell(s),
assign(s) and transfer(s) unto

Insert Taxpayer Identification No.

- --------------------------------------------------------------------------------
(Please print or typewrite name and address including zip code of assignee)

- --------------------------------------------------------------------------------
the within Note and all rights thereunder, hereby irrevocably constituting and
appointing

- --------------------------------------------------------------------------------
attorney to transfer such Note on the books of the Issuers with full power of
substitution in the premises.

                                      A-10



                     [THE FOLLOWING PROVISION TO BE INCLUDED
             ON ALL CERTIFICATES BEARING A PRIVATE PLACEMENT LEGEND]

     In connection with any transfer of this Note occurring prior to
              , the undersigned confirms that without utilizing any general
- --------------
solicitation or general advertising that:

                                    Check One

          (a) this Note is being transferred in compliance with the exemption
from registration under the Securities Act of 1933, as amended, provided by Rule
144A thereunder. [ ]

          (b) this Note is being transferred in compliance with Regulation S
under the Securities Act and a certificate in the form specified by the
Indenture is being furnished herewith. [ ]

          (c) this Note is being transferred in compliance with the exemption
from registration under the Securities Act of 1933, as amended, provided by Rule
144 thereunder. [ ]

          (d) this Note is being transferred to the Company. [ ]

                                       or

          (e) this Note is being transferred other than in accordance with (a),
(b) or (c) above and documents are being furnished which comply with the
conditions of transfer set forth in this Note and the Indenture. [ ]

     If none of the foregoing boxes is checked, the Trustee or other Registrar
shall not be obligated to register this Note in the name of any Person other
than the Holder hereof unless and until the conditions to any such transfer of
registration set forth herein and in Sections 3.13 and 3.14 of the Indenture
shall have been satisfied.

Date:
     --------------------------
- --------------------

                                           NOTICE: The signature to this
                                           assignment must correspond with the
                                           name as written upon the face of the
                                           within-mentioned instrument in every
                                           particular, without alteration or any
                                           change whatsoever.

Signature Guarantee:
                     -------------------------------

     Signatures must be guaranteed by an "eligible guarantor institution"
meeting the requirements of the Registrar, which requirements include membership
or participation

                                      A-11



in the Security Transfer Agent Medallion Program ("STAMP") or such other
"signature guarantee program" as may be determined by the Registrar in addition
to, or in substitution for, STAMP, all in accordance with the Securities
Exchange Act of 1934, as amended.

              TO BE COMPLETED BY PURCHASER IF (a) ABOVE IS CHECKED.

     The undersigned represents and warrants that it is purchasing this Note for
its own account or an account with respect to which it exercises sole investment
discretion and that it and any such account is a "qualified institutional buyer"
within the meaning of Rule 144A under the Securities Act of 1933, as amended,
and is aware that the sale to it is being made in reliance on Rule 144A and
acknowledges that it has received such information regarding the Issuers as the
undersigned has requested pursuant to Rule 144A or has determined not to request
such information and that it is aware that the transferor is relying upon the
undersigned's foregoing representations in order to claim the exemption from
registration provided by Rule 144A.

Dated:
      --------------------------

              -------------------------------
                                          To be executed by an executive officer

                                      A-12



                       OPTION OF HOLDER TO ELECT PURCHASE

     If you wish to have this Note purchased by the Issuers pursuant to Section
4.10 or Section 4.13 of the Indenture, check the box: [ ]

     If you wish to have a portion of this Note purchased by the Issuers
pursuant to Section 4.10 or Section 4.13 of the Indenture, state the amount (in
original principal amount) below:

$                     .
 ---------------------

Date:
     --------------------------


Your Signature:
               -----------------------------

(Sign exactly as your name appears on the other side of this Note)

Signature Guarantee:
                    -----------------------------

Signatures must be guaranteed by an "eligible guarantor institution" meeting the
requirements of the Registrar, which requirements include membership or
participation in the Security Transfer Agent Medallion Program ("STAMP") or such
other "signature guarantee program" as may be determined by the Registrar in
addition to, or in substitution for, STAMP, all in accordance with the
Securities Exchange Act of 1934, as amended.

                                      A-13



                       SCHEDULE OF EXCHANGES OF SECURITIES

The following exchanges of a part of this Global Note for Physical Notes or a
part of another Global Note have been made:



                                                               Principal Amount of
                                                                 this Global Note
                    Amount of decrease    Amount of increase      following such         Signature of
                   in principal amount   in principal amount       decrease (or      authorized officer of
Date of Exchange   of this Global Note   of this Global Note        increase)               Trustee
- ----------------   -------------------   -------------------   -------------------   ---------------------
                                                                         



                                      A-14



                                                                       EXHIBIT B

                             SUPPLEMENTAL INDENTURE

                           dated as of            ,
                                       -----------  -------

                                      among

                             EQUISTAR CHEMICALS, LP,

                          EQUISTAR FUNDING CORPORATION,

                                   as Issuers

                             [SUBSIDIARY GUARANTORS]

                                       and

                              THE BANK OF NEW YORK,
                                   as Trustee

                           10 % Senior Notes due 2011
                             -

                                      B-1



          THIS SUPPLEMENTAL INDENTURE (this "Supplemental Indenture"), entered
into as of           ,     , among EQUISTAR CHEMICALS, LP., a Delaware limited
           ----------  ----
partnership (the "Company"), EQUISTAR FUNDING CORPORATION, a Delaware
Corporation ("Equistar Funding") (collectively, the "Issuers") [INSERT EACH
Subsidiary Guarantor Executing This Supplemental Indenture and Its jurisdiction
of incorporation] (each an "Undersigned") and THE BANK OF NEW YORK, as trustee
(the "Trustee").

                                    RECITALS

          WHEREAS, the Issuers and the Trustee entered into the Indenture, dated
as of April 22, 2003 (the "Indenture"), relating to the Issuers's 10_% Senior
Notes due 2008 (the "Notes");

          WHEREAS, as a condition to the Trustee entering into the Indenture and
the purchase of the Notes by the Holders, the Issuers agreed, subject to certain
exceptions, pursuant to Section 4.22 of the Indenture to cause any Restricted
Subsidiary that has guaranteed or secured Indebtedness of the Company or any of
its Restricted Subsidiaries to provide Subsidiary Guarantees.

                                    AGREEMENT

          NOW, THEREFORE, in consideration of the premises and mutual covenants
herein contained and intending to be legally bound, the parties hereto hereby
agree as follows:

          Section 1. Capitalized terms used herein and not otherwise defined
herein are used as defined in the Indenture.

          Section 2. Each Undersigned, by its execution of this Supplemental
Indenture, agrees to be a Subsidiary Guarantor under the Indenture and to be
bound by the terms of the Indenture applicable to Subsidiary Guarantors,
including, but not limited to, Article 13 thereof.

          Section 3. This Supplemental Indenture shall be governed by and
construed in accordance with the internal laws of the State of New York.

          Section 4. This Supplemental Indenture may be signed in various
counterparts which together shall constitute one and the same instrument.

          Section 5. This Supplemental Indenture is an amendment supplemental to
the Indenture and said Indenture and this Supplemental Indenture shall
henceforth be read together.

                                      B-2



          IN WITNESS WHEREOF, the parties have duly executed and delivered this
Supplemental Indenture or have caused this Supplemental Indenture to be duly
executed on their respective behalf by their respective officers thereunto duly
authorized, as of the day and year first above written.

                                          EQUISTAR CHEMICALS, LP


                                          By:
                                              -------------------------------
                                              Name:
                                              Title:


                                          EQUISTAR FUNDING CORPORATION


                                          By:
                                              ----------------------------------
                                              Name:
                                              Title:


                                          [SUBSIDIARY GUARANTORS]


                                          THE BANK OF NEW YORK,
                                             as Trustee


                                          By:
                                              ----------------------------------
                                              Name:
                                              Title:

                                      B-3



                                                                       EXHIBIT C

                   Form of Certificate of Beneficial Ownership

The Bank of New York
101 Barclay Street
Floor 8 West
New York, NY 10286

Attention: Corporate Trust Administration

          Re:  EQUISTAR CHEMICALS, LP and EQUISTAR FUNDING CORPORATION
               10 % Senior Notes due 2011 (the "Notes") Issued under the
                 -
               Indenture (the "Indenture") dated as of April 22, 2003
               relating to the Notes

          This is to certify that based solely on certifications we have
received in writing, by tested telex or by electronic transmission from member
organizations ("Member Organizations") appearing in our records as persons being
entitled to a portion of the principal amount of Notes represented by the
Temporary Offshore Global Note issued under the above-referenced Indenture, that
as of the date hereof, $     principal amount of Notes represented by the
                        ----
Regulation S Temporary Global Note being submitted herewith for exchange is
beneficially owned by persons who are either (i) non-U.S. persons (within the
meaning of Regulation S under the Securities Act of 1933, as amended) or (ii)
U.S. persons who purchased the Notes in a transaction that did not require
registration under the Securities Act of 1933, as amended. We further certify
that (i) we are not submitting herewith for exchange any portion of such
Temporary Offshore Global Note excepted in such Member Organization
certifications and (ii) as of the date hereof we have not received any
notification from any Member Organization to the effect that the statements made
by such Member Organization with respect to any portion of such Temporary
Offshore Global Note submitted herewith for exchange are no longer true and
cannot be relied upon as of the date hereof. Accordingly, you are hereby
requested to (i) exchange $       of such beneficial interest held by non-U.S.
                           ------
persons in the Temporary Offshore Global Note for an equivalent beneficial
interest in a Permanent Offshore Global Note and (ii) transfer $         of such
                                                                --------
beneficial interest held by U.S. persons in the Temporary Offshore Global Note
into an equivalent beneficial interest in the U.S. Global Note.

                                      C-1



          You and the Issuers are entitled to rely upon this Certificate and are
irrevocably authorized to produce this Certificate or a copy hereof to any
interested party in any administrative or legal proceeding or official inquiry
with respect to the matters covered hereby.

          Yours faithfully,
                                          [JPMORGAN CHASE BANK, Brussels office,
                                          as operator of the Euroclear System]

                                                         OR

                                          [CLEARSTREAM BANKING SA]


                                          By:
                                              ----------------------------------
                                              Name:
                                              Title:
Date:
     ----------------
                                      C-2



                                                                       EXHIBIT D

                       Form of Certificate to be Delivered
                          in Connection with Transfers
                            Pursuant to Regulation S

                   ,
          ---------  ----

The Bank of New York
101 Barclay Street
Floor 8 West
New York, NY 10286

Attention: Corporate Trust Administration

          Re:  EQUISTAR CHEMICALS, LP and EQUISTAR FUNDING CORPORATION
               10 % Senior Notes due 2011 (the "Notes")
                 -

Dear Sirs:

          In connection with our proposed sale of U.S.$         aggregate
                                                       --------
principal amount of the Notes, we confirm that such sale has been effected
pursuant to and in accordance with Regulation S under the Securities Act of
1933, as amended, and, accordingly, we represent that:

          (1) the offer of the Notes was not made to a person in the United
States;

          (2) at the time the buy order was originated, the transferee was
outside the United States or we and any person acting on our behalf reasonably
believed that the transferee was outside the United States;

          (3) no directed selling efforts have been made by us in the United
States in contravention of the requirements of Rule 903(b) or Rule 904(b) of
Regulation S, as applicable; and

          (4) the transaction is not part of a plan or scheme to evade the
registration requirements of the Securities Act of 1933.

                                      D-1



          You and the Issuers are entitled to rely upon this letter and are
irrevocably authorized to produce this letter or a copy hereof to any interested
party in any administrative or legal proceedings or official inquiry with
respect to the matters covered hereby. Terms used in this certificate have the
meanings set forth in Regulation S.

                                          Very truly yours,

                                          [Name of Transferor]


                                          By:
                                              ----------------------------------
                                                     Authorized Signatory

                                      D-2



                                                                       EXHIBIT E

                     Form of Accredited Investor Certificate
                       Transferee Letter of Representation

The Bank of New York
101 Barclay Street
Floor 8 West
New York, NY 10286

Attention: Corporate Trust Administration

Ladies and Gentlemen:

          In connection with our proposed purchase of $[___] aggregate principal
amount of the 10 % Senior Notes due 2011 (the "Notes") of Equistar Chemicals, LP
                -
(the "Company" and Equistar Funding Corporation (the "Issuers"), we confirm
that:

          1. We are an institutional "accredited investor" (as defined in Rule
501(a)(1), (2), (3) or (7) of Regulation D under the Securities Act of 1933, as
amended (the "Securities Act"), purchasing for our own account or for the
account of such an institutional "accredited investor" as to which we exercise
sole investment discretion, and we have such knowledge and experience in
financial and business matters as to be capable of evaluating the merits and
risks of our investment in the Notes, and we and any account for which we are
acting are each able to bear the economic risk of our or its investment.

          2. We understand and acknowledge that the Notes have not been
registered under the Securities Act or any other applicable securities law, and
that the Notes may not be offered or sold except as permitted in the following
sentence. We agree, on our own behalf and on behalf of any account for which we
are acting, that if we should sell any Notes within the time period referred to
in Rule 144(k) of the Securities Act, we will do so only (A) to the Company, (B)
pursuant to an effective registration statement under the Securities Act, (C) in
accordance with Rule 144A under the Securities Act to a "qualified institutional
buyer" (as defined therein), (D) in an offshore transaction in accordance with
Rule 904 of Regulation S under the Securities Act, (E) to an institutional
"accredited investor" (as defined above) in an aggregate principal amount of not
less than $100,000 that, prior to such transfer, furnishes to the Trustee under
the Indenture a signed letter containing certain representations and agreements
relating to the restrictions on transfer of the Notes (the form of which letter
can be obtained from the Trustee) or (F) pursuant to the exemption from
registration provided by Rule 144 under the Securities Act (if available), or
any other available exemption from the registration requirements of the
Securities Act and in each case in compliance with the terms of the Indenture
(which terms require the delivery of such opinions and certifications as the
Issuers and the Trustee may require in connection with transfers pursuant to (E)
and (F)), and we further agree to

                                      E-1



provide to any person purchasing any of the Notes from us a notice advising such
purchaser that resales of the Notes are restricted as stated herein.

          3. We are acquiring the Notes for investment purposes and not with a
view to distribution thereof or with any present intention of offering or
selling any Notes, except as permitted above.

          You and the Issuers are entitled to rely upon this letter and you are
irrevocably authorized to produce this letter or a copy hereto to any interested
party in any administrative or legal proceeding or official inquiry with respect
to the matters covered hereby.

          THIS LETTER SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO THE CONFLICT OF LAWS
PRINCIPLES THEREOF, OTHER THAN ANY MANDATING THE APPLICATION OF SUCH LAWS).

                                          Very truly yours,

                                          (Name of Purchaser)


                                          By:
                                              ----------------------------------
                                              Name:
                                              Title:

                                          Date:
                                                --------------------------------

          Upon transfer, the Notes would be registered in the name of the new
beneficial owner as follows:


By:
    ------------------------------------

Date:
      ----------------------------------

Taxpayer ID number:
                    --------------------

                                      E-1

EX-4.7C

EXHIBIT 4.7(c)

EQUISTAR CHEMICALS, LP

EQUISTAR FUNDING CORPORATION,

as Issuers

and

THE BANK OF NEW YORK,

as Trustee

FIRST SUPPLEMENTAL INDENTURE

Dated as of November 21, 2003

10 ⁵/8% Senior Notes Due 2011

FIRST SUPPLEMENTAL INDENTURE, dated as of November 21, 2003 (the “Supplemental Indenture”) to the Indenture dated as of April 22, 2003 (the “Base Indenture” and as supplemented by this Supplemental Indenture, the “Indenture”), among EQUISTAR CHEMICALS, LP, a Delaware limited partnership (as further defined below, the “Company”), EQUISTAR FUNDING CORPORATION, a Delaware corporation (as further defined below, “Equistar Funding”) and THE BANK OF NEW YORK, a New York banking corporation, as trustee (the “Trustee”).

WHEREAS, the Company and Equistar Funding (together, the “Issuers”) have duly authorized the execution and delivery of the Base Indenture and $450,000,000 aggregate principal amount of the Issuers’ 10 ⁵/8% Senior Notes due 2011;

WHEREAS, the Issuers desire and have requested the Trustee to join them in the execution and delivery of this Supplemental Indenture in connection with the issuance by the Company of $250,000,000 principal amount of the Issuers’ Additional Notes;

WHEREAS, the Depository Trust Company will no longer honor requests to impose a 40-day “chill” period on certain securities (including the Additional Notes) offered and sold in offshore transactions in reliance on Regulation S under the Securities Act;

WHEREAS, Section 9.01(a) of the Base Indenture provides that a supplemental indenture may be entered into without the consent of the holders of any Notes by the Issuers and the Trustee for certain purposes, including the purposes contemplated hereby, provided certain conditions are met;

WHEREAS, the conditions set forth in the Indenture for the execution and delivery of this Supplemental Indenture have been complied with; and

WHEREAS, all things necessary to make this Supplemental Indenture a valid agreement of the Issuers and the Trustee, in accordance with its terms, and a valid amendment of, and supplement to, the Base Indenture have been done;

NOW, THEREFORE:

In consideration of the premises and the purchase and acceptance of the Additional Notes by the holders thereof the Issuers agree with the Trustee, for the equal and ratable benefit of the holders of the Notes, that the Base Indenture is supplemented and amended, to the extent expressed herein, as follows:

ARTICLE 1

SCOPE OF SUPPLEMENTAL INDENTURE; GENERAL

Section 1.01. Scope of Supplemental Indenture; General. This Supplemental Indenture supplements, and to the extent inconsistent therewith, replaces the provisions of the Base Indenture, to which provisions specific reference is hereby made. Capitalized terms used but not defined herein have the meanings ascribed to such terms in the Base Indenture.

2

ARTICLE 2

AMENDMENTS

Section 2.01. Section 2.01 of the Base Indenture is hereby amended by deleting the third and fourth paragraph thereof and replacing them with the following:

“Initial Notes offered and sold in offshore transactions in reliance on Regulation S under the Securities Act shall be issued initially in the form of a single temporary global Note in substantially the form set forth in Exhibit A and containing each of the legends set forth in Section 2.03 (the “Temporary Offshore Global Note”), registered in the name of the nominee of the Depositary, deposited with the Trustee, as custodian for the Depositary or its nominee, duly executed by each Issuer and authenticated by the Trustee as hereinafter provided. At any time following termination of the Restricted Period (the “Offshore Note Exchange Date”), upon receipt by the Trustee and the Issuers of a certificate substantially in the form set forth in Exhibit C hereto, a single permanent global Note substantially in the form of Exhibit A hereto and containing the legend set forth in Section 2.03(b) (the “Permanent Offshore Global Note,” and together with the Temporary Offshore Global Note, the “Offshore Global Note”) duly executed by each Issuer and authenticated by the Trustee as hereinafter provided shall be deposited with the Trustee, as custodian for the Depositary, and the Registrar shall reflect on its books and records the date and a decrease in the principal amount of the Temporary Offshore Global Note in an amount equal to the principal amount of the beneficial interest in the Temporary Offshore Global Note transferred. Prior to the Offshore Note Exchange Date and receipt of the certificate referred to above, beneficial interests in a Temporary Offshore Global Note may be held only through Euroclear or Clearstream. The aggregate principal amount of the Offshore Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary for the Offshore Global Note as provided in Sections 3.13 and 3.14.

Initial Notes issued in exchange for or upon transfer of beneficial interests in the U.S. Global Note or the Permanent Offshore Global Note pursuant to Section 3.13 shall be in the form of permanent certificated Notes in substantially the form set forth in Exhibit A containing the Private Placement Legend as set forth in Section 2.03 (the “U.S. Physical Notes”), or in the form of permanent certificated Notes substantially in the form set forth in Exhibit A (the “Offshore Physical Notes”), respectively, as hereinafter provided. No Offshore Physical Notes may be issued until expiration of the applicable Restricted Period and receipt by the Issuers and the Trustee from the (x) proposed transferor of a certificate substantially in the form set forth in Exhibit D or (y) holder of a beneficial interest being exchanged, of certification that such holder is a non-U.S. person (within the meaning of Regulation S under the Securities Act) or a U.S. person who acquired such interest in a transaction exempt from the registration requirements of the Securities Act (in which case a U.S. Physical Note shall be issued).

Any Initial Additional Notes offered and sold in offshore transactions in reliance on Regulation S under the Securities Act shall be issued in the form of a single permanent Global Note in substantially the form set forth in Exhibit A and containing each of the legends set forth in Section 2.03(a) and (b), registered in the name of the nominee of the Depositary, deposited with the Trustee, as custodian for the Depositary or its nominee, duly executed by each Issuer and authenticated by the Trustee as hereinafter provided.

3

The aggregate principal amount of the Offshore Global Note may from time to time be increased or decreased by adjustments made on the records of the Trustee, as custodian for the Depositary for the Offshore Global Note as provided in Sections 3.13 and 3.14.

Any Initial Additional Notes issued in exchange for or upon transfer of beneficial interests in the U.S. Global Note or the Offshore Global Note pursuant to Section 3.13 shall be in the form of U.S. Physical Notes in substantially the form set forth in Exhibit A containing the Private Placement Legend as set forth in Section 2.03, or in the form of Offshore Physical Notes substantially in the form set forth in Exhibit A containing the Private Placement Legend (if issued during the Restricted Period), respectively, as hereinafter provided.”

Section 2.02. Section 2.03(a) of the Base Indenture is hereby amended by deleting the text preceding the Private Placement Legend and replacing it with the following:

“Except as set forth in Section 3.14(l), unless and until (i) an Initial Note or any Initial Additional Note is sold pursuant to an effective registration statement, whether pursuant to the Registration Rights Agreement or otherwise, (ii) an Initial Note or any Initial Additional Note is exchanged for an Exchange Note in an Exchange Offer pursuant to an effective Exchange Offer or (iii) in the case of the Offshore Global Note, upon termination of the Restricted Period, each Initial Note or Initial Additional Note shall bear the following legend set forth below (the “Private Placement Legend”) on the face thereof:”

Section 2.03. Transfer Provisions. (a) Section 3.14(d) of the Base Indenture is hereby amended by deleting it in its entirety and replacing it with the following:

“(a) Transfers of Interests in the Offshore Global Notes. With respect to registration of any proposed transfer of interests in any Offshore Global Note,

(I) the Registrar shall register the transfer of any interest in such Note only

(i) if the proposed transferee is a Non-U.S. Person and the proposed transferor has delivered to the Registrar a certificate substantially in the form of Exhibit D hereto; or

(ii) if the proposed transferee is a QIB and the proposed transferor has checked the box provided for on the form of Note stating, or has otherwise certified to the Issuers and the Registrar in writing, that the sale has been made in compliance with provisions of Rule 144A to a transferee who has signed the certification provided for on the form of Note stating, or has otherwise advised the Issuers and the Registrar in writing, that it is purchasing the Note for its own account or an account with respect to which it exercises sole investment discretion and that it and any such account is a QIB within the meaning of Rule 144A, and is aware that the sale to it is being made in reliance on Rule 144A and acknowledges that it has received such information regarding the Issuers as it has requested pursuant to Rule 144A or has determined not to request such information and that it is aware that the transferor is relying upon its foregoing

4

representations in order to claim the exemption from registration provided by Rule 144A; and

(iii) upon receipt by the Registrar of written instructions given in accordance with the Depositary’s and the Registrar’s procedures; and

(II) the Registrar shall reflect on its books and records (and make a notation on the relevant Global Note of) the date and an increase in the principal amount of the transferee Global Note, in an amount equal to the principal amount of the Offshore Global Note to be transferred, and the Registrar shall reflect on its books and records (and make a notation on the relevant Global Note of) the date and a decrease in the principal amount of the transferor Offshore Global Note.

provided that, after the Restricted Period, the relevant parties need not comply with provisions of (a)(I)(i) (unless the proposed transfer is to a QIB that holds an interest in the Global Note) or (ii).”

(b) Section 3.14(h) of the Base Indenture is hereby amended by deleting it in its entirety and replacing it with the following:

“(h) Interests in the Temporary Offshore Global Note prior to the Offshore Note Exchange Date. Notwithstanding anything to the contrary contained in this Indenture, until the Offshore Note Exchange Date occurs and appropriate certification substantially in the form of Exhibit C is made as provided in Section 2.01, beneficial interests in the Temporary Offshore Global Note may be held only in or through accounts maintained at the Depositary by Euroclear or Clearstream, and no person shall be entitled to effect any transfer or exchange that would result in any such interest being held otherwise than in or through such an account, and no Physical Notes may be issued in exchange therefor.”

(c) Section 3.14(l)(iii) is hereby amended by deleting it in its entirety and replacing it with the following:

“(iii) (A) with respect to a Temporary Offshore Global Note, with the agreement of the Issuers on or after the Offshore Note Exchange Date with respect to such Note and (B) with respect to a Permanent Offshore Global Note upon expiration of the Restricted Period with respect to such Note,”

ARTICLE 3

MICELLANEOUS

Section 3.01. Governing Law. This Supplemental Indenture shall be governed by and construed in accordance with the internal laws of the State of New York.

Section 3.02. Counterparts. This Supplemental Indenture may be signed in various counterparts which together shall constitute one and the same instrument.

Section 3.03. Trustee Not Responsible for Recitals. The recitals contained herein shall be taken as the statements of the Issuers and the Trustee assumes no

5

responsibility for their correctness. The Trustee makes no representation as to the validity or sufficiency of this Supplemental Indenture except that the Trustee represents that it is duly authorized to execute and deliver this Supplemental Indenture and perform its obligations hereunder.

Section 3.04. This Supplemental Indenture is an amendment supplemental to the Indenture and said Indenture and this Supplemental Indenture shall henceforth be read together.

6

IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, all as of the date first written above.

EQUISTAR CHEMICALS, LP
By:	/s/    Karen A. Twitchell
	Name:  Karen A. Twitchell Title:  Principal Financial Officer
EQUISTAR FUNDING CORPORATION
By:	/s/    Charles L. Hall
	Name:  Charles L. Hall Title:  Vice President and Controller
THE BANK OF NEW YORK, as Trustee
By:	/s/    Van K. Brown
	Name:  Van K. Brown Title:  Vice President

7

EX-5

[LETTERHEAD OF BAKER BOTTS L.L.P.]

EXHIBIT 5

064655.0178

December 12, 2003

Equistar Chemicals, LP

Equistar Funding Corporation

One Houston Center

1221 McKinney, Suite 700

Houston, Texas 77010

Ladies and Gentlemen:

As set forth in the Registration Statement on Form S-4 (the “Registration Statement”) to be filed by Equistar Chemicals, LP, a Delaware limited partnership (“Equistar”), and Equistar Funding Corporation, a Delaware corporation (“Equistar Funding” and, together with Equistar, the “Issuers”), with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Act”), relating to the registration under the Act of $250 million aggregate principal amount of 10?% Senior Notes due 2011 (the “New Notes”) to be offered by the Issuers in exchange (the “Exchange Offer”) for a like principal amount of their issued and outstanding unregistered 10?% Senior Notes due 2011 (the “Outstanding Notes”), we are passing upon certain legal matters in connection with the New Notes for the Issuers. The New Notes are to be issued under an Indenture dated as of April 22, 2003 among the Issuers and The Bank of New York, as trustee, as amended and supplemented by the First Supplemental Indenture dated as of November 21, 2003 (as so amended and supplemented, the “Indenture”). At your request, this opinion is being furnished to you for filing as Exhibit 5 to the Registration Statement.

In our capacity as counsel to the Issuers in connection with the matters referred to above, we have examined each of (i) the Certificate of Limited Partnership and the Amended and Restated Limited Partnership Agreement of Equistar and the Certificate of Incorporation and the Bylaws of Equistar Funding, each as amended to date, (ii) the Indenture and (iii) the originals, or copies certified or otherwise identified, of corporate records of Equistar and Equistar Funding, including minute books of Equistar and Equistar Funding as furnished to us by Equistar and Equistar Funding, certificates of public officials and of representatives of Equistar and Equistar Funding, statutes and other instruments and documents as a basis for the opinions hereinafter expressed. In giving such opinion, we have relied upon certificates of officers of Equistar and Equistar Funding with respect to the accuracy of the material factual matters contained in such certificates. We have assumed that all signatures on documents examined by us are genuine, all documents submitted to us are authentic and all documents submitted as certified or photostatic copies conform to the originals thereof.

Equistar Chemicals, LP

Equistar Funding Corporation

December 12, 2003

Page 2

On the basis of the foregoing, and subject to the assumptions, limitations and qualifications set forth herein, we are of the opinion that when (i) the Registration Statement has become effective under the Act and the Indenture has been qualified under the Trust Indenture Act of 1939, as amended, and (ii) the New Notes have been duly executed, authenticated and delivered in accordance with the provisions of the Indenture and issued in exchange for the Outstanding Notes tendered pursuant to, and in accordance with the terms of, the Exchange Offer as contemplated by the Registration Statement, the New Notes will constitute legal, valid and binding obligations of the Issuers enforceable against them in accordance with their terms, except to the extent that the enforceability thereof may be limited by bankruptcy, fraudulent conveyance, insolvency, reorganization, moratorium or other laws relating to or affecting creditors’ rights generally and by general principles of equity and public policy (regardless of whether such enforceability is considered in a proceeding in equity or at law).

The opinions set forth above are based on and limited in all respects to matters of the federal laws of the United States, the General Corporation Law of the State of Delaware, the Revised Uniform Limited Partnership Act of the State of Delaware and the contract law of the State of New York, each as currently in effect.

We hereby consent to the filing of this opinion of counsel as Exhibit 5 to the Registration Statement and to the reference to our Firm under the heading “Legal Matters” in the prospectus forming a part of the Registration Statement. In giving this consent, we do not hereby admit that we are in the category of persons whose consent is required under Section 7 of the Act or the rules and regulations of the Commission thereunder.

Very truly yours,

/s/ Baker Botts L.L.P.

SAM/SRA

EX-12

Exhibit 12

EQUISTAR CHEMICALS, LP

STATEMENT SETTING FORTH DETAIL FOR COMPUTATION OF

RATIO OF EARNINGS TO FIXED CHARGES

(Millions of dollars)

	Year Ended December 31,												Nine Months Ended September 30,
	1998		1999		2000		2001			2002			2002			2003
Income (loss) from continuing operations before income taxes	$	143	$	32	$	153	$	(283	)	$	(246	)	$	(132	)	$	(235	)
Fixed charges:
Interest expense, gross		156		182		185		192			205			154			159
Portion of rentals representative of interest		37		37		38		37			42			28			32
Total fixed charges before capitalized interest		193		219		223		229			247			182			191
Capitalized interest		—		—		—		—			—			—			—
Total fixed charges including capitalized interest		193		219		223		229			247			182			191
Earnings before fixed charges	$	336	$	251	$	376	$	(54	)	$	1		$	50		$	(44	)
Ratio of earnings to fixed charges (a)		1.7		1.1		1.7		—			—			—			—

(a) Earnings were insufficient to cover fixed charges for the years ended 2002 and 2003 and for the nine months ended September 30, 2002 and 2003 by $283 million, $246 million, $132 million and $235 million, respectively.

EX-23.1

EXHIBIT 23.1

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-4 of Equistar Chemicals, LP of our report dated March 10, 2003, except for matters as discussed under the heading “Adoption of SFAS No. 145” in Note 2, as to which the date is November 13, 2003, relating to the consolidated financial statements of Equistar Chemicals, LP, which appears in such Registration Statement. We also consent to the reference to us under the heading “Experts” in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

December 12, 2003

EX-23.2

EXHIBIT 23.2

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-4 of Equistar Chemicals, LP of our report dated March 10, 2003, except for matters as discussed under the heading “Adoption of SFAS No. 145” in Note 2, as to which the date is November 13, 2003, relating to the consolidated financial statements of Lyondell Chemical Company, which appears in such Registration Statement. We also consent to the reference to us under the heading “Experts” in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

Houston, Texas

December 12, 2003

EX-23.3

Exhibit 23.3

CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the use in this Registration Statement on Form S-4 of Equistar Chemicals, LP of our report dated January 30, 2002, except for the impact of the restatement in Notes 1, 2, 8, 9, 12, 14, 17, 18 and 19, as to which the date is November 12, 2003 relating to the financial statements of Millennium Chemicals Inc., which appear in such Registration Statement. We also consent to the reference to us under the heading “Experts” in such Registration Statement.

/s/ PricewaterhouseCoopers LLP

Florham Park, New Jersey

December 12, 2003

EX-24.1

Exhibit 24.1

POWER OF ATTORNEY

WHEREAS, Equistar Chemicals, LP, a Delaware limited partnership (the “Partnership”), together with Equistar Funding Corporation, a Delaware corporation, intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Act”), a Registration Statement on Form S-4, including a prospectus, with such amendment or amendments thereto, whether pre-effective or post-effective, in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Registration Statement (collectively, the “Registration Statement”), in connection with the Partnership’s proposal to offer to exchange up to $250,000,000 aggregate principal amount of notes registered under the Act for a like aggregate principal amount of outstanding notes;

NOW, THEREFORE, each of the undersigned, in his or her capacity as an officer of the Partnership, does hereby appoint Gerald A. O’Brien and Charles L. Hall, each of whom may act without the joinder of the other, as his or her true and lawful attorneys-in-fact and agents with power to act and with full power of substitution and resubstitution, to execute in his or her name, place and stead, in his or her capacity as an officer of the Partnership, the Registration Statement and all instruments necessary or incidental in connection therewith, with such amendment or amendments thereto in each case as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate, together with any and all exhibits and other documents relating thereto as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Said attorneys-in-fact and agents shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as each of the undersigned might or could do in person, each of the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and agents or any of them or their substitutes.

IN WITNESS WHEREOF, each of the undersigned has executed this instrument on this 12th day of December, 2003.

/s/    Dan F. Smith Name:  Dan F. Smith	/s/    Charles L. Hall Name:  Charles L. Hall
Title:    Chief Executive Officer	Title:    Vice President and Controller

EX-24.2

Exhibit 24.2

POWER OF ATTORNEY

WHEREAS, Equistar Chemicals, LP, a Delaware limited partnership (the “Partnership”), together with Equistar Funding Corporation, a Delaware corporation, intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Act”), a Registration Statement on Form S-4, including a prospectus, with such amendment or amendments thereto, whether pre-effective or post-effective, in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Registration Statement (collectively, the “Registration Statement”), in connection with the Partnership’s proposal to offer to exchange up to $250,000,000 aggregate principal amount of notes registered under the Act for a like aggregate principal amount of outstanding notes;

NOW, THEREFORE, each of the undersigned, in his or her capacity as a member of the Governance Committee of the Partnership (the “Committee”), does hereby appoint Gerald A. O’Brien and Charles L. Hall, each of whom may act without the joinder of the others, as his or her true and lawful attorneys-in-fact and agents with power to act and with full power of substitution and resubstitution, to execute in his or her name, place and stead, in his or her capacity as a member of the Committee, the Registration Statement and all instruments necessary or incidental in connection therewith, with such amendment or amendments thereto in each case as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate, together with any and all exhibits and other documents relating thereto as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Said attorneys-in-fact and agents shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as each of the undersigned might or could do in person, each of the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and agents or any of them or their substitutes.

IN WITNESS WHEREOF, each of the undersigned has executed this instrument on this 12th day of December, 2003.

/s/    Dan F. Smith Name:  Dan F. Smith	/s/    Robert E. Lee Name:  Robert E. Lee
Title:    Co-Chairman	Title:    Co-Chairman
Partnership Governance Committee	Partnership Governance Committee

/s/    Kerry A. Galvin Name:  Kerry A. Galvin	/s/    John E. Lushefski Name:  John E. Lushefski
Title:    Member	Title:    Member
Partnership Governance Committee	Partnership Governance Committee

/s/    T. Kevin DeNicola Name:  T. Kevin DeNicola	/s/    C. William Carmean Name:  C. William Carmean
Title:    Member	Title:    Member
Partnership Governance Committee	Partnership Governance Committee

EX-24.3

Exhibit 24.3

POWER OF ATTORNEY

WHEREAS, Equistar Funding Corporation, a Delaware corporation (the “Company”), together with Equistar Chemicals, LP, a Delaware limited partnership, intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Act”), a Registration Statement on Form S-4, including a prospectus, with such amendment or amendments thereto, whether pre-effective or post-effective, in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Registration Statement (collectively, the “Registration Statement”), in connection with the Company’s proposal to offer to exchange up to $250,000,000 aggregate principal amount of notes registered under the Act for a like aggregate principal amount of outstanding notes;

NOW, THEREFORE, each of the undersigned, in his or her capacity as an officer or director or both, as the case may be, of the Company, does hereby appoint Gerald A. O’Brien and Charles L. Hall, each of whom may act without the joinder of the other, as his or her true and lawful attorneys-in-fact and agents with power to act and with full power of substitution and resubstitution, to execute in his or her name, place and stead, in his or her capacity as an officer or director or both, as the case may be, of the Company, the Registration Statement and all instruments necessary or incidental in connection therewith, with such amendment or amendments thereto in each case as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate, together with any and all exhibits and other documents relating thereto as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Said attorneys-in-fact and agents shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as each of the undersigned might or could do in person, each of the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and agents or any of them or their substitutes.

IN WITNESS WHEREOF, each of the undersigned has executed this instrument on this 12th day of December, 2003.

/s/    Dan F. Smith Name:  Dan F. Smith	/s/    Karen A. Twitchell Name:  Karen A. Twitchell
Title:    Chief Executive Officer	Title:    Vice President and Treasurer

/s/    Morris Gelb Name:  Morris Gelb	/s/    Edward J. Dineen Name:  Edward J. Dineen
Title:    President and Chief Operating Officer              and Director	Title:     Director

/s/    T. Kevin DeNicola

Name:  T. Kevin DeNicola

Title:    Director

EX-24.4

Exhibit 24.4

POWER OF ATTORNEY

WHEREAS, Lyondell Petrochemical G.P. Inc., a Delaware corporation (the “Company”), is a general partner of Equistar Chemicals, LP, a Delaware limited partnership (the “Partnership”);

WHEREAS, the Partnership, together with Equistar Funding Corporation, a Delaware corporation, intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Act”), a Registration Statement on Form S-4, including a prospectus, with such amendment or amendments thereto, whether pre-effective or post-effective, in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Registration Statement (collectively, the “Registration Statement”), in connection with the Partnership’s proposal to offer to exchange up to $250,000,000 aggregate principal amount of notes registered under the Act for a like aggregate principal amount of outstanding notes;

NOW, THEREFORE, each of the undersigned, in his or her capacity as an officer or director or both, as the case may be, of the Company, does hereby appoint Gerald A. O’Brien and Charles L. Hall, each of whom may act without the joinder of the other, as his or her true and lawful attorneys-in-fact and agents with power to act and with full power of substitution and resubstitution, to execute in his or her name, place and stead, in his or her capacity as an officer or director or both, as the case may be, of the Company, the Registration Statement and all instruments necessary or incidental in connection therewith, with such amendment or amendments thereto in each case as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate, together with any and all exhibits and other documents relating thereto as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Said attorneys-in-fact and agents shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as each of the undersigned might or could do in person, each of the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and agents or any of them or their substitutes.

IN WITNESS WHEREOF, each of the undersigned has executed this instrument on this 12th day of December, 2003.

/s/    Morris Gelb Name:  Morris Gelb	/s/    Karen A. Twitchell Name:  Karen A. Twitchell
Title:    President and Director	Title:    Vice President and Treasurer

/s/    T. Kevin DeNicola Name:  T. Kevin DeNicola	/s/    Edward J. Dineen Name:  Edward J. Dineen
Title:    Director	Title:    Director

EX-24.5

Exhibit 24.5

POWER OF ATTORNEY

WHEREAS, Equistar Chemicals, LP, a Delaware limited partnership (the “Partnership”), together with Equistar Funding Corporation, a Delaware corporation, intends to file with the Securities and Exchange Commission (the “Commission”) under the Securities Act of 1933, as amended (the “Act”), a Registration Statement on Form S-4, including a prospectus, with such amendment or amendments thereto, whether pre-effective or post-effective, in each case as may be necessary or appropriate, together with any and all exhibits and other documents having relation to said Registration Statement (collectively, the “Registration Statement”), in connection with the Partnership’s proposal to offer to exchange up to $250,000,000 aggregate principal amount of notes registered under the Act for a like aggregate principal amount of outstanding notes;

NOW, THEREFORE, each of the undersigned, in his or her capacity as a member of the Board of Directors of Millennium Petrochemicals Inc. (the “Board”) and/or as the Principal Executive Officer or Principal Accounting and Principal Financial Officer of Millennium Petrochemicals Inc., does hereby appoint Gerald A. O’Brien and Charles L. Hall, each of whom may act without the joinder of the other, as his or her true and lawful attorneys-in-fact and agents with power to act and with full power of substitution and resubstitution, to execute in his or her name, place and stead, in his or her capacity as a member of the Board and/or as the Principal Executive Officer or Principal Accounting and Principal Financial Officer of Millennium Petrochemicals Inc., the Registration Statement and all instruments necessary or incidental in connection therewith, with such amendment or amendments thereto in each case as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate, together with any and all exhibits and other documents relating thereto as said attorneys-in-fact and agents or any of them shall deem necessary or appropriate or incidental in connection therewith, and to file the same or cause the same to be filed with the Commission. Said attorneys-in-fact and agents shall have full power and authority to do and perform in the name and on behalf of each of the undersigned, in any and all capacities, every act whatsoever necessary or desirable to be done to the premises, as fully and to all intents and purposes as each of the undersigned might or could do in person, each of the undersigned hereby ratifying and approving the acts of said attorneys-in-fact and agents or any of them or their substitutes.

IN WITNESS WHEREOF, each of the undersigned has executed this instrument on this 12th day of December, 2003.

/s/    Robert E. Lee Name:  Robert E. Lee	/s/    C. William Carmean Name:  C. William Carmean
Title:    Director, President and Chief              Executive Officer	Title:    Director, Senior Vice President,             General Counsel and Secretary

/s/    Timothy E. Dowdle Name:  Timothy E. Dowdle	/s/    John E. Lushefski Name:  John E. Lushefski
Title:    Director and Senior Vice President	Title:    Senior Vice President

EX-25

Exhibit 25

FORM T-1

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

STATEMENT OF ELIGIBILITY

UNDER THE TRUST INDENTURE ACT OF 1939 OF A

CORPORATION DESIGNATED TO ACT AS TRUSTEE

CHECK IF AN APPLICATION TO DETERMINE

ELIGIBILITY OF A TRUSTEE PURSUANT TO

SECTION 305(b)(2) ¨

THE BANK OF NEW YORK

(Exact name of trustee as specified in its charter)

New York (State of incorporation if not a U.S. national bank)	13-5160382 (I.R.S. employer identification no.)
One Wall Street, New York, N.Y. (Address of principal executive offices)	10286 (Zip code)

Equistar Chemicals, LP

(Exact name of obligor as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization) 76-0550481 (I.R.S. employer identification no.)

Equistar Funding Corporation

(Exact name of obligor as specified in its charter)

Delaware (State or other jurisdiction of incorporation or organization)	51-0388569 (I.R.S. employer identification no.)
1221 McKinney Street, Suite 700 Houston, Texas (Address of principal executive offices)	77010 (Zip code)

10-5/8% Senior Notes due 2011

(Title of the indenture securities)

1. General information. Furnish the following information as to the Trustee:

(a) Name and address of each examining or supervising authority to which it is subject.

Name	Address
Superintendent of Banks of the State of New York	2 Rector Street, New York, N.Y. 10006, and Albany, N.Y. 12203
Federal Reserve Bank of New York	33 Liberty Plaza, New York, N.Y. 10045
Federal Deposit Insurance Corporation	Washington, D.C. 20429
New York Clearing House Association	New York, New York 10005

(b) Whether it is authorized to exercise corporate trust powers.

Yes.

2. Affiliations with Obligor.

If the obligor is an affiliate of the trustee, describe each such affiliation.

None.

16. List of Exhibits.

Exhibits identified in parentheses below, on file with the Commission, are incorporated herein by reference as an exhibit hereto, pursuant to Rule 7a-29 under the Trust Indenture Act of 1939 (the “Act”) and 17 C.F.R. 229.10(d).

1. A copy of the Organization Certificate of The Bank of New York (formerly Irving Trust Company) as now in effect, which contains the authority to commence business and a grant of powers to exercise corporate trust powers. (Exhibit 1 to Amendment No. 1 to Form T-1 filed with Registration Statement No. 33-6215, Exhibits 1a and 1b to Form T-1 filed with Registration Statement No. 33-21672 and Exhibit 1 to Form T-1 filed with Registration Statement No. 33-29637.)

4. A copy of the existing By-laws of the Trustee. (Exhibit 4 to Form T-1 filed with Registration Statement No. 33-31019.)

6. The consent of the Trustee required by Section 321(b) of the Act. (Exhibit 6 to Form T-1 filed with Registration Statement No. 33-44051.)

7. A copy of the latest report of condition of the Trustee published pursuant to law or to the requirements of its supervising or examining authority.

- 2 -

SIGNATURE

Pursuant to the requirements of the Act, the Trustee, The Bank of New York, a corporation organized and existing under the laws of the State of New York, has duly caused this statement of eligibility to be signed on its behalf by the undersigned, thereunto duly authorized, all in The City of New York, and State of New York, on the 1st day of December, 2003.

THE BANK OF NEW YORK
By:	/S/ STACEY POINDEXTER
	Name:	STACEY POINDEXTER
	Title:	ASSISTANT TREASURER

- 3 -

EX-99.1

Exhibit 99.1

EQUISTAR CHEMICALS, LP

EQUISTAR FUNDING CORPORATION

LETTER TO CLIENTS

for Tender of All Outstanding

Unregistered 10 ⁵/8% Senior Notes due 2011

in Exchange for

Registered 10 ⁵/8% Senior Notes due 2011

The Exchange Offer will expire at 5:00 p.m., New York City time, on                     , 2004 (the “Expiration Date”), unless sooner terminated or extended. Outstanding notes tendered in the exchange offer may be withdrawn at any time before 5:00 p.m., New York City time, on the Expiration Date.

To Our Clients:

We are enclosing with this letter a prospectus dated                         , 2004 (the “Prospectus”) of Equistar Chemicals, LP and Equistar Funding Corporation (together, the “Issuers”) and the related letter of transmittal. These two documents together constitute the Issuers’ offer to exchange their 10 ⁵/8% Senior Notes due 2011 ( the “New Notes”), the issuance of which has been registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of their issued and outstanding 10 ⁵/8% Senior Notes due 2011 issued on November 21, 2003 (the “Outstanding Notes”). The exchange of Outstanding Notes for New Notes and related documentation are referred to herein as the “Exchange Offer.”

The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Outstanding Notes being tendered for exchange.

We are the holder of record of Outstanding Notes held by us for your own account. A tender of your Outstanding Notes held by us can be made only by us as the record holder according to your instructions. The letter of transmittal is furnished to you for your information only and cannot be used by you to tender Outstanding Notes held by us for your account.

We request instructions as to whether you wish to tender any or all of the Outstanding Notes held by us for your account under the terms and conditions of the Exchange Offer. We also request that you confirm that we may, on your behalf, make the representations contained in the letter of transmittal.

Under the Letter of Transmittal, each holder of Outstanding Notes will represent to the Issuers that:

1. such person is not an “affiliate,” as defined in Rule 405 under the Securities Act, of the Issuers or a broker-dealer tendering Outstanding Notes acquired directly from the Issuers for its own account;

2. if such person is not a broker-dealer or is a broker-dealer but will not receive New Notes for its own account in exchange for Outstanding Notes, it is not engaged in, and does not intend to participate in, a distribution of the New Notes;

3. such person does not have an arrangement or understanding with any person to participate in the distribution of the Outstanding Notes or the New Notes within the meaning of the Securities Act;

4. any New Notes to be received are being acquired in the ordinary course of business of the person receiving such New Notes; and

5. if such person is a broker-dealer who will receive New Notes for its own account in exchange for Outstanding Notes, the Outstanding Notes to be exchanged for New Notes were acquired as a result of market-making activities or other trading activities, and it will deliver a Prospectus in connection with any resale of those New Notes; however, by so acknowledging and by delivering a Prospectus, it will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

Very truly yours,

Please return your instructions to us in the enclosed envelope within ample time to permit us to submit a tender on your behalf before the Expiration Date.

INSTRUCTION TO

DTC TRANSFER PARTICIPANT

To Participant of The Depository Trust Company:

The undersigned hereby acknowledges receipt and review of the prospectus dated                     , 2004 (the “Prospectus”) of Equistar Chemicals, LP and Equistar Funding Corporation (together, the “Issuers”) and the related letter of transmittal. These two documents together constitute the Issuers’ offer to exchange their 10 ⁵/8% Senior Notes due 2011 (the “New Notes”), the issuance of which has been registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of their issued and outstanding 10 ⁵/8% Senior Notes due 2011 issued on November 21, 2003 (the “Outstanding Notes”). The exchange of Outstanding Notes for New Notes is referred to herein as an “Exchange Offer.”

This will instruct you, the registered holder and DTC participant, as to the action to be taken by you relating to the Exchange Offer for the Outstanding Notes held by you for the account of the undersigned.

The aggregate principal amount of the Outstanding Notes held by you for the account of the undersigned is (fill in amount):

Title of Series	Principal Amount
Equistar Chemicals, LP and Equistar Funding Corporation 10 5/8% Senior Notes due 2011

With respect to the Exchange Offer, the undersigned hereby instructs you (check appropriate box):

¨ To TENDER all Outstanding Notes held by you for the account of the undersigned.

¨ To TENDER the following amount of Outstanding Notes held by you for the account of the undersigned:

Title of Series	Principal Amount
Equistar Chemicals, LP and Equistar Funding Corporation 10 5/8% Senior Notes due 2011

¨ NOT to TENDER any Outstanding Notes held by you for the account of the undersigned.

If no box is checked, a signed and returned Instruction to DTC Transfer Participant will be deemed to instruct you to tender all Outstanding Notes held by you for the account of the undersigned.

If the undersigned instructs you to tender the Outstanding Notes held by you for the account of the undersigned, it is understood that you are authorized to make, on behalf of the undersigned (and the undersigned, by its signature below, hereby makes to you), the representations contained in the letter of transmittal that are to be made with respect to the undersigned as a beneficial owner, including, but not limited to, the representations that

1. the undersigned is not an “affiliate,” as defined in Rule 405 under the Securities Act, of the Issuers or a broker-dealer tendering Outstanding Notes acquired directly from the Issuers for its own account;

2

2. if the undersigned is not a broker-dealer or is a broker-dealer but will not receive New Notes for its own account in exchange for Outstanding Notes, it is not engaged in, and does not intend to participate in, a distribution of New Notes;

3. the undersigned does not have an arrangement or understanding with any person to participate in the distribution of the Outstanding Notes or the New Notes within the meaning of the Securities Act;

4. any New Notes received are being acquired in the ordinary course of business of the undersigned; and

5. if the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Outstanding Notes, the Outstanding Notes to be exchanged for New Notes were acquired as a result of market-making activities or other trading activities, and the undersigned will deliver a Prospectus in connection with any resale of those New Notes; however, by so acknowledging and by delivering a Prospectus, the undersigned will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

SIGN HERE

Name of beneficial owner(s):

Signature(s):

Name(s) (please print):

Address:

Telephone Number:

Taxpayer Identification or Social Security Number:

Date:

3

EX-99.2

Exhibit 99.2

EQUISTAR CHEMICALS, LP

EQUISTAR FUNDING CORPORATION

LETTER TO THE DEPOSITORY TRUST COMPANY PARTICIPANTS

for Tender of All Outstanding

Unregistered 10 ⁵/8% Senior Notes due 2011

in Exchange for

Registered 10 ⁵/8% Senior Notes due 2011

The Exchange Offer will expire at 5:00 p.m., New York City time, on                     , 2004 (the “Expiration Date”), unless sooner terminated or extended. Outstanding notes tendered in the exchange offer may be withdrawn at any time before 5:00 p.m., New York City time, on the Expiration Date.

To The Depository Trust Company Participants:

We are enclosing herewith the materials listed below relating to the offer by Equistar Chemicals, LP and Equistar Funding Corporation (together, the “Issuers”) to exchange their 10 ⁵/8% Senior Notes due 2011 ( the “New Notes”), the issuance of which has been registered under the Securities Act of 1933, as amended, for a like principal amount of their issued and outstanding 10 ⁵/8% Senior Notes due 2011 issued on November 21, 2003 (the “Outstanding Notes”), upon the terms and subject to the conditions described in the Issuers’ prospectus dated                             , 2004 and the related letter of transmittal (the “Exchange Offer”).

We are enclosing copies of the following documents:

1. Prospectus dated                         , 2004;

2. Letter of Transmittal;

3. Notice of Guaranteed Delivery; and

4. Letter of instructions that may be sent to your clients for whose account you hold Outstanding Notes in your name or in the name of your nominee, with space provided for obtaining that client’s instruction with regard to the Exchange Offer.

We urge you to contact your clients promptly. Please note that the Exchange Offer will expire at 5:00 p.m., New York City time, on                     , 2004, unless sooner terminated or extended.

The Exchange Offer is not conditioned upon any minimum aggregate principal amount of Outstanding Notes being tendered for exchange.

Pursuant to the letter of transmittal, each holder of Outstanding Notes will represent to the Issuers that:

1. such person is not an “affiliate,” as defined in Rule 405 under the Securities Act, of the Issuers or a broker-dealer tendering Outstanding Notes acquired directly from the Issuers for its own account;

2. if such person is not a broker-dealer or is a broker-dealer but will not receive New Notes for its own account in exchange for Outstanding Notes, it is not engaged in, and does not intend to participate in, a distribution of the New Notes;

3. such person does not have an arrangement or understanding with any person to participate in the distribution of the Outstanding Notes or the New Notes within the meaning of the Securities Act;

4. any New Notes to be received are being acquired in the ordinary course of business of the person receiving such New Notes; and

5. if such person is a broker-dealer who will receive New Notes for its own account in exchange for Outstanding Notes, the Outstanding Notes to be exchanged for New Notes were acquired as a result of market-making activities or other trading activities, and it will deliver a Prospectus in connection with any resale of those New Notes; however, by so acknowledging and by delivering a Prospectus, it will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

The enclosed letter to clients contains an authorization by the beneficial owners of the Outstanding Notes for you to make the foregoing representations.

The Issuers will not pay any fee or commission to any broker or dealer or to any other person other than the Exchange Agent, in connection with the solicitation of tenders of Outstanding Notes pursuant to the Exchange Offer. The Issuers will pay, or cause to be paid, any transfer taxes payable on the transfer of Outstanding Notes to it, except as otherwise provided in Instruction 7 of the enclosed letter of transmittal.

Additional copies of the enclosed material may be obtained from us upon request.

Very truly yours,

Equistar Chemicals, LP

Equistar Funding Corporation

2

EX-99.3

Exhibit 99.3

EQUISTAR CHEMICALS, LP

EQUISTAR FUNDING CORPORATION

NOTICE OF GUARANTEED DELIVERY

for Tender of All Outstanding

Unregistered 10 ⁵/8% Senior Notes due 2011

in Exchange for

Registered 10 ⁵/8% Senior Notes due 2011

This form, or one substantially equivalent hereto, must be used by a holder to accept the Exchange Offer relating to the 10 ⁵/8% Senior Notes due 2011 of Equistar Chemicals, LP, and Equistar Funding Corporation (together, the “Issuers”), and to tender outstanding 10 ⁵/8% Senior Notes due 2011 issued on November 21, 2003 (the “Outstanding Notes”) to the exchange agent under the guaranteed delivery procedures described in “The Exchange Offer—Guaranteed Delivery Procedures” of the Issuers’ prospectus dated                     , 2004, and in Instruction 2 to the related letter of transmittal. Any holder who wishes to tender their Outstanding Notes under the guaranteed delivery procedures must ensure that The Bank of New York, as exchange agent (the “Exchange Agent”), receives this notice of guaranteed delivery, properly completed and duly executed, before the Expiration Date (as defined below) of the Exchange Offer. The exchange of Outstanding Notes for New Notes and related documentation are referred to herein as the “Exchange Offer.” Capitalized terms used but not defined herein have the meanings ascribed to them in the Prospectus or the letter of transmittal.

The Exchange Offer will expire at 5:00 p.m., New York City time, on                     , 2004 (the “Expiration Date”), unless sooner terminated or extended. Outstanding notes tendered in the exchange offer may be withdrawn at any time before 5:00 p.m., New York City time, on the Expiration Date.

The Exchange Agent for the Exchange Offer is:

The Bank of New York

For Delivery by Mail (registered or certified mail recommended),

Overnight Delivery or by Hand:

The Bank of New York

101 Barclay Street

Floor 7 East

New York, NY 10286

Attn:                         

By Facsimile Transmission (eligible institutions only):

(212) 298-1915

Attn:                             

Confirm by Telephone:

Delivery of this instrument to an address other than as shown above or transmission of instructions via a facsimile number other than the one listed above will not constitute a valid delivery. The instructions accompanying this notice of guaranteed delivery should be read carefully before the notice of guaranteed delivery is completed.

This notice of guaranteed delivery is not to be used to guarantee signatures. If a signature on a letter of transmittal is required to be guaranteed by an “Eligible Institution” under the instructions thereto, such signature guarantee must appear in the applicable space in the box provided on the letter of transmittal for guarantee of signatures.

Ladies and Gentlemen:

The undersigned hereby tenders to the Issuers, in accordance with the Issuers’ Exchange Offer, upon the terms and subject to the conditions described in the Prospectus and the related letter of transmittal, receipt of which is hereby acknowledged, the principal amount of Outstanding Notes set forth below pursuant to the guaranteed delivery procedures described in the Prospectus under the caption “The Exchange Offer—Guaranteed Delivery Procedures” and in Instruction 2 of the related letter of transmittal.

The undersigned hereby tenders the Outstanding Notes listed below:

Title of Series	Certificate Number(s) (if known) of Outstanding Notes or Account Number at the Book-entry Facility	Aggregate Principal Amount Represented	Aggregate Principal Amount Tendered
Equistar Chemicals, LP and Equistar Funding Corporation 10 5/8% Senior Notes due 2011

PLEASE SIGN AND COMPLETE

Name(s) of Registered Holder(s)	Signatures of Registered Holder(s) or Authorized Signatory
Address
	Dated	, 2004
Area Code and Telephone Number(s)

This notice of guaranteed delivery must be signed by the registered holder(s) of the tendered Outstanding Notes exactly as the name(s) of such person(s) appear(s) on certificates for the Outstanding Notes or on a security position listing as the owner of the Outstanding Notes, or by person(s) authorized to become holder(s) by endorsements and documents transmitted with this Notice of Guaranteed Delivery. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer or other person acting in a fiduciary or representative capacity, such person must provide the following information:

Please print name(s) and address(es)

Name(s):

Capacity:

Address(es):

2

GUARANTEE

(Not to be used for signature guarantee)

The undersigned, a firm which is a member firm of a registered national securities exchange or of the National Association of Securities Dealers, Inc., or is a commercial bank or trust company having an office or correspondent in the United States, or is otherwise an “eligible guarantor institution” within the meaning of Rule 17Ad-15 under the Securities Exchange Act of 1934, as amended, hereby guarantees deposit with the Exchange Agent of the letter of transmittal (or facsimile thereof or agent’s message in lieu thereof), together with the Outstanding Notes tendered hereby in proper form for transfer (or confirmation of the book-entry transfer of such Outstanding Notes into the Exchange Agent’s account at DTC as described in the Prospectus under the caption “The Exchange Offer—Procedures for Tendering—Book-Entry Transfer” and in the related letter of transmittal) and any other required documents, all by 5:00 p.m., New York City time, within three business days following the Expiration Date.

Name of Firm:
	(Authorized Signature)

Address:		Name:
	(Include Zip Code)	Title:
			(Please Type or Print)

Area Code and Telephone Number:
	Date:	, 2004

Do not send Outstanding Notes with this form. Actual surrender of Outstanding Notes must be made pursuant to, and be accompanied by, a properly completed and duly executed Letter of Transmittal and any other required documents.

INSTRUCTIONS FOR NOTICE OF GUARANTEED DELIVERY

1.    Delivery of this Notice of Guaranteed Delivery.    A properly completed and duly executed copy of this notice of guaranteed delivery (or facsimile hereof or an agent’s message and notice of guaranteed delivery in lieu hereof) and any other documents required by this notice of guaranteed delivery with respect to the Outstanding Notes must be received by the Exchange Agent at its address listed herein before the Expiration Date of the Exchange Offer. The method of delivery of this notice of guaranteed delivery and any other required documents to the Exchange Agent is at the election and sole risk of the holder, and the delivery will be deemed made only when actually received by the Exchange Agent. If delivery is by mail, registered mail with return receipt requested, properly insured, is recommended. As an alternative to delivery by mail, holders may wish to consider using an overnight or hand delivery service. In all cases, sufficient time should be allowed to ensure timely delivery. For a description of the guaranteed delivery procedures, see Instruction 2 of the letter of transmittal.

2.    Signatures on this Notice of Guaranteed Delivery.    If this notice of guaranteed delivery (or facsimile hereof) is signed by the registered holder(s) of the Outstanding Notes referred to herein, the signature(s) must correspond exactly with the name(s) written on the face of the Outstanding Notes without alteration, enlargement, or any change whatsoever. If this notice of guaranteed delivery (or facsimile hereof) is signed by a participant of DTC whose name appears on a security position listing as the owner of the Outstanding Notes, the signature must correspond with the name shown on the security position listing as the owner of the Outstanding Notes.

3

If this notice of guaranteed delivery (or facsimile hereof) is signed by a person other than the registered holder(s) of any Outstanding Notes listed or a participant of the DTC, this notice of guaranteed delivery must be accompanied by appropriate bond powers, signed as the name(s) of the registered holder(s) appear(s) on the Outstanding Notes or signed as the name(s) of the participant shown on DTC’s security position listing.

If this notice of guaranteed delivery (or facsimile hereof) is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation, or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and submit with the letter of transmittal evidence satisfactory to the Exchange Agent of such person’s authority to so act.

3.    Requests for Assistance or Additional Copies.    Questions and requests for assistance and requests for additional copies of the Prospectus and this notice of guaranteed delivery may be directed to the Exchange Agent at the address listed on the cover page hereof. Holders may also contact their broker-dealer, commercial bank, trust company, or other nominee for assistance concerning the Exchange Offer.

4

EX-99.4

Exhibit 99.4

EQUISTAR CHEMICALS, LP

EQUISTAR FUNDING CORPORATION

LETTER OF TRANSMITTAL

for Tender of All Outstanding

Unregistered 10 ⁵/8% Senior Notes due 2011

in Exchange for

Registered 10 ⁵/8% Senior Notes due 2011

The Exchange Offer will expire at 5:00 p.m., New York City time, on                     , 2004 (the “Expiration Date”), unless sooner terminated or extended. Outstanding notes tendered in the exchange offer may be withdrawn at any time before 5:00 p.m., New York City time, on the Expiration Date.

PLEASE READ CAREFULLY THE ATTACHED INSTRUCTIONS

If you desire to accept the Exchange Offer, this Letter of Transmittal should be completed, signed and submitted to the Exchange Agent:

The Bank of New York

For Delivery by Mail (registered or certified mail recommended),

Overnight Delivery or by Hand:

The Bank of New York

101 Barclay Street

Floor 7 East

New York, NY 10286

Attn:                         

By Facsimile Transmission (eligible institutions only):

(212) 298-1915

Attn:                         

Confirm by Telephone:

Delivery of this instrument to an address other than as shown above or transmission of instructions via a facsimile number other than the one listed above will not constitute a valid delivery. The instructions accompanying this letter of transmittal should be read carefully before this letter of transmittal is completed.

The undersigned hereby acknowledges receipt and review of the prospectus dated                     , 2004 (the “Prospectus”) of Equistar Chemicals, LP and Equistar Funding Corporation (together, the “Issuers”) and this letter of transmittal which together constitute the Issuers’ offer to exchange their 10 ⁵/8% Senior Notes due 2011 (the “New Notes”), the issuance of which has been registered under the Securities Act of 1933, as amended (the “Securities Act”), for a like principal amount of their issued and outstanding unregistered 10 ⁵/8% Senior Notes due 2011 issued on November 21, 2003 (the “Outstanding Notes”). The exchange of Outstanding Notes for New Notes and related documentation are referred to herein as the “Exchange Offer.” The Issuers also have $450 million of 10 ⁵/8% Senior Notes due 2011 issued on April 22, 2003 outstanding, which are not subject to the Exchange Offer. Capitalized terms used but not defined herein have the respective meanings given them in the Prospectus.

The Issuers reserve the right, at any time or from time to time, to extend the period of time during which the Exchange Offer for the Outstanding Notes is open, at their discretion, in which event the term “Expiration Date” shall mean the latest date to which the Exchange Offer is extended. The Issuers shall notify The Bank of New York (the “Exchange Agent”) of any extension by oral or written notice and shall make a public announcement thereof no later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date.

The New Notes will bear interest at the rate of 10 ⁵/8% per annum. Interest Payment Dates will be May 1 and November 1 of each year, commencing May 1, 2004. Registered holders of New Notes on the relevant record date for the first interest payment date following the consummation of the Exchange Offer will receive interest accruing from the most recent date to which interest has been paid on the Outstanding Notes or, if no interest has been paid, from November 1, 2003. Outstanding Notes accepted for exchange will cease to accrue interest from and after the date of consummation of the Exchange Offer. Holders whose Outstanding Notes are accepted for exchange will not receive any payment in respect of accrued interest on such Outstanding Notes otherwise payable on any interest payment date the record date for which occurs on or after the consummation of the Exchange Offer. Interest shall be paid to the person in whose name the applicable New Note is registered at the close of business on April 15, in the case of the May 1 interest payment date, and October 15, in the case of the November 1 interest payment date. Interest will be computed on the basis of a 360-day year of twelve 30-day months. No liquidated damages will be payable on the New Notes.

This letter of transmittal is to be used by a holder of Outstanding Notes if:

1. certificates of Outstanding Notes are to be forwarded herewith; or

2. delivery of Outstanding Notes is to be made by book-entry transfer to the account maintained by the Exchange Agent at The Depository Trust Company (“DTC”), pursuant to the procedures set forth in the Prospectus under the caption “The Exchange Offer — Procedures for Tendering — Book-Entry Transfer.”

Tenders by book-entry transfer may also be made by delivering an “agent’s message” pursuant to DTC’s Automated Tender Offer Program in lieu of this letter of transmittal. Holders of Outstanding Notes (1) whose Outstanding Notes are not immediately available, or (2) who are unable to deliver their Outstanding Notes, this letter of transmittal and all other documents required hereby to the Exchange Agent on or prior to the Expiration Date, or (3) who are unable to complete the procedure for book-entry transfer on a timely basis, must tender their Outstanding Notes in accordance with the guaranteed delivery procedures set forth in the Prospectus under the caption “The Exchange Offer — Guaranteed Delivery Procedures.” See Instruction 2 of this letter of transmittal. Delivery of documents to DTC does not constitute delivery to the Exchange Agent.

The term “holder” with respect to the Exchange Offer means (1) any person in whose name such Outstanding Notes are registered on the books of the Issuers, (2) any person who holds such Outstanding Notes and has obtained a properly completed bond power from the registered holder or (3) any participant in the DTC system whose name appears on a security position listing as the holder of such Outstanding Notes and who desires to deliver the Outstanding Notes by book-entry transfer at DTC. The undersigned has completed, executed and delivered this letter of transmittal to indicate the action the undersigned desires to take with respect to the Exchange Offer. Holders who wish to tender their Outstanding Notes must complete this letter of transmittal in its entirety (unless such Outstanding Notes are to be tendered by book-entry transfer and an agent’s message is delivered in lieu hereof).

Please read the entire letter of transmittal and the Prospectus carefully before checking any box below. The instructions included with this letter of transmittal must be followed. Questions and requests for assistance or for additional copies of the Prospectus and this letter of transmittal may be directed to the Exchange Agent.

2

List below the Outstanding Notes tendered under this letter of transmittal. If the space below is inadequate, list the title of the series, registered numbers and principal amounts on a separate signed schedule and affix the list to this letter of transmittal.

DESCRIPTION OF OUTSTANDING NOTES TENDERED

Name(s) and Address(es) of Registered Holder(s) Exactly as Name(s) Appear(s) on Outstanding Notes (Please Fill In, If Blank)

Outstanding Note(s) Tendered

Title of Series	Registered Number(s)*	Aggregate Principal Amount Represented by Note(s)	Principal Amount Tendered**
Equistar Chemicals, LP and Equistar Funding Corporation
10 5/8% Senior Notes due 2011
Total

* Need not be completed by book-entry holders.

** Unless otherwise indicated, any tendering holder of Outstanding Notes will be deemed to have tendered the entire aggregate principal amount represented by such Outstanding Notes. All tenders must be in integral multiples of $1,000.

¨ CHECK HERE IF TENDERED OUTSTANDING NOTES ARE ENCLOSED HEREWITH.

¨ CHECK HERE AND COMPLETE THE FOLLOWING IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER MADE TO THE ACCOUNT MAINTAINED BY THE EXCHANGE AGENT WITH DTC (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):

Name of Tendering

Institution:

DTC Account

Number(s):

Transaction Code

Number(s):

3

¨ CHECK HERE AND COMPLETE THE FOLLOWING IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY EITHER ENCLOSED HEREWITH OR PREVIOUSLY DELIVERED TO THE EXCHANGE AGENT (COPY ATTACHED) (FOR USE BY ELIGIBLE INSTITUTIONS ONLY):

Name(s) of Registered Holder(s)

of Outstanding Notes:

Date of Execution of Notice of

Guaranteed Delivery:

Window Ticket Number

(if available):

Name of Eligible Institution that

Guaranteed Delivery:

DTC Account Number(s) (if delivered

by book-entry transfer):

Transaction Code Number (if delivered

by book-entry transfer):

Name of Tendering Institution (if delivered

by book-entry transfer):

¨ CHECK HERE IF TENDERED OUTSTANDING NOTES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER AND NON-EXCHANGED OUTSTANDING NOTES ARE TO BE RETURNED, BY CREDITING THE DTC ACCOUNT NUMBER(S) SET FORTH ABOVE (FOR USE BY ELIGIBLE INSTITUTIONS ONLY).

¨ CHECK HERE AND COMPLETE THE FOLLOWING IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS THERETO:

Name:

Address:

If the undersigned is not a broker-dealer, the undersigned represents that it is not engaged in, and does not intend to participate in, a distribution of New Notes. If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Outstanding Notes, it represents that the New Notes are acquired as a result of market-making activities or other trading activities and that it will deliver a Prospectus in connection with any resale of such New Notes; however, by so acknowledging and by delivering a Prospectus, the undersigned will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

4

SIGNATURES MUST BE PROVIDED BELOW

PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY.

Ladies and Gentlemen:

Subject to the terms and conditions of the Exchange Offer, the undersigned hereby tenders to the Issuers for exchange the principal amount of Outstanding Notes indicated above. Subject to and effective upon the acceptance for exchange of the principal amount of Outstanding Notes tendered in accordance with this letter of transmittal, the undersigned hereby exchanges, assigns and transfers to, or upon the order of, the Issuers all right, title and interest in and to the Outstanding Notes tendered for exchange hereby, including all rights to accrued and unpaid interest thereon as of the Expiration Date. The undersigned hereby irrevocably constitutes and appoints the Exchange Agent as the true and lawful agent and attorney-in-fact for the undersigned (with full knowledge that said Exchange Agent also acts as the agent for the Issuers in connection with the Exchange Offer) with respect to the tendered Outstanding Notes with full power of substitution to:

1. deliver such Outstanding Notes, or transfer ownership of such Outstanding Notes on the account books maintained by DTC, to the Issuers and deliver all accompanying evidences of transfer and authenticity and

2. present such Outstanding Notes for transfer on the books of the Issuers and receive all benefits and otherwise exercise all rights of beneficial ownership of such Outstanding Notes, all in accordance with the terms of the Exchange Offer.

The power of attorney granted in this paragraph shall be deemed to be irrevocable and coupled with an interest.

The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, exchange, assign and transfer the Outstanding Notes tendered hereby and to acquire the New Notes issuable upon the exchange of such tendered Outstanding Notes, and that the Issuers will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claim, when the same are accepted for exchange by the Issuers as contemplated herein.

The undersigned acknowledges that the Exchange Offer is being made in reliance upon interpretations set forth in no-action letters issued to third parties by the staff of the Securities and Exchange Commission (the “SEC”), including Exxon Capital Holdings Corporation (available Apr. 13, 1988), Morgan Stanley & Co. Incorporated (available June 5, 1991), Shearman & Sterling (available July 2, 1993) and similar no-action letters (the “Prior No-Action Letters”), that the New Notes issued in exchange for Outstanding Notes pursuant to the Exchange Offer may be offered for resale, resold and otherwise transferred by holders thereof (other than any such holder that is an “affiliate” of the Issuers within the meaning of Rule 405 under the Securities Act), without compliance with the registration and prospectus delivery provisions of the Securities Act, provided that such New Notes are acquired in the ordinary course of such holders’ business and that such holders are not engaging in, do not intend to participate in and have no arrangement or understanding with any person to participate in a distribution of such New Notes. The SEC has not, however, considered this Exchange Offer in the context of a no-action letter, and there can be no assurance that the staff of the SEC would make a similar determination with respect to the Exchange Offer as in other circumstances.

The undersigned hereby further represents to the Issuers that:

1. neither the holder nor any other person receiving New Notes in the Exchange Offer is an “affiliate,” as defined in Rule 405 under the Securities Act, of the Issuers or a broker-dealer tendering Outstanding Notes acquired directly from the Issuers for its own account;

2. if the undersigned is not a broker-dealer or is a broker-dealer but will not receive New Notes for its own account in exchange for Outstanding Notes, the undersigned represents that it is not engaged in, and does not intend to participate in, a distribution of New Notes, within the meaning of the Securities Act;

5

3. neither the undersigned nor any other person receiving notes in the Exchange Offer has an arrangement or understanding with any person to participate in the distribution of the Outstanding Notes or the New Notes within the meaning of the Securities Act; and

4. the New Notes to be received are being acquired in the ordinary course of business of the person receiving such New Notes, whether or not the undersigned.

If the undersigned is a broker-dealer that will receive New Notes for its own account in exchange for Outstanding Notes, it represents that the New Notes are being acquired by it as a result of market-making activities or other trading activities and that it will deliver a Prospectus in connection with any resale of such New Notes. By so acknowledging and by delivering a Prospectus, however, the undersigned will not be deemed to admit that it is an “underwriter” within the meaning of the Securities Act.

The undersigned acknowledges that if the undersigned is tendering Outstanding Notes in the Exchange Offer with the intention of participating in any manner in a distribution of the New Notes:

1. the undersigned cannot rely on the position of the staff of the SEC set forth in the Prior No-Action Letters and, in the absence of an exemption therefrom, must comply with the registration and prospectus delivery requirements of the Securities Act in connection with the resale transaction of the New Notes, in which case the registration statement must contain the selling security holder information required by Item 507 or Item 508, as applicable, of Regulation S-K of the SEC; and

2. failure to comply with such requirements in such instance could result in the undersigned incurring liability for which the undersigned is not indemnified by the Issuers.

The undersigned will, upon request, execute and deliver any additional documents deemed by the Exchange Agent or the Issuers to be necessary or desirable to complete the exchange, assignment and transfer of the Outstanding Notes tendered hereby, including the transfer of such Outstanding Notes on the account books maintained by DTC.

For purposes of the Exchange Offer, the Issuers shall be deemed to have accepted for exchange validly tendered Outstanding Notes when, as and if the Issuers give oral or written notice thereof to the Exchange Agent. Any tendered Outstanding Notes that are not accepted for exchange pursuant to the Exchange Offer for any reason will be returned, without expense, to the undersigned at the address shown below or at a different address as may be indicated herein under “Special Delivery Instructions” as promptly as practicable after the Expiration Date for the Exchange Offer.

All authority conferred or agreed to be conferred by this letter of transmittal shall survive the death, incapacity or dissolution of the undersigned, and every obligation of the undersigned under this letter of transmittal shall be binding upon its successors, assigns, heirs, executors, administrators, trustees in bankruptcy and legal representatives. This tender may be withdrawn only in accordance with the procedures set forth in the section of the Prospectus entitled “The Exchange Offer — Withdrawal of Tenders.”

The undersigned acknowledges that the Issuers’ acceptance of properly tendered Outstanding Notes pursuant to the procedures described under the caption “The Exchange Offer — Procedures for Tendering” in the Prospectus and in the instructions hereto will constitute a binding agreement between the undersigned and the Issuers upon the terms and subject to the conditions of the Exchange Offer. The undersigned further agrees that acceptance of any tendered Outstanding Notes by the Issuers and the issuance of New Notes in exchange therefor shall constitute performance in full by the Issuers of their obligations under the registration rights agreement and that the Issuers shall have no further obligations or liabilities thereunder for the registration of the Outstanding Notes or the New Notes.

The Exchange Offer is subject to certain conditions set forth in the Prospectus under the caption “The Exchange Offer — Conditions to the Exchange Offer.” The undersigned recognizes that as a result of these

6

conditions (which may be waived, in whole or in part, by the Issuers), the Issuers may not be required to exchange any of the Outstanding Notes tendered hereby. In such event, the Outstanding Notes not exchanged will be returned to the undersigned at the address shown below the signature of the undersigned.

Unless otherwise indicated under “Special Issuance Instructions” below, please issue the New Notes issued in exchange for the Outstanding Notes accepted for exchange and return any Outstanding Notes not tendered or not exchanged, in the name(s) of the undersigned (or, in the case of a book-entry delivery of Outstanding Notes, please credit the account indicated above maintained at DTC). Similarly, unless otherwise indicated under “Special Delivery Instructions,” please mail or deliver the New Notes issued in exchange for the Outstanding Notes accepted for exchange and any Outstanding Notes not tendered or not exchanged (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned’s signature(s). In the event that both “Special Issuance Instructions” and “Special Delivery Instructions” are completed, please issue the New Notes issued in exchange for the Outstanding Notes accepted for exchange in the name(s) of, and return any Outstanding Notes not tendered or not exchanged to, the person(s) so indicated. The undersigned recognizes that the Issuers have no obligation pursuant to the “Special Issuance Instructions” and “Special Delivery Instructions” to transfer any Outstanding Notes from the name of the registered holder(s) thereof if the Issuers do not accept for exchange any of the Outstanding Notes so tendered for exchange.

SPECIAL ISSUANCE INSTRUCTIONS (SEE INSTRUCTIONS 5 AND 6) To be completed ONLY (i) if Outstanding Notes in a principal amount not tendered, or New Notes issued in exchange for Outstanding Notes accepted for exchange, are to be issued in the name of someone other than the undersigned or (ii) if Outstanding Notes tendered by book-entry transfer which are not exchanged are to be returned by credit to an account maintained at DTC other than the DTC Account Number set forth above. Issue New Notes and/or Outstanding Notes to:

SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 5 AND 6) To be completed ONLY if Outstanding Notes in a principal amount not tendered, or New Notes issued in exchange for Outstanding Notes accepted for exchange, are to be mailed or delivered to someone other than the undersigned, or to the undersigned at an address other than that shown below the undersigned’s signature. Mail or deliver New Notes and/or Outstanding Notes to:

Name:                                                                                        Address:                                                                                    (Include Zip Code) (Tax Identification or Social Security Number) (Please Type or Print)

Name:                                                                                        Address:                                                                                    (Include Zip Code) (Tax Identification or Social Security Number) (Please Type or Print)

¨	Credit unexchanged Outstanding Notes delivered by book-entry transfer to the DTC account number set forth below:
	DTC Account Number:

7

IMPORTANT

PLEASE SIGN HERE WHETHER OR NOT

OUTSTANDING NOTES ARE BEING PHYSICALLY TENDERED HEREBY

(Complete Accompanying Substitute Form W-9 Below)

X
X
	(Signature(s) of Registered Holder(s) of Outstanding Notes)

Dated                                 , 2004

(The above lines must be signed by the registered holder(s) of Outstanding Notes as your/their name(s) appear(s) on the Outstanding Notes or on a security position listing, or by person(s) authorized to become registered holder(s) by a properly completed bond power from the registered holder(s), a copy of which must be transmitted with this letter of transmittal. If Outstanding Notes to which this letter of transmittal relate are held of record by two or more joint holders, then all such holders must sign this letter of transmittal. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, then such person must (i) set forth his or her full title below and (ii) unless waived by the Issuers, submit evidence satisfactory to the Issuers of such person’s authority to so act. See Instruction 5 regarding the completion of this letter of transmittal, printed below.)

Name(s):

(Please Type or Print)

Capacity (Full Title):

Address:

(Include Zip Code)

Area Code and Telephone Number:

Taxpayer Identification or Social Security Number:

MEDALLION SIGNATURE GUARANTEE

(If Required by Instruction 5)

Certain signatures must be guaranteed by an Eligible Institution.

Signature(s) Guaranteed by an

Eligible Institution:                                                                                                                                                                                        

(Authorized Signature)

(Title)

(Name of Firm)

(Address, Including Zip Code)

(Area Code and Telephone Number)

Dated:                                                              , 2004

8

INSTRUCTIONS

FORMING PART OF THE TERMS AND CONDITIONS OF THE EXCHANGE OFFER

1.    Delivery of this Letter of Transmittal and Outstanding Notes or Agent’s Message and Book-Entry Confirmations.    All physically delivered Outstanding Notes or any confirmation of a book-entry transfer to the Exchange Agent’s account at DTC of Outstanding Notes tendered by book-entry transfer (a “Book-Entry Confirmation”), as well as a properly completed and duly executed copy of this letter of transmittal or facsimile hereof (or an agent’s message in lieu hereof pursuant to DTC’s Automated Tender Offer Program), and any other documents required by this letter of transmittal must be received by the Exchange Agent at its address set forth herein prior to 5:00 p.m., New York City time, on the Expiration Date for the Exchange Offer, or the tendering holder must comply with the guaranteed delivery procedures set forth below. Outstanding Notes tendered hereby must be in denominations of principal amount of $1,000 and any integral multiple thereof. The method of delivery of the tendered Outstanding Notes, this letter of transmittal and all other required documents to the Exchange Agent is at the sole election and risk of the holder and, except as otherwise provided below, the delivery will be deemed made only when actually received or confirmed by the Exchange Agent. Instead of delivery by mail, it is recommended that the holder use an overnight or hand delivery service. In all cases, sufficient time should be allowed to assure delivery to the Exchange Agent before the Expiration Date. NEITHER THIS LETTER OF TRANSMITTAL NOR OUTSTANDING NOTES SHOULD BE SENT TO THE ISSUERS.

All questions as to the validity, form, eligibility (including time of receipt) or acceptance of tendered Outstanding Notes and withdrawal of tendered Outstanding Notes will be determined by the Issuers in their sole discretion, which determination will be final and binding. The Issuers reserve the absolute right to reject any and all Outstanding Notes not properly tendered or any Outstanding Notes the Issuers’ acceptance of which would, in the opinion of counsel for the Issuers, be unlawful. The Issuers also reserve the right to waive any defects, irregularities or conditions of tender as to particular Outstanding Notes. The Issuers’ interpretation of the terms and conditions of the Exchange Offer (including the instructions in this letter of transmittal) shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Outstanding Notes must be cured within such time as the Issuers shall determine. Neither the Issuers, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Outstanding Notes, nor shall any of them incur any liability for failure to give such notification. Tenders of Outstanding Notes will not be deemed to have been made until such defects or irregularities have been cured or waived. Any Outstanding Notes received by the Exchange Agent that are not properly tendered and as to which the defects or irregularities have not been cured or waived will be returned by the Exchange Agent to the tendering holders of Outstanding Notes, unless otherwise provided in this letter of transmittal, as soon as practicable following the Expiration Date.

See the section of the Prospectus captioned “The Exchange Offer” section of the Prospectus.

2.    Guaranteed Delivery Procedures.    Holders who wish to tender their Outstanding Notes and (a) whose Outstanding Notes are not immediately available, (b) who cannot deliver their Outstanding Notes (or tender by book-entry transfer), this letter of transmittal or any other documents required hereby to the Exchange Agent prior to the Expiration Date or (c) who are unable to comply with the applicable procedures under DTC’s Automated Tender Offer Program on a timely basis, must tender their Outstanding Notes according to the guaranteed delivery procedures set forth in the Prospectus. Pursuant to such procedures:

a. such tender must be made by or through a financial institution (including most banks, savings and loan associations, and brokerage houses) that is a participant in the Securities Transfer Agents’ Medallion Program, the New York Stock Exchange Medallion Program or the Stock Exchanges’ Medallion Program approved by the Securities Transfer Association Inc. (an “Eligible Institution”);

b. prior to the Expiration Date, the Exchange Agent must have received from the Eligible Institution a properly completed and duly executed notice of guaranteed delivery (by facsimile transmission, mail or

9

hand delivery) or a properly transmitted agent’s message and notice of guaranteed delivery setting forth the name and address of the holder of the Outstanding Notes, the registration number(s) of such Outstanding Notes and the total principal amount of Outstanding Notes tendered, stating that the tender is being made thereby and guaranteeing that, within three business days after such Expiration Date, this letter of transmittal (or facsimile hereof or an agent’s message in lieu hereof) together with the Outstanding Notes in proper form for transfer (or a Book-Entry Confirmation) and any other documents required by this letter of transmittal will be deposited by the Eligible Institution with the Exchange Agent; and

c. this letter of transmittal (or a facsimile hereof or an agent’s message in lieu hereof) together with the certificates for all physically tendered Outstanding Notes in proper form for transfer (or Book-Entry Confirmation, as the case may be) and all other documents required hereby are received by the Exchange Agent within three business days after such Expiration Date.

Any holder of Outstanding Notes who wishes to tender Outstanding Notes pursuant to the guaranteed delivery procedures described above must ensure that the Exchange Agent receives the notice of guaranteed delivery prior to 5:00 p.m., New York City time, on the Expiration Date. Upon request of the Exchange Agent, a notice of guaranteed delivery will be sent to holders who wish to tender their Outstanding Notes according to the guaranteed delivery procedures set forth above.

See the section of the Prospectus captioned “The Exchange Offer — Guaranteed Delivery Procedures.”

3.    Tender by Holder.    Only a registered holder of Outstanding Notes may tender such Outstanding Notes in the Exchange Offer. Any beneficial holder of Outstanding Notes who is not the registered holder and who wishes to tender should arrange with the registered holder to execute and deliver this letter of transmittal on his behalf or must, prior to completing and executing this letter of transmittal and delivering his Outstanding Notes, either make appropriate arrangements to register ownership of the Outstanding Notes in such holder’s name or obtain a properly completed bond power from the registered holder.

4.    Partial Tenders (Not Applicable to Holders Who Tender by Book-Entry Transfer).    Tenders of Outstanding Notes will be accepted only in integral multiples of $1,000. If less than the entire principal amount of any Outstanding Notes is tendered, the tendering holder should fill in the principal amount tendered in the third column of the box entitled “Description of Outstanding Notes Tendered” above. The entire principal amount of Outstanding Notes delivered to the Exchange Agent will be deemed to have been tendered unless otherwise indicated. If the entire principal amount of all Outstanding Notes is not tendered, then Outstanding Notes for the principal amount of Outstanding Notes not tendered and New Notes issued in exchange for any Outstanding Notes accepted will be returned to the holder as promptly as practicable after the Outstanding Notes are accepted for exchange.

5.    Signatures on this Letter of Transmittal; Bond Powers and Endorsements; Medallion Guarantee of Signatures.    If this letter of transmittal (or facsimile hereof) is signed by the record holder(s) of the Outstanding Notes tendered hereby, the signature(s) must correspond exactly with the name(s) as written on the face of the Outstanding Notes without alteration, enlargement or any change whatsoever. If this letter of transmittal (or facsimile hereof) is signed by a participant in DTC, the signature must correspond with the name as it appears on the security position listing as the holder of the Outstanding Notes.

If any tendered Outstanding Notes are owned of record by two or more joint owners, all of such owners must sign this letter of transmittal.

If this letter of transmittal (or facsimile hereof) is signed by the registered holder(s) of Outstanding Notes listed and tendered hereby and the New Notes issued in exchange therefor are to be issued (or any untendered principal amount of Outstanding Notes is to be reissued) to the registered holder(s), then said holder(s) need not and should not endorse any tendered Outstanding Notes, nor provide a separate bond power. In any other case,

10

such holder(s) must either properly endorse the Outstanding Notes tendered or transmit a properly completed separate bond power with this letter of transmittal, with the signatures on the endorsement or bond power guaranteed by an Eligible Institution.

If this letter of transmittal (or facsimile hereof) or any Outstanding Notes or bond powers are signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such persons should so indicate when signing, and, unless waived by the Issuers, evidence satisfactory to the Issuers of their authority to act must be submitted with this letter of transmittal.

No signature guarantee is required if (i) this letter of transmittal (or facsimile hereof) is signed by the registered holder(s) of the Outstanding Notes tendered herein (or by a participant in DTC whose name appears on a security position listing as the owner of the tendered Outstanding Notes), and the New Notes are to be issued directly to such registered holder(s) (or, if signed by a participant in DTC, deposited to such participant’s account at DTC), and neither the box entitled “Special Delivery Instructions” nor the box entitled “Special Registration Instructions” has been completed, or (ii) such Outstanding Notes are tendered for the account of an Eligible Institution. In all other cases, all signatures on this letter of transmittal (or facsimile hereof) must be guaranteed by an Eligible Institution.

6.    Special Issuance and Delivery Instructions.    Tendering holders should indicate, in the applicable box or boxes, the name and address to which New Notes or substitute Outstanding Notes for principal amounts not tendered or not accepted for exchange are to be issued or sent, if different from the name and address of the person signing this letter of transmittal. In the case of issuance in a different name, the taxpayer identification or social security number of the person named must also be indicated. Holders tendering Outstanding Notes by book-entry transfer may request that Outstanding Notes not exchanged be credited to such account maintained at DTC as such noteholder may designate hereon. If no such instructions are given, such Outstanding Notes not exchanged will be returned to the name and address (or account number) of the person signing this letter of transmittal.

7.    Transfer Taxes.    The Issuers will pay all transfer taxes, if any, applicable to the exchange of Outstanding Notes pursuant to the Exchange Offer. If, however, New Notes or Outstanding Notes for principal amounts not tendered or accepted for exchange are to be delivered to, or are to be registered or issued in the name of, any person other than the registered holder of the Outstanding Notes tendered hereby, or if tendered Outstanding Notes are registered in the name of any person other than the person signing this letter of transmittal, or if a transfer tax is imposed for any reason other than the exchange of Outstanding Notes pursuant to the Exchange Offer, then the amount of any such transfer taxes (whether imposed on the registered holder or any other persons) will be payable by the tendering holder. If satisfactory evidence of payment of such taxes or exemption therefrom is not submitted with this letter of transmittal, the amount of such transfer taxes will be billed directly to such tendering holder and the Exchange Agent will retain possession of an amount of Exchange Notes with a face amount at least equal to the amount of such transfer taxes due by such tendering holder pending receipt by the Exchange Agent of the amount of such taxes.

8.    Tax Identification Number.    Federal income tax law requires that a holder of any Outstanding Notes or New Notes must provide the Issuers (as payor) with its correct taxpayer identification number (“TIN”), which, in the case of a holder who is an individual, is his or her social security number. If the Issuers are not provided with the correct TIN, the holder or payee may be subject to a $50 penalty imposed by Internal Revenue Service and backup withholding, currently at a rate of 28%, on interest payments on the New Notes.

To prevent backup withholding, each tendering holder and each prospective holder must provide such holder’s correct TIN by completing the Substitute Form W-9 set forth herein, certifying that the TIN provided is correct (or that such holder is awaiting a TIN), and that (i) the holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of failure to report all interest or

11

dividends or (ii) the Internal Revenue Service has notified the holder that such holder is no longer subject to backup withholding. If the New Notes will be registered in more than one name or will not be in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for information on which TIN to report.

Certain foreign individuals and entities will not be subject to backup withholding or information reporting if they submit a Form W-8BEN, signed under penalties of perjury, attesting to their foreign status. A Form W-8BEN can be obtained from the Exchange Agent.

If a tendering holder does not have a TIN, such holder should consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Form W-9 concerning applying for a TIN, check the box in Part 3 of the Substitute Form W-9, write “applied for” in lieu of its TIN and sign and date the form and the Certificate of Awaiting Taxpayer Identification Number. Checking this box, writing “applied for” on the form and signing such certificate means that such holder has already applied for a TIN or that such holder intends to apply for one in the near future. If such holder does not provide its TIN to the Issuers within 60 days, backup withholding will begin and continue until such holder furnishes its TIN to the Issuers. Under some circumstances, withholding will also be required during the 60 day period.

The Issuers reserve the right in their sole discretion to take whatever steps are necessary to comply with the Issuers’ obligations regarding backup withholding.

9.    Validity of Tenders.    All questions as to the validity, form, eligibility (including time of receipt), acceptance and withdrawal of tendered Outstanding Notes will be determined by the Issuers in their sole discretion, which determination will be final and binding. The Issuers reserve the absolute right to reject any and all Outstanding Notes not properly tendered or any Outstanding Notes the Issuers’ acceptance of which might, in the opinion of the Issuers or their counsel, be unlawful. The Issuers also reserve the absolute right to waive any conditions of the Exchange Offer or defects or irregularities of tenders as to particular Outstanding Notes. The Issuers’ interpretation of the terms and conditions of the Exchange Offer (including this letter of transmittal and the instructions hereto) shall be final and binding on all parties. Unless waived, any defects or irregularities in connection with tenders of Outstanding Notes must be cured within such time as the Issuers shall determine. Neither the Issuers, the Exchange Agent nor any other person shall be under any duty to give notification of defects or irregularities with respect to tenders of Outstanding Notes nor shall any of them incur any liability for failure to give such notification.

10.    Waiver of Conditions.    The Issuers reserve the absolute right to waive, in whole or part, any of the conditions to the Exchange Offer set forth in the Prospectus.

11.    No Conditional Tender.    No alternative, conditional, irregular or contingent tender of Outstanding Notes will be accepted.

12.    Mutilated, Lost, Stolen or Destroyed Outstanding Notes.    Any holder whose Outstanding Notes have been mutilated, lost, stolen or destroyed should contact the Exchange Agent at the address indicated above for further instructions. This letter of transmittal and related documents cannot be processed until the procedures for replacing lost, stolen or destroyed Outstanding Notes have been followed.

13.    Requests for Assistance or Additional Copies.    Requests for assistance or for additional copies of the Prospectus or this letter of transmittal may be directed to the Exchange Agent at the address or telephone number set forth on the cover page of this letter of transmittal. Holders may also contact their broker, dealer, commercial bank, trust issuers or other nominee for assistance concerning the Exchange Offer.

14.    Withdrawal.    Tenders may be withdrawn only pursuant to the limited withdrawal rights set forth in the Prospectus under the caption “The Exchange Offer — Withdrawal of Tenders.”

12

IMPORTANT: This letter of transmittal or a manually signed facsimile hereof or an agent’s message in lieu thereof (together with the Outstanding Notes delivered by book-entry transfer or in original hard copy form) must be received by the Exchange Agent, or the notice of guaranteed delivery must be received by the Exchange Agent, prior to the Expiration Date.

SUBSTITUTE Form W-9 Department of the Treasury, Internal Revenue Service Payer’s Request for Taxpayer Identification Number (“TIN”)	PART 1—PLEASE PROVIDE YOUR TIN IN THE BOX AT RIGHT AND CERTIFY BY SIGNING AND DATING BELOW.	Social Security Number or Employer ID Number
	Part 2—Certifications—Under penalties of perjury, I certify that: (1)  The number shown on this form is my correct Taxpayer Identification Number (or I have checked the box in Part 3 and executed the Certificate of Awaiting Taxpayer Identification Number below), and (2)  I am not subject to backup withholding either because I have not been notified by the Internal Revenue Service (“IRS”) that I am subject to backup withholding as a result of failure to report all interest or dividends, or because the IRS has notified me that I am no longer subject to backup withholding, and (3)  I am a U.S. person (including a U.S. resident alien). Certification Instructions—You must cross out item (2) in Part 2 above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if after being notified by the IRS that you are subject to backup withholding you received another notification from the IRS stating that you are no longer subject to backup withholding, do not cross out item (2).
	Name	Part 3
	Address: City, State and Zip Code Signature , 2004 Date	Awaiting TIN    ¨ Please complete the certificate of Awaiting Taxpayer Identification Number below.

FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF A PORTION (CURRENTLY 28%) OF ANY PAYMENTS MADE TO YOU WITH RESPECT TO THE NEW NOTES.

YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU CHECKED THE BOX IN PART 3 OF THE SUBSTITUTE FORM W-9

CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER

I certify under penalties of perjury that a taxpayer identification number has not been issued to me, and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that if I do not provide a taxpayer identification number to the payor within 60 days, a portion (currently 28%) of all reportable payments made to me thereafter will be withheld until I provide a number and, under some circumstances, withholding will also be required during that 60 day period.

	, 2004
Signature	Date

13

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION

NUMBER ON SUBSTITUTE FORM W-9

Guidelines for Determining the Proper Identification Number to Give the Payer. — Social Security numbers have nine digits separated by two hyphens: i.e., 000-00-0000. Employer identification numbers have nine digits separated by only one hyphen: i.e., 00-0000000. The table below will help determine the number to give the payer.

	For this type of account:	Give the SOCIAL SECURITY number of —		For this type of account:	Give the EMPLOYER IDENTIFICATION number of —
1.	An individual’s account	The individual	6.	A valid trust, estate or pension trust	The legal entity (4)
2.	Two or more individuals (joint account)	The actual owner of the account or, if combined funds, the first individual on the account (1)	7.	Corporate account or LLC electing corporate status on IRS Form 8832	The corporation
3.	Custodian account of a minor (Uniform Gift to Minors Act)	The minor (2)	8.	Partnership or multi-member LLC account held in the name of the partnership or LLC	The partnership
4.	a. The usual revocable savings trust account (grantor is also trustee)	The grantor-trustee (1)	9.	Association, club, religious, charitable, educational or other tax-exempt organization	The organization
	b. So-called trust account that is not a legal or valid trust under State law	The actual owner (1)
5.	Sole proprietorship account or single owner LLC	The owner (3)	10.	A broker or registered nominee	The broker or registered nominee
			11.	Account with the Department of Agriculture in the name of a public entity (such as a State or local government, school district or prison) that receives agricultural program payments.	The public entity

(1) List first and circle the name of the person whose number you furnish.

(2) Circle the minor’s name and furnish the minor’s social security number.

(3) You must show your individual name, but may enter your business or “doing business as” name. You may use either your Social Security Number or Employer Identification Number (if you have one).

(4) List first and circle the name of the legal trust, estate, or pension trust. (Do not furnish the taxpayer identification of the personal representative or trustee unless the legal entity itself is not designated in the account title.)

NOTE:    If no name is circled when there is more than one name listed, the number will be considered to be that of the first name listed.

GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9

Obtaining a Number

If you don’t have a taxpayer identification number, apply for one immediately. To apply for a social security number, obtain Form SS-5, Application for a Social Security Number Card, at the local office of the Social Security Administration or at www.ssa.gov/online/sss.html. To apply for an employer identification number, obtain Form SS-4, Application for Employer Identification Number, from the IRS at 1-800-TAX-FORM or www.irs.gov.

Payees Exempt from Backup Withholding

Payees exempt from backup withholding include the following:

• A corporation

• A financial institution

• An organization exempt from tax under section 501(a),* an individual retirement plan or a custodial account under section 403(b)(7) if the account satisfies the requirements of section 401(f)(2).

• The United States or any agency or instrumentality thereof.

• A State, The District of Columbia, a possession of the United States, or any subdivision or instrumentality thereof.

• A foreign government, a political subdivision of a foreign government, or any agency or instrumentality thereof.

• An international organization or any agency or instrumentality thereof.

• A dealer in securities or commodities required to register in the U.S., the District of Columbia or a possession of the U.S.

• A real estate investment trust.

• A common trust fund operated by a bank under section 584(a).

• A trust exempt from tax under section 664, or described in section 4947(a)(1).

• An entity registered at all times under the Investment Company Act of 1940.

• A foreign central bank of issue.

• A middleman known in the investment community as a nominee or custodian.

* Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended

Exempt payees described above should complete the Substitute Form W-9 to avoid possible erroneous backup withholding. FURNISH YOUR TAXPAYER IDENTIFICATION NUMBER, WRITE “EXEMPT” ON THE FACE OF THE FORM AND SIGN AND DATE THE FORM.

Privacy Act Notice–Section 6109 requires most recipients of interest, or other payments to give their correct taxpayer identification numbers to payers who must report the payments to IRS. The IRS uses the numbers for identification purposes and to help verify the accuracy of tax returns. The IRS may also provide this information to the Department of Justice for civil and criminal litigation and to cities, states and the District of Columbia to carry out their tax laws. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold federal income tax on taxable interest, and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply.

Penalties

(1)    Penalty for Failure to Furnish Taxpayer Identification Number.—If you fail to furnish your taxpayer identification number to a payer, you are subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect.

(2)    Civil Penalty for False Information With Respect to Withholding.—If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you are subject to a penalty of $500.

(3)    Criminal Penalty for Falsifying Information.— Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment.

(4)    Misuse of Taxpayer Identification Numbers.—If the requester discloses or uses taxpayer identification numbers in violation of federal law, the requester may be subject to civil and criminal penalties.

FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE.