10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended September 30, 2006
	OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from ______________ to ______________

Commission file number 1-12626

EASTMAN CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware	62-1539359
(State or other jurisdiction of	(I.R.S. employer
incorporation or organization)	identification no.)
200 South Wilcox Drive
Kingsport, Tennessee	37660
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code: (423) 229-2000

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

YES [X] NO [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one);

Large accelerated filer [X] Accelerated filer [ ] Non-accelerated filer [ ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) YES [ ] NO [X]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Class	Number of Shares Outstanding at September 30, 2006
Common Stock, par value $0.01 per share		82,285,145
(including rights to purchase shares of Common Stock or Participating Preferred Stock)

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PAGE 1 OF 52 TOTAL SEQUENTIALLY NUMBERED PAGES

EXHIBIT INDEX ON PAGE 51

TABLE OF CONTENTS

ITEM PAGE

PART I. FINANCIAL INFORMATION

1.	Financial Statements
	Unaudited Consolidated Statements of Earnings, Comprehensive Income and Retained Earnings	3
	Consolidated Statements of Financial Position	4
	Unaudited Consolidated Statements of Cash Flows	5
	Notes to the Unaudited Consolidated Financial Statements	6
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
3.	Quantitative and Qualitative Disclosures About Market Risk	46
4.	Controls and Procedures	47

PART II. OTHER INFORMATION

1.	Legal Proceedings	48
1A.	Risk Factors	48
2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
6.	Exhibits	49

SIGNATURES

Signatures   5001  

2

UNAUDITED CONSOLIDATED STATEMENTS OF EARNINGS,

COMPREHENSIVE INCOME AND RETAINED EARNINGS

		Third Quarter				First Nine Months
(Dollars in millions, except per share amounts)		2006		2005		2006		2005
Sales	$	1,966	$	1,816	$	5,698	$	5,330
Cost of sales		1,650		1,464		4,701		4,205
Gross profit		316		352		997		1,125
Selling, general and administrative expenses		105		108		316		339
Research and development expenses		40		42		126		120
Asset impairments and restructuring charges, net		13		4		23		23
Other operating income		--		--		--		(2)
Operating earnings		158		198		532		645
Interest expense, net		21		23		62		77
Income from equity investment in Genencor		--		--		--		(173)
Early debt extinguishment costs		--		--		--		46
Other (income) charges, net		1		(2)		(2)		(3)
Earnings before income taxes		136		177		472		698
Provision for income taxes		41		54		158		207
Net earnings	$	95	$	123	$	314	$	491
Earnings per share
Basic	$	1.16	$	1.51	$	3.84	$	6.10
Diluted	$	1.15	$	1.50	$	3.79	$	6.01
Comprehensive Income
Net earnings	$	95	$	123	$	314	$	491
Other comprehensive income (loss)
Change in cumulative translation adjustment		(8)		(5)		32		(84)
Change in unrealized gains (losses) on investments, net of tax		--		5		(1)		18
Change in unrealized gains (losses) on derivative instruments, net of tax		(6)		--		5		1
Total other comprehensive income (loss)		(14)		--		36		(65)
Comprehensive income	$	81	$	123	$	350	$	426
Retained Earnings
Retained earnings at beginning of period	$	2,070	$	1,806	$	1,923	$	1,509
Net earnings		95		123		314		491
Cash dividends declared		(36)		(36)		(108)		(107)
Retained earnings at end of period	$	2,129	$	1,893	$	2,129	$	1,893

The accompanying notes are an integral part of these consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF FINANCIAL POSITION

		September 30,		December 31,
(Dollars in millions, except per share amounts)		2006		2005
		(Unaudited)
Assets
Current assets
Cash and cash equivalents	$	430	$	524
Trade receivables, net of allowance of $16 and $20		758		575
Miscellaneous receivables		81		81
Inventories		702		671
Other current assets		56		73
Current assets held for sale		132		--
Total current assets		2,159		1,924
Properties
Properties and equipment at cost		8,763		9,597
Less: Accumulated depreciation		5,707		6,435
Net properties		3,056		3,162
Goodwill		313		312
Other noncurrent assets		358		375
Noncurrent assets held for sale		180		--
Total assets	$	6,066	$	5,773
Liabilities and Stockholders’ Equity
Current liabilities
Payables and other current liabilities	$	1,041	$	1,047
Borrowings due within one year		3		4
Current liabilities related to assets held for sale		15		--
Total current liabilities		1,059		1,051
Long-term borrowings		1,586		1,621
Deferred income tax liabilities		264		317
Post-employment obligations		1,058		1,017
Other long-term liabilities		151		155
Long-term liabilities related to assets held for sale		46		--
Total liabilities		4,164		4,161
Stockholders’ equity
Common stock ($0.01 par value - 350,000,000 shares authorized; shares issued - 90,214,704 and 89,566,115 for 2006 and 2005, respectively)		1		1
Additional paid-in capital		368		320
Retained earnings		2,129		1,923
Accumulated other comprehensive loss		(164)		(200)
		2,334		2,044
Less: Treasury stock at cost (8,036,330 shares for 2006 and 8,034,901 shares for 2005)		432		432
Total stockholders’ equity		1,902		1,612
Total liabilities and stockholders’ equity	$	6,066	$	5,773

The accompanying notes are an integral part of these consolidated financial statements.

4

UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS

		First Nine Months
(Dollars in millions)		2006		2005
Cash flows from operating activities
Net earnings	$	314	$	491
Adjustments to reconcile net earnings to net cash provided by operating activities:
Income from equity investment in Genencor		--		(173)
Depreciation and amortization		226		229
Gain on sale of assets		(5)		--
Early debt extinguishment costs		--		46
Asset impairments		20		1
Provision for deferred income taxes		49		130
Changes in operating assets and liabilities:
(Increase) decrease in receivables		(189)		(35)
(Increase) decrease in inventories		(134)		(141)
Increase (decrease) in trade payables		50		(5)
Increase (decrease) in liabilities for employee benefits and incentive pay		(60)		(108)
Other items, net		(38)		(58)
Net cash provided by operating activities		233		377
Cash flows from investing activities
Proceeds from sale of equity investment in Genencor, net		--		417
Additions to properties and equipment		(279)		(224)
Proceeds from sale of assets and investments		12		50
Additions to capitalized software		(12)		(8)
Other items, net		--		(5)
Net cash provided by (used in) investing activities		(279)		230
Cash flows from financing activities
Net increase (decrease) in commercial paper, credit facility and other borrowings		33		(84)
Repayment of borrowings		--		(544)
Dividends paid to stockholders		(108)		(106)
Proceeds from stock option exercises and other items		25		91
Net cash provided by (used in) financing activities		(50)		(643)
Effect of exchange rate changes on cash and cash equivalents		2		(3)
Net change in cash and cash equivalents		(94)		(39)
Cash and cash equivalents at beginning of period		524		325
Cash and cash equivalents at end of period	$	430	$	286

The accompanying notes are an integral part of these consolidated financial statements.

5

ITEM	Page
Note 1. Basis of Presentation	7
Note 2. Inventories	7
Note 3. Other Noncurrent Assets	7
Note 4. Equity Investment in Genencor	8
Note 5. Assets Held for Sale	8
Note 6. Payables and Other Current Liabilities	9
Note 7. Provision for Income Taxes	9
Note 8. Borrowings	10
Note 9. Early Extinguishment of Debt	11
Note 10. Asset Impairments and Restructuring Charges, Net	11
Note 11. Pension and Other Post-Employment Benefits	12
Note 12. Environmental Matters	14
Note 13. Commitments	14
Note 14. Derivative Financial Instruments Held or Issued for Purposes Other Than Trading	15
Note 15. Stockholders' Equity	16
Note 16. Earnings and Dividends per Share	16
Note 17. Share-Based Compensation Awards	17
Note 18. Segment Information	21
Note 19. Legal Matters	23
Note 20. Recently Issued Accounting Standards	24
Note 21. Subsequent Events	26

6

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

1.   BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements have been prepared by Eastman Chemical Company (the "Company" or "Eastman") in accordance and consistent with the accounting policies stated in the Company's 2005 Annual Report on Form 10-K, except as described in Note 17 to the Company's unaudited financial statements in this Form 10-Q, and should be read in conjunction with the consolidated financial statements in Part II, Item 8 of the Company’s 2005 Annual Report on Form 10-K. In the opinion of the Company, all normal recurring adjustments necessary for a fair presentation have been included in the unaudited consolidated financial statements. The unaudited consolidated financial statements are prepared in conformity with accounting principles generally accepted ("GAAP") in the United States and, of necessity, include some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The unaudited consolidated financial statements include assets, liabilities, revenues and expenses of all majority-owned subsidiaries and joint ventures. Eastman accounts for other joint ventures and investments in minority-owned companies where it exercises significant influence on the equity basis. Intercompany transactions and balances are eliminated in consolidation. The Company has reclassified certain 2005 amounts to conform to the 2006 presentation including the reclassification of segment sales and operating earnings. For additional information, see Note 18 to the Company's unaudited consolidated financial statements.

2.   INVENTORIES

		September 30,		December 31,
(Dollars in millions)		2006		2005
At FIFO or average cost (approximates current cost)
Finished goods	$	672	$	664
Work in process		227		207
Raw materials and supplies		378		247
Total inventories		1,277		1,118
LIFO Reserve		(466)		(447)
Inventories before assets held for sale		811		671
Assets held for sale (1)		(109)		--
Total inventories	$	702	$	671

⁽¹⁾   For more information regarding assets held for sale, see Note 5 to the Company's unaudited consolidated financial statements.

Inventories valued on the LIFO method were approximately 60% as of September 30, 2006 and 65% as of December 31, 2005 of total inventories.

3.   OTHER NONCURRENT ASSETS

The Company has a 50 percent interest in and serves as the operating partner in Primester, a joint venture which manufactures cellulose acetate at Eastman's Kingsport, Tennessee plant. This investment is accounted for under the equity method. During fourth quarter 2005, the Company provided a line of credit to the joint venture of up to $125 million, which Primester fully utilized to repay the principal amount of the joint venture's third-party borrowings, previously guaranteed by Eastman. The Company holds an interest-bearing note receivable. Eastman's investment in the joint venture was approximately $87 million and $86 million at September 30, 2006 and December 31, 2005, respectively, which was comprised of the recognized portion of the venture's accumulated deficits and the line of credit of $125 million. Such amount was included in other noncurrent assets.

7

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Eastman also owns a 50 percent interest in Nanjing Yangzi Eastman Chemical Ltd. ("Nanjing"), a company which manufactures Eastotac hydrocarbon tackifying resins for the adhesives market. This joint venture is accounted for under the equity method and is included in other noncurrent assets. At September 30, 2006 and December 31, 2005, the Company’s investment in Nanjing was approximately $5 million.

4.   EQUITY INVESTMENT IN GENENCOR

On April 21, 2005, the Company completed the sale of its preferred and common stock of Genencor International, Inc. ("Genencor") for cash proceeds of approximately $417 million, net of $2 million in fees. The book value of the investment prior to sale was $246 million, and the Company recorded a pre-tax gain on the sale of $171 million.

5.   ASSETS HELD FOR SALE

		September 30,
(Dollars in millions)		2006
Current assets
Trade receivables, net	$	23
Inventories		109
Total current assets		132
Non-current assets
Properties and Equipment, net		174
Other non-current assets		6
Total non-current assets		180
Total assets	$	312
Current liabilities
Payables and other current liabilities, net	$	15
Total current liabilities		15
Long-term liabilities
Deferred income tax liabilities		40
Other long term liabilities		6
Total long-term liabilities		46
Total liabilities	$	61

For the third quarter 2006, the Company reclassified certain businesses and product lines and related assets as held for sale based on entry into two definitive agreements for the sale of those assets and recorded an impairment charge of $11 million to adjust the asset values to the sales amounts less cost to sell. These businesses and product lines are (i) the specialty organic chemicals product lines of the Performance Chemicals and Intermediates ("PCI") segment at the Batesville, Arkansas manufacturing facility and (ii) the Polyethylene and Epolene polymer businesses, related assets and the Company's ethylene pipeline in the Coatings, Adhesives, Specialty Polymers and Inks ("CASPI") and Performance Polymers segments.

The Company has concluded that the assets, businesses and product lines being sold should not be reported as discontinued operations per Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," due to supply agreements between the Company and the buyers that will continue beyond the date of sale.

8

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

6.   PAYABLES AND OTHER CURRENT LIABILITIES

		September 30,		December 31,
(Dollars in millions)		2006		2005
Trade creditors	$	590	$	534
Accrued payrolls, vacation, and variable-incentive compensation		120		154
Accrued taxes		--		49
Post-employment obligations		65		134
Interest payable		26		31
Bank overdrafts		89		10
Other		166		135
Payables and other current liabilities before assets held for sale		1,056		1,047
Assets held for sale (1)		(15)		--
Total payables and other current liabilities	$	1,041	$	1,047

⁽¹⁾ For more information regarding assets held for sale, see Note 5 to the Company's unaudited consolidated financial statements.

7.   PROVISION FOR INCOME TAXES

		Third Quarter					First Nine Months
(Dollars in millions)		2006		2005	Change		2006		2005	Change
Provision for income taxes	$	41	$	54	(24)%	$	158	$	207	(24)%
Effective tax rate		30 %		31 %			34 %		30 %

The third quarter and first nine months 2006 effective tax rate reflects the Company's expected annual tax rate on reported operating earnings before income tax, excluding discrete items, of approximately 34 percent. The third quarter 2006 effective tax rate was impacted by the reversal of foreign loss valuation allowances. The implementation of SFAS No. 123 Revised December 2004 ("SFAS No. 123 (R)"), "Share Based Payment", effective January 1, 2006, did not have a material effect on the Company's effective income tax rate in the third quarter and first nine months 2006. For additional information regarding SFAS No. 123 (R), see Note 17 to the Company's unaudited consolidated financial statements.

The third quarter 2005 effective tax rate reflects the Company's then expected annual tax rate on reported operating earnings before income tax, excluding discrete items, of approximately 30 percent and higher applicable tax rates related to the early extinguishment of debt costs and the gain on the sale of Genencor stock. The first nine months 2005 effective tax rate also reflects a net deferred tax benefit adjustment related to the expected utilization of capital loss carryforwards.

As described in Note 19 to the consolidated financial statements in Part II, Item 8 of the Company’s 2005 Annual Report on Form 10-K, the Company has significant foreign net operating loss carryforwards and related valuation allowances. Future tax provisions may be positively or negatively impacted to the extent that the realization of these carryforwards is greater or less than anticipated.

9

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

8.   BORROWINGS

		September 30,		December 31,
(Dollars in millions)		2006		2005
Borrowings consisted of:
3 1/4% notes due 2008	$	72	$	72
7% notes due 2012		141		142
6.30% notes due 2018		182		185
7 1/4% debentures due 2024		497		497
7 5/8% debentures due 2024		200		200
7.60% debentures due 2027		297		297
Credit facility borrowings		182		214
Other		18		18
Total borrowings		1,589		1,625
Borrowings due within one year		(3)		(4)
Long-term borrowings	$	1,586	$	1,621

At September 30, 2006, the Company has credit facilities with various U.S. and non-U.S. banks totaling approximately $880 million as disclosed in Note 7 to the consolidated financial statements in Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K. These credit facilities consist of a $700 million revolving credit facility (the "Credit Facility"), which was amended in April 2006 to extend the expiration date to April 2011, and a 144 million euro credit facility ("Euro Facility") which expires in December 2010. Borrowings under these credit facilities are subject to interest at varying spreads above quoted market rates. These credit facilities require facility fees on the total commitment that are based on Eastman's credit rating. In addition, these credit facilities contain a number of covenants and events of default, including the maintenance of certain financial ratios. The Company's combined credit facility borrowings at September 30, 2006 and December 31, 2005 were $182 million and $214 million at weighted average interest rates of 3.49 percent and 3.01 percent, respectively.

The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Since the Credit Facility expires in April 2011, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings on a long-term basis.

At September 30, 2006 and December 31, 2005, the Company had outstanding interest rate swaps associated with the entire outstanding principle of the 7% notes due in 2012 and $150 million of the outstanding principle of the 6.30% notes due in 2018. The average variable interest rate on the 7% notes was 7.89 percent and 7.22 percent for September 30, 2006 and December 31, 2005, respectively. The average variable interest rate on the 6.30% notes was 6.30 percent and 5.63 percent for September 30, 2006 and December 31, 2005, respectively.

10

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

9.   EARLY EXTINGUISHMENT OF DEBT

In the second quarter 2005, the Company completed the early repayment of $500 million of its outstanding long-term debt for $544 million in cash, which resulted in a charge of $46 million for early debt extinguishment costs including $2 million in unamortized bond issuance costs. The book value of the repaid debt was $500 million, as follows:

(dollars in millions)		Book Value
3 1/4% notes due 2008	$	178
6.30% notes due 2018		68
7% notes due 2012		254
Total	$	500

10.   ASSET IMPAIRMENTS AND RESTRUCTURING CHARGES, NET

In the third quarter and first nine months 2006, asset impairments and restructuring charges totaled $13 million and $23 million, respectively. During the third quarter 2006, the Company classified the Batesville, Arkansas manufacturing facility as an asset group held for sale and recorded a related $11 million impairment charge to reduce the recorded book value of the assets to the contracted sales price. Other charges for the year relate primarily to previously closed manufacturing facilities.

During the third quarter 2005, the Company recognized pre-tax restructuring charges of approximately $4 million, related primarily to Cendian Corporation's ("Cendian") shutdown of its business activities.

For the first nine months 2005, pre-tax restructuring charges totaled $23 million, primarily related to Cendian's shutdown of its business activities as well as the closure of other manufacturing facilities. Included in the $23 million are approximately $4 million in severance charges recognized within the PCI segment related to the severance of approximately 90 employees at the Company's Batesville, Arkansas manufacturing facility.

11

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Changes in Reserves for Asset Impairments, Restructuring Charges, and Severance Charges

The following table summarizes the beginning reserves, charges to and changes in estimates to the reserves as described above, and the cash and non-cash reductions to the reserves attributable to asset impairments and the cash payments for severance and site closure costs for the full year 2005 and the first nine months 2006:

(Dollars in millions)		Balance at January 1, 2005		Provision/ Adjustments		Non-cash Reductions		Cash Reductions		Balance at December 31, 2005
Non-cash charges	$	--	$	12	$	(12)	$	--	$	--
Severance costs		26		3		--		(26)		3
Site closure and other restructuring costs		9		18		(1)		(19)		7
Total	$	35	$	33	$	(13)	$	(45)	$	10
		Balance at January 1, 2006		Provision/ Adjustments		Non-cash Reductions		Cash Reductions		Balance at September 30, 2006
Non-cash charges	$	--	$	21	$	(21)	$	--	$	--
Severance costs		3		--		--		(1)		2
Site closure and other restructuring costs		7		2		--		--		9
Total	$	10	$	23	$	(21)	$	(1)	$	11

A majority of the remaining severance and site closure costs is expected to be applied to the reserves within one year.

11.   PENSION AND OTHER POST-EMPLOYMENT BENEFITS

DEFINED BENEFIT PENSION PLANS

Eastman maintains defined benefit plans that provide eligible employees with retirement benefits. Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined.

Below is a summary of the components of net periodic benefit cost recognized for Eastman's significant defined benefit pension plans:

Summary of Components of Net Periodic Benefit Costs
		Third Quarter				First Nine Months
(Dollars in millions)		2006		2005		2006		2005
Service cost	$	11	$	11	$	33	$	32
Interest cost		21		20		61		59
Expected return on assets		(21)		(21)		(65)		(59)
Amortization of:
Prior service credit		(3)		(2)		(7)		(8)
Actuarial loss		9		9		28		27
Net periodic benefit cost	$	17	$	17	$	50	$	51

In July 2006, the Company announced plans to change the U.S. defined benefit plans such that employees hired on or after January 1, 2007 will not be eligible for those plans. This change will not impact net periodic benefit cost in 2006 and will begin to impact the financial statements in first quarter 2007.

12

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2006, the Company has contributed $75 million to its U.S. defined benefit plans during 2006.

DEFINED CONTRIBUTION PLANS

The Company sponsors a defined contribution employee stock ownership plan (the "ESOP"), a qualified plan under Section 401(a) of the Internal Revenue Code, which is a component of the Eastman Investment Plan and Employee Stock Ownership Plan ("EIP/ESOP"). Eastman anticipates that it will make annual contributions for substantially all U.S. employees equal to five percent of eligible compensation to the ESOP, or for employees who have five or more prior ESOP contributions, to either the Eastman Stock Fund or other investment funds within the EIP. Employees may diversify to other investment funds within the EIP from the ESOP at any time without restrictions.

In July 2006, the Company amended its EIP/ESOP to provide a company match of 50 percent of the first 7 percent of an employee's compensation contributed to the plan for employees who are hired on or after January 1, 2007. Employees who are hired on or after January 1, 2007, will also be eligible for the 5 percent contribution to the ESOP as described above.

POSTRETIREMENT WELFARE PLANS

Eastman provides life insurance and health care benefits for eligible retirees, and health care benefits for retirees' eligible survivors. Similar benefits are also provided to retirees of Holston Defense Corporation ("HDC"), a wholly-owned subsidiary of the Company that, prior to January 1, 1999, operated a government-owned ammunition plant. HDC’s contract with the Department of the Army ("DOA") provided for reimbursement of allowable costs incurred by HDC, including certain postretirement welfare costs, for as long as HDC operated the plant. After the contract was terminated at the end of 1998, the Army did not contribute further to these costs. The Company continues to accrue and pay for the costs related to HDC retirees, and has pursued extraordinary relief from the DOA for reimbursement of these and other previously expensed employee benefit costs. In October 2006, HDC received notification that the request for extraordinary contractual relief to provide funding for post-retirement benefits had been approved by the DOA, and HDC expects the decision to be effective during the fourth quarter 2006. The Company will begin recognizing the impact of any reimbursement in the period settled by recording an unrecognized gain which will be amortized into earnings over a period of time.

In general, Eastman provides those benefits to retirees eligible under the Company's U.S. pension plans. A few of the Company's non-U.S. operations have supplemental health benefit plans for certain retirees, the cost of which is not significant to the Company. Costs recognized for these benefits are recorded using estimated amounts, which may change as actual costs derived for the year are determined. Below is a summary of the components of net periodic benefit cost recognized for the Company’s U.S. plans:

Summary of Components of Net Periodic Benefit Costs
		Third Quarter				First Nine Months
(Dollars in millions)		2006		2005		2006		2005
Service cost	$	2	$	2	$	6	$	6
Interest cost		10		11		31		32
Amortization of:
Prior service credit		(5)		(6)		(17)		(17)
Actuarial loss		3		5		11		15
Net periodic benefit cost	$	10	$	12	$	31	$	36

In July 2006, the Company announced plans to change its U.S. life insurance and health care benefit plans such that employees hired on or after January 1, 2007 will have access to post-retirement health care benefits only, while Eastman will not provide a company contribution toward the premium cost of post-retirement benefits for those employees. This change will begin to impact the financial statements in first quarter 2007.

13

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

12.   ENVIRONMENTAL MATTERS

Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, the treatment, storage, transportation, and disposal of which are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure and postclosure under the federal Resource Conservation and Recovery Act. Reserves for environmental contingencies have been established in accordance with Eastman’s policies described in Note 1 to the consolidated financial statements in Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K. Because of expected sharing of costs, the availability of legal defenses, and the Company’s preliminary assessment of actions that may be required, management does not believe that the Company's liability for these environmental matters, individually or in the aggregate, will be material to the Company’s consolidated financial position, results of operations or cash flows. The Company’s reserve for environmental contingencies was $51 million at September 30, 2006 and December 31, 2005, representing the minimum or best estimate for remediation costs and the best estimate accrued to date over the facilities’ estimated useful lives for asset retirement obligation costs. Estimated future environmental expenditures for remediation costs range from the minimum or best estimate of $21 million to the maximum of $42 million at September 30, 2006 and at December 31, 2005.

13.   COMMITMENTS

Purchasing Obligations and Lease Commitments

At September 30, 2006, the Company had various purchase obligations totaling approximately $2.1 billion over a period of approximately 15 years for materials, supplies, and energy incident to the ordinary conduct of business. The Company also had various lease commitments for property and equipment under cancelable, non-cancelable, and month-to-month operating leases totaling approximately $200 million over a period of several years. Of the total lease commitments, approximately 15 percent relate to machinery and equipment, including computer and communications equipment and production equipment; approximately 45 percent relate to real property, including office space, storage facilities and land; and approximately 40 percent relate to vehicles, primarily railcars.

Accounts Receivable Securitization Program

In 1999, the Company entered into an agreement that allows the Company to sell certain domestic accounts receivable under a planned continuous sale program to a third party. The agreement permits the sale of undivided interests in domestic trade accounts receivable. Receivables sold to the third party totaled $200 million at September 30, 2006 and December 31, 2005. Undivided interests in designated receivable pools were sold to the purchaser with recourse limited to the purchased interest in the receivable pools. Average monthly proceeds from collections reinvested in the continuous sale program were approximately $334 million and $314 million in the third quarter 2006 and 2005, respectively, and $323 million and $283 million for the first nine months of 2006 and 2005, respectively.

Guarantees

Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"), clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. If certain operating leases are terminated by the Company, it guarantees a portion of the residual value loss, if any, incurred by the lessors in disposing of the related assets. Under these operating leases, the residual value guarantees at September 30, 2006 totaled $98 million and consisted primarily of leases for railcars, aircraft, and other equipment. The Company believes, based on current facts and circumstances, that a material payment pursuant to such guarantees is remote. Leases with guarantee amounts totaling $3 million, $27 million, and $68 million will expire in 2006, 2008, and 2012, respectively.

14

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Variable Interest Entities

The Company has evaluated material relationships and has concluded that the legal entities involved with these material relationships are not Variable Interest Entities ("VIEs") or, in the case of Primester, a joint venture that manufactures cellulose acetate at its Kingsport, Tennessee plant, the Company is not the primary beneficiary of the VIE. As such, in accordance with Interpretation No. 46R "Consolidation of Variable Interest Entities" ("FIN 46R"), the Company is not required to consolidate these entities. In addition, the Company has evaluated long-term purchase obligations with two entities that may be VIEs at September 30, 2006. These potential VIEs are joint ventures from which the Company has purchased raw materials and utilities for several years and purchases approximately $70 million of raw materials and utilities on an annual basis. The Company has no equity interest in these entities and has confirmed that one party to each of these joint ventures does consolidate the potential VIE. However, due to competitive and other reasons, the Company has not been able to obtain the necessary financial information to determine whether the entities are VIEs, and if one or both are VIEs, whether or not the Company is the primary beneficiary.

14.   DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING

Hedging Programs

Financial instruments held as part of the hedging programs discussed below are recorded at fair value based upon comparable market transactions as quoted by brokers.

The Company is exposed to market risk, such as changes in currency exchange rates, raw material and energy costs and interest rates. The Company uses various derivative financial instruments pursuant to the Company's hedging policies to mitigate these market risk factors and their effect on the cash flows of the underlying transactions. 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 cash flows of the underlying exposures being hedged. The Company does not hold or issue derivative financial instruments for trading purposes. For further information, see Note 9 to the consolidated financial statements in Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K.

At September 30, 2006, mark-to-market gains from raw material, currency and certain interest rate hedges that were included in accumulated other comprehensive loss totaled approximately $2 million. If realized, approximately $1 million in losses will be reclassified into earnings during the next 12 months. The mark-to-market gains or losses on non-qualifying, excluded and ineffective portions of hedges are immediately recognized in cost of sales or other income and charges. Such amounts did not have a material impact on earnings during the third quarter and first nine months 2006.

15

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

15.   STOCKHOLDERS' EQUITY

A reconciliation of the changes in stockholders’ equity for the first nine months 2006 is provided below:

(Dollars in millions)	Common Stock at Par Value $	Paid-in Capital $	Retained Earnings $	Accumulated Other Comprehensive Income (Loss) $	Treasury Stock at Cost $	Total Stockholders' Equity $
Balance at December 31, 2005	1	320	1,923	(200)	(432)	1,612
Net Earnings	--	--	314	--	--	314
Cash Dividends Declared	--	--	(108)	--	--	(108)
Other Comprehensive Income	--	--	--	36	--	36
Stock Option Exercises and Other Items (1)	--	48	--	--	--	48
Balance at September 30, 2006	1	368	2,129	(164)	(432)	1,902

⁽¹⁾ The tax benefits relating to the difference between the amounts deductible for federal income taxes over the amounts charged to income for book purposes have been credited to paid-in capital.

(Dollars in millions)		Cumulative Translation Adjustment		Unfunded Minimum Pension Liability		Unrealized Gains (Losses) on Derivative Instruments		Unrealized Gains (Losses) on Investments		Accumulated Other Comprehensive Income (Loss)
Balance at December 31, 2004	$	155	$	(248)	$	(8)	$	(2)	$	(103)
Period change		(94)		(7)		3		1		(97)
Balance at December 31, 2005		61		(255)		(5)		(1)		(200)
Period change		32		--		5		(1)		36
Balance at September 30, 2006	$	93	$	(255)	$	--	$	(2)	$	(164)

Except for cumulative translation adjustment, amounts of other comprehensive loss are presented net of applicable taxes. Because cumulative translation adjustment is considered a component of permanently invested unremitted earnings of subsidiaries outside the United States, no taxes are provided on such amounts.

16.   EARNINGS AND DIVIDENDS PER SHARE

	Third Quarter		First Nine Months
	2006	2005	2006	2005
Shares used for earnings per share calculation:
Basic	82.1	81.3	81.8	80.5
Diluted	83.1	82.0	82.8	81.7

In the third quarter and first nine months 2006, common shares underlying options to purchase 2,193,779 shares of common stock at a range of prices from $52.18 to $63.25 were excluded from the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares during those periods.

In the third quarter and first nine months 2005, common shares underlying options to purchase 1,210,088 shares of common stock at a range of prices from $52.19 to $67.50 and 854,187 shares of common stock at a range of prices from $56.50 to $67.50, respectively, were excluded from the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares during those periods.

16

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

The Company declared cash dividends of $0.44 per share in the third quarters 2006 and 2005 and $1.32 per share in the first nine months 2006 and 2005.

17.   SHARE-BASED COMPENSATION AWARDS

On January 1, 2006, the Company adopted SFAS No. 123 (R). SFAS No. 123 (R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". Prior to adoption, the Company implemented the disclosure-only requirements of SFAS No. 123 and continued to implement the requirements of APB No. 25 for financial statement reporting. Additional information regarding SFAS No. 123 (R), SFAS No. 123 and APB No. 25 may be found in Note 23 to the consolidated financial statements in Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K.

The Company adopted SFAS No. 123 (R) using the "modified prospective" method that requires compensation expense of all employee and non-employee director share-based compensation awards be recognized in the financial statements based upon their fair value over the requisite service or vesting period: a) based upon the requirements of SFAS No. 123 (R) for all new awards granted after the effective date and b) based upon the requirements of SFAS No. 123 for all awards granted prior to the effective date of SFAS No. 123 (R) that remain unvested on the effective date. Under the requirements of APB No. 25, the Company was required to recognize compensation cost for such awards unless the employee or non-employee director paid an amount to acquire the awarded shares at least equal to the quoted market price of the stock at the measurement date (typically the date of grant). This requirement resulted in compensation expense recognition and reporting in the financial statements for most share-based awards (unrestricted stock awards, restricted stock awards, long-term performance stock awards and stock appreciation rights) except for stock options, substantially all of which were awarded at the closing market price of the Company's common stock on the date of grant. Effective with adoption of SFAS No. 123 (R), compensation expense related to stock option awards are recognized in the financial statements at their fair value.

The Company is authorized by the Board of Directors under the 2002 Omnibus Long-Term Compensation Plan and 2002 Director Long-Term Compensation Plan to provide grants to employees and non-employee members of the Board of Directors. Additional information regarding compensation plans may be found in Note 15 to the consolidated financial statements in Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K. It has been the Company's practice to issue new shares rather than treasury shares for equity awards that require payment by the issuance of common stock and to withhold or accept back shares awarded necessary to cover the income taxes of employee participants. Shares of non-employee directors are not withheld or acquired for the withholding of their income taxes. Shares of unrestricted common stock owned by specified senior management level employees are accepted by the Company to pay for the exercise price of stock option exercises in accordance with the terms and conditions of the awards.

17

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In accordance with implementation requirements of SFAS No. 123 (R) under the modified prospective method, the Company did not restate prior fiscal periods and is required to continue the same disclosure-only requirements of SFAS No. 123 for comparative purposes until all periods reported are comparable on the same basis. The following table illustrates the effect on net earnings and earnings per share as formerly provided under SFAS No. 123:

			Third Quarter				First Nine Months
(Dollars and shares in millions, except per share amounts)			2006		Proforma 2005		2006		Proforma 2005
Net earnings, as reported		$	95	$	123	$	314	$	491
Add: Stock-based employee compensation expense
included in net earnings, as reported			2		--		9		7
Deduct: Total additional stock-based employee compensation cost, net of tax, that would have been included in net earnings under fair value method			2		1		9		10
Pro forma net earnings		$	95	$	122	$	314	$	488
Basic earnings per share	As reported	$	1.16	$	1.51	$	3.84	$	6.10
	Pro forma	$	N.A.	$	1.50	$	N.A.	$	6.06
Diluted earnings per share	As reported	$	1.15	$	1.50	$	3.79	$	6.01
	Pro forma	$	N.A.	$	1.49	$	N.A.	$	5.99

In the third quarter and first nine months 2006, approximately $4 million and $15 million, respectively, of compensation expense before tax was recognized in selling, general and administrative expense in the earnings statement for all share-based awards of which approximately $2 million and $6 million related to stock options in the third quarter and the first nine months 2006, respectively. The impact on third quarter 2006 net earnings of $2 million is net of a $2 million credit to deferred tax expense for recognition of deferred tax assets. The impact on the first nine months 2006 net earnings of $9 million is net of a $6 million credit to deferred tax expense for recognition of deferred tax assets.

The impact on the financial statements of implementing SFAS No. 123 (R) is the recognition of compensation expense for all stock options granted.

18

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Stock Option Awards

Option awards are granted to non-employee directors on an annual basis and to employees who meet certain eligibility requirements. A single large volume option grant is usually awarded to eligible employees in the fourth quarter of each year, if and when granted by the Compensation and Management Development Committee of the Board of Directors, and occasional individual grants are awarded to eligible employees throughout the year. Option awards have an exercise price equal to the closing price of the Company's stock on the date of grant. The term of options is ten years with vesting periods that vary up to three years. Vesting usually occurs ratably or at the end of the vesting period. The fair value of options cannot be determined by market value as they are not traded in an open market. Accordingly, a financial pricing model is utilized to determine fair value. The Company utilizes the Black Scholes Merton ("BSM") model which relies on certain assumptions to estimate an option's fair value. These weighted average assumptions relevant to options granted in the third quarter and first nine months 2006 and the same periods for 2005 are identified in the table below:

Assumptions	Third Quarter 2006	Third Quarter 2005	First Nine Months 2006	First Nine Months 2005
Exercise Price	$52.18	--	$56.25	$56.52
Expected term years	5.00	--	4.41	6.00
Expected volatility rate	22.58%	--	22.51%	27.90%
Expected dividend yield	3.37%	--	3.13%	3.70%
Average risk-free interest rate	4.99%	--	5.02%	3.50%
Expected forfeiture rate	0.75%	--	0.75%	Actual

In the third quarter and first nine months 2006, the Company granted 3,200 and 110,838 options, respectively. The Company did not grant any options during the third quarter 2005 and granted 64,788 options during the first nine months 2005.

Prior to adoption of SFAS No. 123 (R), the Company calculated the expected term of stock options using a standard formula prescribed in accounting literature which indicated a six year expected term. Effective with the fourth quarter 2005 large annual option award, the Company analyzed historical pre-vesting and post-vesting cancellations, forfeitures, expirations and exercise transactions of large annual grants to determine the expected term. The Company expects to analyze historical transactions preceding the large annual option grant to ensure that all assumptions based upon internal data reflect the most reasonable expectations for fair value analysis.

The volatility rate is derived from actual Company common stock volatility over the same time period as the expected term. The Company uses a weekly high closing stock price based upon daily closing prices in the week. The volatility rate is derived by mathematical formula utilizing the weekly high closing price data.

The expected dividend yield is derived by mathematical formula which uses the expected Company annual dividends over the expected term divided by the fair market value of the Company's common stock at the grant date.

The average risk-free interest rate is derived from United States Department of Treasury published interest rates of daily yield curves for the same time period as the expected term.

19

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Prior to adoption of SFAS No. 123 (R), the Company did not estimate forfeitures and recognized them as they occurred for proforma disclosure of share-based compensation expense. With adoption of SFAS No. 123 (R), estimated forfeitures must be considered in recording share-based compensation expense. While not actually utilized by the BSM model to determine the fair value amount of a share-based payment award, it is a factor that must be estimated, monitored and reviewed over the life of share-based compensation awards to record the most probable expected compensation expense related to the award. Estimated forfeiture rates vary with each type of award affected by several factors, one of which is the varying composition and characteristics of the award participants. Estimated forfeitures for the Company's share-based awards range from 0.75 percent to 10.0 percent with the estimated forfeitures for options at 0.75 percent.

The following tables provide a reconciliation of option activity for the first nine months 2006 and 2005:

Stock Options	Number of Shares		Weighted Average Exercise Price	Weighted Average Remaining Contractual Life (years)		Aggregate Intrinsic Value(1)
Outstanding at 12/31/2005	6,616,803	$	48.26
Grants	110,838	$	56.25
Exercises	(542,506)	$	44.82		$	5,938,424
Cancelled/Forfeited/Expired	(228,226)	$	55.65
Outstanding at 9/30/2006	5,956,909	$	48.44	5.6	$	37,167,411
Exercisable at 9/30/2006	4,173,751	$	47.12	4.3	$	32,447,135
Outstanding at 12/31/2004	8,155,148	$	46.86
Grants	64,788	$	56.52
Exercises	(2,159,797)	$	43.27		$	32,982,186
Cancelled/Forfeited/Expired	(469,135)	$	63.65
Outstanding at 9/30/2005	5,591,004	$	46.93	5.4	$	15,808,530
Exercisable at 9/30/2005	4,628,774	$	47.24	4.8	$	13,758,499

⁽¹⁾ Intrinsic value is the amount by which the market price of the stock or the market price at the exercise date underlying the option exceeds the exercise price of the option.

A total of 1,783,158 options are unvested at September 30, 2006 for which $12 million in compensation expense will be recognized over 3 years. A total of 962,230 options were unvested at September 30, 2005. Cash proceeds from the exercise of options in the first nine months 2006 total approximately $23 million with a related tax benefit of approximately $2 million.

Other Share-Based Compensation Awards

In addition to stock option awards, the Company has long-term performance stock awards, restricted stock awards and stock appreciation rights. The long-term performance awards are based upon return on capital and total shareholder return. The recognized compensation cost before tax for these other share-based awards in the third quarter and first nine months 2006, is approximately $2 million and $9 million, respectively. The unrecognized compensation cost before tax for these same awards total approximately $18 million at September 30, 2006 and will be recognized through 2009.

20

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

18.   SEGMENT INFORMATION

The Company's products and operations are managed and reported in five reportable operating segments, consisting of the CASPI segment, the Fibers segment, the PCI segment, the Performance Polymers segment and the Specialty Plastics ("SP") segment. The Company's segments were previously aligned in a divisional structure that provided for goods and services to be transferred between divisions at predetermined prices that may have been in excess of cost, which resulted in the recognition of intersegment sales revenue and operating earnings. Such interdivisional transactions were eliminated in the Company's consolidated financial statements. In first quarter 2006, the Company realigned its organizational structure to support its growth strategy and to better reflect the integrated nature of the Company's assets. A result of the realigned organizational structure is that goods and services are transferred among the segments at cost. As part of this change, the Company's segment results have been restated to eliminate the impact of interdivisional sales revenue and operating earnings. For additional information concerning the Company's segments' businesses and products, refer to Note 21 to the consolidated financial statements in Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K and the Form 8-K filed on April 20, 2006.

In the first quarter of 2006, management determined that the Developing Businesses ("DB") segment is not of continuing significance for financial reporting purposes. As a result, revenues and costs previously included in the DB segment and research and development expenses not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown in the tables below as "other" revenues and operating losses.

		Third Quarter
(Dollars in millions)		2006		2005
Sales by Segment
CASPI	$	367	$	333
Fibers		228		228
PCI		457		428
Performance Polymers		707		646
SP		207		179
Total Sales by Segment		1,966		1,814
Other		--		2
Total Sales	$	1,966	$	1,816

		First Nine Months
(Dollars in millions)		2006		2005
Sales by Segment
CASPI	$	1,078	$	977
Fibers		696		633
PCI		1,321		1,214
Performance Polymers		2,007		1,944
SP		596		536
Total Sales by Segment		5,698		5,304
Other		--		26
Total Sales	$	5,698	$	5,330

21

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

		Third Quarter
(Dollars in millions)		2006		2005
Operating Earnings (Loss) (1)
CASPI (1)	$	53	$	63
Fibers		55		60
PCI (1)		25		40
Performance Polymers		17		32
SP		18		17
Total Operating Earnings by Segment		168		212
Other (1)		(10)		(14)
Total Operating Earnings	$	158	$	198

⁽¹⁾   Operating earnings (loss) for the following segments include asset impairments and restructuring charges: CASPI includes $1 million in third quarter 2005 for previously closed manufacturing facilities; PCI includes $11 million in third quarter 2006 for the expected divestiture of the Arkansas facility and Other includes $4 million for Cendian's shutdown of its business activities.

		First Nine Months
(Dollars in millions)		2006		2005
Operating Earnings (Loss) (1)
CASPI (2)	$	176	$	194
Fibers		182		155
PCI (2)		113		128
Performance Polymers		46		166
SP		50		59
Total Operating Earnings by Segment		567		702
Other (2)		(35)		(57)
Total Operating Earnings	$	532	$	645

⁽²⁾   Operating earnings (loss) for the following segments include asset impairments and restructuring charges: CASPI includes $8 million and $3 million in the first nine months 2006 and 2005, respectively, for previously closed manufacturing facilities; PCI includes $11 million and $4 million in the first nine months 2006 and 2005, respectively, for the expected divestiture of the Arkansas facility and Other includes $4 million and $16 million for the first nine months 2006 and 2005, respectively for Cendian's shutdown of its business activities.

22

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

		September 30,		December 31,
(Dollars in millions)		2006		2005
Assets by Segment
CASPI	$	1,509	$	1,393
Fibers		612		675
PCI		1,541		1,589
Performance Polymers		1,318		1,416
SP		772		689
Total Assets by Segment Before Assets Held for Sale		5,752		5,762
Other		2		11
Assets Held for Sale (3)		312		--
Total Assets	$	6,066	$	5,773

⁽³⁾   For more information regarding assets held for sale, see Note 5 to the Company's unaudited consolidated financial statements.

19.   LEGAL MATTERS

General

From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters, including the sorbates litigation and the asbestos litigation (described below), will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could negatively impact earnings or cash flows in a particular future period.

Sorbates Litigation

Two civil cases relating to sorbates remain. In each case, the Company prevailed at the trial court, and in each case, the plaintiff has appealed the trial court's decision. The Company intends to vigorously defend its position at the appellate court level in both cases.

Asbestos Litigation

Over the years, Eastman has been named as a defendant, along with numerous other defendants, in lawsuits in various state courts in which plaintiffs have alleged injury due to exposure to asbestos at Eastman’s manufacturing sites and sought unspecified monetary damages and other relief. Historically, these cases have been dismissed or settled without a material effect on Eastman’s financial condition, results of operations, or cash flows.

In certain recently filed cases, plaintiffs allege exposure to asbestos-containing products allegedly made by Eastman. Based on its investigation to date, the Company has information that it manufactured limited amounts of an asbestos-containing plastic product between the mid-1960’s and the early 1970’s. The Company’s investigation has found no evidence that any of the plaintiffs worked with or around any such product alleged to have been manufactured by the Company. The Company intends to defend vigorously all such claims or to settle them on acceptable terms.

The Company has finalized an agreement with an insurer that issued primary general liability insurance to certain predecessors of the Company prior to the mid-1970's, pursuant to which that insurer will provide coverage for a portion of certain of the Company's defense costs and payments of settlements or judgments in connection with asbestos-related lawsuits.

23

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

Evaluation of the allegations and claims made in recent asbestos-related lawsuits continue to be reviewed by the Company. Based on such evaluation to date, the Company continues to believe that the ultimate resolution of the approximately 1,000 pending asbestos claims will not have a material impact on the Company’s financial condition, results of operations, or cash flows, although these matters could result in the Company being subject to monetary damages, costs or expenses, and charges against earnings in particular periods. To date, costs incurred by the Company related to the recent asbestos-related lawsuits have not been material.

20.   RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 155 simplifies accounting for certain hybrid instruments under SFAS No. 133 by permitting fair value remeasurement for financial instruments containing an embedded derivative that otherwise would require bifurcation. SFAS No. 155 eliminates both the previous restriction under SFAS No. 140 on passive derivative instruments that a qualifying special-purpose entity may hold and SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” which provides that beneficial interests are not subject to the provisions of SFAS No. 133. SFAS No. 155 also establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, and clarifies that concentrations of credit risk in the form of subordination are not imbedded derivatives. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company has evaluated the effect of SFAS No. 155 and determined that it does not expect a material impact from the adoption to its consolidated financial position, liquidity, or results from operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” an amendment of SFAS No. 140. SFAS No. 156 permits entities to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess to rights for impairment or the need for an increased obligation. SFAS No. 156 also clarifies when a servicer should separately recognize servicing assets and liabilities; requires all separately recognized assets and liabilities to be initially measured at fair value, if practicable; permits a one-time reclassification of available-for-sales securities to trading securities by an entity with recognized servicing rights and requires additional disclosures for all separately recognized servicing assets and liabilities. SFAS No. 156 is effective as of the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company has evaluated the effect of SFAS No. 156 and determined that it does not expect a material impact from the adoption to its consolidated financial position, liquidity, or results from operations.

In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS 109 "Accounting for Income Taxes". FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect FIN 48 will have on its consolidated financial position, liquidity, or results of operations.

24

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which addresses the measurement of fair value by companies when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS No. 157 provides a common definition of fair value to be used throughout GAAP which is intended to make the measurement of fair value more consistent and comparable and improve disclosures about those measures. SFAS No. 157 will be effective for an entity's financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect SFAS No. 157 will have on its consolidated financial position, liquidity, or results of operations.

In September 2006, the FASB issued SFAS No. 158, "Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)". One objective of this standard is to make it easier for investors, employees, retirees and other parties to understand and assess an employer’s financial position and its ability to fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. SFAS No. 158 requires an employer to fully recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also requires an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 requires an entity to recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87. This Statement requires an entity to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures for fiscal years ending after December 15, 2006. Based on the funded status of Eastman's pension and postretirement benefit plans in the December 31, 2005 Annual Report on Form 10-K, the adoption of SFAS No. 158 will result in a $128 million reduction to stockholders' equity.

In September 2006, the Securities and Exchange Commission ("SEC") published Staff Accounting Bulletin No. 108 ("SAB 108") which expresses the SEC staff's views regarding the process to be applied in considering the effects of prior years' misstatements when quantifying misstatements in the current year's financial statements. Registrants must quantify the impact on the current year's financial statements of correcting all misstatements, including the carryover and reversing effects of prior years' misstatements, as well as the effects of errors arising in the current year. If material to the current year's income statement, correction of existing accumulated balance sheet misstatements (i.e., from immaterial errors in prior years) should be accomplished by correcting the financial statements of affected previous years. However, in such case, previously filed reports would not require amendment; rather, corrections should be made the next time such prior years' statements are filed with the SEC. The Company does not expect to change its current practice regarding accounting for misstatements and does not expect the need for restatement of prior periods as a result of SAB 108.

In September 2006, the FASB issued Staff Position No. AUG AIR-1 ("FSP No. AUG AIR-1") which addresses the accounting for planned major maintenance activities. FSP No. AUG AIR-1 amends certain provisions in the American Institute of Certified Public Accountants ("AICPA") Industry Audit Guide and APB Opinion No. 28, "Interim Financial Reporting". Four alternative methods of accounting for planned major maintenance activities were permitted: direct expense, built-in overhaul, deferral, and accrual ("accrue-in-advance"). This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities because it results in the recognition of a liability in a period prior to the occurrence of the transaction or event obligating the entity. FSP No. AUG AIR-1 is effective for an entity's financial statements issued for fiscal years beginning after December 15, 2006. The Company does not utilize the accrue-in-advance method of accounting and therefore expects this FSP to have no impact on its consolidated financial position, liquidity, or results of operations.

25

NOTES TO THE UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

21.   SUBSEQUENT EVENTS

In October 2006, the Company announced a definitive agreement for the sale of its polyethylene businesses for a purchase price of $255 million in cash at closing. The sale will include Eastman's polyethylene and Epolene polymer businesses, related assets, and the Company's ethylene pipeline. Subject to regulatory approval and satisfaction of customary conditions, the sale is expected to be completed in fourth quarter 2006. Results from the polyethylene product lines are reported in the Performance Polymers segment and results from the Epolene polymer businesses are reported in the CASPI Segment.

In October 2006, the Company decided to cease production of cyclohexane dimethanol ("CHDM") modified polymers, intermediate products primarily used internally, in San Roque, Spain to gain operational efficiencies at other facilities, which will result in asset impairment and restructuring charges in the fourth quarter 2006 of approximately $25 million.

26

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

ITEM	Page
Critical Accounting Policies	27
Overview	28
Results of Operations	29
Summary by Operating Segment	32
Summary by Customer Location	37
Liquidity, Capital Resources, and Other Financial Information	38
Recently Issued Accounting Standards	41
Outlook	43
Forward-Looking Statements and Risk Factors	44

This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's audited consolidated financial statements, including related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations contained in the Company's 2005 Annual Report on Form 10-K, and the Company's unaudited consolidated financial statements, including related notes, included elsewhere in this report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.

CRITICAL ACCOUNTING POLICIES

In preparing the consolidated financial statements in conformity with accounting principles generally accepted ("GAAP") in the United States, Eastman Chemical Company's (the "Company" or "Eastman") management must make decisions which impact the reported amounts and the related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and assumptions on which to base estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to allowances for doubtful accounts, impaired assets, environmental costs, U.S. pension and other post-employment benefits, litigation and contingent liabilities, and income taxes. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The Company’s management believes the critical accounting policies listed and described in Part II, Item 7 of the Company's 2005 Annual Report on Form 10-K are the most important to the fair presentation of the Company’s financial condition and results. These policies require management’s more significant judgments and estimates in the preparation of the Company’s consolidated financial statements.

27

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Sales revenue in third quarter 2006 was $2.0 billion, an 8 percent increase over third quarter 2005. Sales revenue in the first nine months 2006 was $5.7 billion, a 7 percent increase over the first nine months 2005. Operating earnings were $158 million in third quarter 2006, a $40 million decrease from third quarter 2005. Operating earnings were $532 million in the first nine months 2006, a $113 million decrease from first nine months 2005. Despite higher raw material and energy costs, especially for paraxylene in the Performance Polymers and Specialty Plastics ("SP") segments and for propane in all segments except Fibers, these results reflect strong earnings from a broad base of businesses. Third quarter and first nine months 2006 results were negatively impacted by $13 million and $23 million, respectively, in asset impairments and restructuring charges compared to $4 million and $23 million for the comparable periods in 2005.

First nine months 2006 results were negatively impacted by approximately $15 million of costs, net of insurance, associated with operational disruptions at the Company's Longview, Texas, manufacturing facility, primarily in the first quarter 2006. The Company expects no further impact on results in the fourth quarter 2006 from these events.

Net earnings for the third quarter 2006 and first nine months 2006 were $95 million and $314 million, respectively, versus the third quarter and first nine months 2005 net earnings of $123 million and $491 million, respectively. Included in 2005 results were a $171 million gain on the sale of the Company's equity investment in Genencor International, Inc. ("Genencor") and early debt retirement costs of $46 million.

The Company generated $233 million in cash from operating activities in the first nine months 2006, a decrease of $144 million compared to the first nine months 2005 due to the prior year's higher net earnings and the current year's increase in working capital, partially offset by lower pension contributions in the current year.

The Company continues to evaluate its portfolio, which could lead to further restructuring, divestiture, or consolidation of product lines. As previously announced, the Company has entered into definitive agreements for the sale of its Batesville, Arkansas manufacturing facility and related assets and the specialty organic chemicals product lines in the Performance Chemicals and Intermediates ("PCI") segment and for the sale of its polyethylene and Epolene polymer businesses and related assets of the Performance Polymers and Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segments located at the Longview, Texas site, and the Company's ethylene pipeline. These sales are for a cash purchase price of $330 million at closing. Subject to regulatory approval and satisfaction of customary conditions, both divestitures are expected to be completed in fourth quarter 2006. For the first nine months of 2006, sales revenue of $667 million and operating earnings of $50 million were attributed to the product lines being divested.

With the continuing successful implementation of the Company's turnaround strategy, as evidenced by strong operating results and a strengthened financial profile, the Company believes that it is positioned for profitable growth. This growth will be focused in markets in which the Company has expertise and deep understanding, and where it can leverage the technological innovation it has built over the past 85 years.

28

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

RESULTS OF OPERATIONS

		Third Quarter				Volume Effect	Price Effect	Product Mix Effect	Exchange Rate Effect
(Dollars in millions)		2006		2005	Change
Sales	$	1,966	$	1,816	8 %	-- %	9 %	(1) %	-- %

		First Nine Months				Volume Effect	Price Effect	Product Mix Effect	Exchange Rate Effect
(Dollars in millions)		2006		2005	Change
Sales	$	5,698	$	5,330	7 %	1 %	7 %	(1) %	-- %

Sales revenue for the third quarter and the first nine months 2006 increased $150 million and $368 million over the third quarter and the first nine months 2005, respectively. The increase was primarily due to higher selling prices in response to both higher raw material and energy costs and continued strong economic conditions.

		Third Quarter					First Nine Months
(Dollars in millions)		2006		2005	Change		2006		2005	Change
Gross Profit	$	316	$	352	(10) %	$	997	$	1,125	(11) %
As a percentage of sales		16%		19 %			17 %		21 %

Gross profit and gross profit as a percentage of sales for third quarter 2006 decreased compared to the third quarter 2005 due to increased raw material and energy costs and operational disruptions that were partially offset by higher selling prices.

Gross profit and gross profit as a percentage of sales for first nine months 2006 decreased compared to the first nine months 2005 primarily due to reduced gross margins in the Performance Polymers segment.

		Third Quarter					First Nine Months
(Dollars in millions)		2006		2005	Change		2006		2005	Change
Selling, General and
Administrative Expenses	$	105	$	108	(3) %	$	316	$	339	(7) %
Research and Development
Expenses		40		42	(5) %		126		120	5 %
	$	145	$	150	(3) %	$	442	$	459	(4) %
As a percentage of sales		7 %		8 %			8 %		9 %

Selling, general and administrative ("SG&A") expenses for third quarter 2006 decreased compared to third quarter 2005 primarily due to lower incentive compensation expense. SG&A expenses in the first nine months 2006 decreased compared to the first nine months 2005 due to lower incentive compensation expense in the first nine months 2006 and to Cendian Corporation's ("Cendian") shutdown of its business activities in the first quarter of 2005. SG&A expenses include compensation expense under Statement of Financial Accounting Standards ("SFAS") No. 123 Revised December 2004 ("SFAS No. 123 (R)"), "Share-Based Payment". For more information concerning SFAS No. 123 (R), see Note 17 to the Company's unaudited consolidated financial statements.

29

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Research and development ("R&D") expenses decreased $2 million in third quarter 2006 compared to third quarter 2005 primarily due to lower expenses in the Performance Polymers segment. R&D expenses increased $6 million in the first nine months 2006 compared to the first nine months 2005 primarily due to increased spending on growth initiatives, particularly in the SP segment. The Company expects that R&D expenses will be approximately 3 percent of revenue in 2006.

Asset Impairments and Restructuring Charges, Net

Asset impairments and restructuring charges totaled $13 million and $23 million for the third quarter and first nine months 2006 compared to $4 million and $23 million in third quarter and first nine months 2005, respectively. The Company continues to review its portfolio of products and businesses, which could result in further restructuring, divestiture, and consolidation. For more information regarding asset impairments and restructuring charges, see Note 10 to the Company's unaudited consolidated financial statements.

Other Operating Income

Other operating income for the first nine months 2005 reflects a gain of $2 million related to the 2004 divestiture of certain businesses and product lines within the CASPI segment.

Interest Expense, Net

		Third Quarter					First Nine Months
(Dollars in millions)		2006		2005	Change		2006		2005	Change
Gross interest costs	$	28	$	27		$	84	$	91
Less: Capitalized interest		2		1			5		3
Interest expense		26		26	-- %		79		88	(10) %
Interest income		5		3			17		11
Interest expense, net	$	21	$	23	(9) %	$	62	$	77	(19) %

Gross interest costs for the third quarter 2006 were higher compared to the third quarter 2005 due to higher average borrowings and higher average interest rates.

Gross interest costs for the first nine months 2006 were lower compared to the first nine months 2005 due to lower average borrowings that more than offset higher average interest rates.

For 2006, the Company expects net interest expense to decrease compared to 2005 due to anticipated lower average borrowings, increased capitalized interest and higher interest income.

Income from Equity Investment in Genencor

Income from equity investment in Genencor includes the Company's portion of earnings from its equity investment in Genencor for the first six months 2005. In the second quarter 2005, the Company completed the sale of its equity interest in Genencor for net cash proceeds of approximately $417 million. The book value of the investment prior to sale was $246 million resulting in a pre-tax gain on the sale of $171 million.

30

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Early Debt Extinguishment Costs

In the second quarter 2005, the Company completed the early repayment of $500 million of its outstanding long-term debt for $544 million in cash and recorded a charge of $46 million for early debt extinguishment costs including $2 million in unamortized bond issuance costs. The book value of the repaid debt was $500 million.

Other (Income) Charges, Net

		Third Quarter						First Nine Months
(Dollars in millions)		2006		2005		Change		2006		2005		Change
Other (income)	$	(3)	$	(2)	$	(1)	$	(10)	$	(8)	$	(2)
Other charges		4		--		4		8		5		3
Other (income) charges, net	$	1	$	(2)	$	3	$	(2)	$	(3)	$	1

Included in other income are the Company’s portion of earnings from its equity investments, gains on the sale of certain technology business venture investments, royalty income, and net gains on foreign exchange transactions. Included in other charges are net losses on foreign exchange transactions, the Company’s portion of losses from its equity investments, write-downs to fair value of certain technology business venture investments due to other than temporary declines in value, and fees on securitized receivables.

Provision for Income Taxes

		Third Quarter					First Nine Months
(Dollars in millions)		2006		2005	Change		2006		2005	Change
Provision for income taxes	$	41	$	54	(24)%	$	158	$	207	(24)%
Effective tax rate		30%		31%			34%		30%

The third quarter and first nine months 2006 effective tax rate reflects the Company's expected annual tax rate on reported operating earnings before income tax, excluding discrete items, of approximately 34 percent. The third quarter 2006 effective tax rate was impacted by the reversal of foreign loss valuation allowances. The increase in the effective tax rate for the first nine months 2006 over the first nine months 2005 is primarily attributable to lower foreign earnings in favorable tax jurisdictions and to a decrease in tax deductions for charitable donations. The implementation of SFAS No. 123 (R), effective January 1, 2006, did not have a material effect on the Company's effective income tax rate in the third quarter and first nine months 2006. For additional information regarding SFAS No. 123 (R), see Note 17 to the Company's unaudited consolidated financial statements.

The third quarter 2005 effective tax rate reflects the Company's then expected annual tax rate on reported operating earnings before income tax, excluding discrete items, of approximately 30 percent and higher applicable tax rates related to the early extinguishment of debt costs and the gain on the sale of Genencor stock. The first nine months 2005 effective tax rate also reflects a net deferred tax benefit adjustment related to the expected utilization of capital loss carryforwards.

As described in Note 19 to the consolidated financial statements in Part II, Item 8 of the Company’s 2005 Annual Report on Form 10-K, the Company has significant foreign net operating loss carryforwards and related valuation allowances. Future tax provisions may be positively or negatively impacted to the extent that the realization of these carryforwards is greater or less than anticipated.

31

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SUMMARY BY OPERATING SEGMENT

The Company's products and operations are managed and reported in five reportable operating segments, consisting of the CASPI segment, the Fibers segment, the PCIsegment, the Performance Polymers segment and the SP segment. The Company's segments were previously aligned in a divisional structure that provided for goods and services to be transferred between divisions at predetermined prices that may have been in excess of cost, which resulted in the recognition of intersegment sales revenue and operating earnings. Such interdivisional transactions were eliminated in the Company's consolidated financial statements. In first quarter 2006, the Company realigned its organizational structure to support its growth strategy and to better reflect the integrated nature of the Company's assets. A result of the realigned organizational structure is that goods and services are transferred among the segments at cost. As part of this change, the Company's segment results have been restated to eliminate the impact of interdivisional sales revenue and operating earnings. For additional information concerning the segments' businesses and products, see Note 21 to the consolidated financial statements in Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K and the Form 8-K filed on April 20, 2006.

In the first quarter of 2006, management determined that the Developing Businesses ("DB") segment is not of continuing significance for financial reporting purposes. As a result, revenues and costs previously included in the DB segment and research and development expenditures not identifiable to an operating segment are not included in segment operating results for either of the periods presented and are shown in Note 18 to the Company's unaudited consolidated financial statements as "other" revenues and operating losses.

During third quarter 2006, the Company entered into a definitive agreement for the sale of its Batesville, Arkansas manufacturing facility and related assets and specialty organic chemicals product lines in the PCI segment. In October 2006, the Company announced a definitive agreement for the sale of its polyethylene and Epolene polymer businesses and related assets located at the Longview, Texas site and the Company's ethylene pipeline. The polyethylene assets and product lines are in the Performance Polymers segment, while the Epolene assets and product lines are in the CASPI segment. Subject to regulatory approval and satisfaction of customary conditions, both divestitures are expected to be completed in fourth quarter 2006.

CASPI Segment
			Third Quarter							First Nine Months
							Change							Change
(Dollars in millions)			2006		2005		$	%		2006		2005		$	%
Sales		$	367	$	333	$	34	10 %	$	1,078	$	977	$	101	10 %
	Volume effect						(2)	(1)%						5	-- %
	Price effect						34	10 %						96	10 %
	Product mix effect						--	-- %						6	1 %
	Exchange rate effect						2	1 %						(6)	(1)%
Operating earnings			53		63		(10)	(16)%		176		194		(18)	(9)%
Asset impairments and
restructuring charges, net			--		1		(1)			8		3		5
Other operating income			--		--		--			--		(2)		2

32

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

For the third quarter and first nine months 2006 compared to the third quarter and first nine months 2005, sales revenue increased $34 million and $101 million, respectively, due to an increase in selling prices in response to higher raw material and energy costs.

Operating earnings decreased $10 million, particularly for cyclical commodity and for adhesives product lines, for the third quarter 2006 compared to the third quarter 2005 due to an increase in raw materials and energy costs which was partially offset by an increase in selling prices.

Operating earnings decreased $18 million for the first nine months 2006 compared to the first nine months 2005, primarily due to increased raw material and energy costs and increased asset impairments and restructuring charges which more than offset an increase in selling prices. Asset impairments and restructuring charges of $8 million for the first nine months 2006 and $3 million for the first nine months 2005, related primarily to previously closed manufacturing facilities.

In October 2006, the Company announced a definitive agreement for the sale of the CASPI segment's Epolene polymer businesses and related assets. Subject to regulatory approval and satisfaction of customary conditions, the divestiture is expected to be completed in fourth quarter 2006. CASPI sales revenue and operating earnings attributed to the assets held for sale were $53 million and $1 million, respectively, for the first nine months of 2006.

Fibers Segment
			Third Quarter							First Nine Months
							Change							Change
(Dollars in millions)			2006		2005		$	%		2006		2005		$	%
Sales		$	228	$	228	$	--	-- %	$	696	$	633	$	63	10 %
	Volume effect						(6)	(3) %						37	6 %
	Price effect						12	6 %						51	8 %
	Product mix effect						(6)	(3) %						(24)	(4) %
	Exchange rate effect						--	-- %						(1)	-- %
Operating earnings			55		60		(5)	(8) %		182		155		27	17 %

Sales revenue remained constant for the third quarter 2006 compared to the third quarter 2005 primarily due to higher selling prices which were offset by lower sales volume and an unfavorable shift in product mix. The higher selling prices were in response to higher raw material and energy costs as well as continued strong demand for and limited supply of acetate yarn and acetyl chemical products. The lower sales volume was primarily a result of reduced operating rates due to operational disruptions.

Sales revenue increased $63 million for the first nine months 2006 compared to the first nine months 2005 primarily due to higher selling prices and higher sales volume that were partially offset by an unfavorable shift in product mix. The higher selling prices were in response to higher raw material and energy costs as well as continued strong demand for and limited supply of acetate yarn and acetyl chemical products. The increased sales volume was due to strong demand for acetyl chemical products attributed to strengthened global acetate tow demand.

Operating earnings for the third quarter 2006 compared to the third quarter 2005 decreased $5 million due to lower sales volume and higher raw materials and energy costs more than offsetting higher selling prices.

Operating earnings for the first nine months 2006 compared to the first nine months 2005 increased $27 million as higher selling prices and increased sales volume more than offset higher raw material and energy costs.

33

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

The Company believes that acetate tow has modest growth potential in future years and has been evaluating growth options in Europe and Asia. In the third quarter 2006, the Company announced plans to add capacity and expand production of Estron acetate tow in Europe at its Workington, England facility to ensure continued supply of customers' acetate tow needs. The Company continues to evaluate options for growth in Asia.

PCI Segment
			Third Quarter							First Nine Months
							Change							Change
(Dollars in millions)			2006		2005		$	%		2006		2005		$	%
Sales		$	457	$	428	$	29	7 %	$	1,321	$	1,214	$	107	9 %
	Volume effect						(1)	-- %						(5)	-- %
	Price effect						32	8 %						113	9 %
	Product mix effect						(3)	(1)%						1	-- %
	Exchange rate effect						1	-- %						(2)	-- %
Operating earnings			25		40		(15)	(38)%		113		128		(15)	(12)%
Asset impairments and
restructuring charges, net			11		--		11			11		4		7

Sales revenue for the third quarter and first nine months 2006 compared to the third quarter and first nine months 2005 increased $29 million and $107 million, respectively, primarily due to higher selling prices, particularly in the intermediates product lines, in response to increases in raw material and energy costs.

Operating earnings decreased $15 million for the third quarter and first nine months 2006 compared to the third quarter and first nine months 2005, respectively. The third quarter 2006 operating earnings included asset impairments and restructuring charges of $11 million related to the expected divestiture of the PCI segment's Arkansas facility, assets and product lines. The third quarter 2005 operating earnings included $10 million of operating earnings from the achievement of certain milestones under an acetyls technology licensing agreement.

In third quarter 2006, the Company announced a definitive agreement for the sale of the PCI segment's Batesville, Arkansas manufacturing facility and related assets and specialty organic chemicals product lines. Subject to regulatory approval and satisfaction of customary conditions, this divestiture is expected to be completed in fourth quarter 2006. PCI sales revenue and operating results attributed to the assets held for sale were $97 million and $3 million, respectively, for the first nine months of 2006.

34

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Performance Polymers Segment
			Third Quarter
							Change
(Dollars in millions)			2006		2005		$	%
Total sales		$	707	$	646	$	61	10 %
Sales - assets held for sale			169		164		5	3 %
Sales - continuing product lines			538		482		56	12 %
	Volume effect						(22)	(3) %
	Price effect						77	12 %
	Product mix effect						(2)	-- %
	Exchange rate effect						8	1 %
Total operating earnings			17		32		(15)	(47) %
Operating earnings - assets held for sale (1)			15		11		4	36 %
Operating earnings - continuing product lines			2		21		(19)	(90) %

			First Nine Months
							Change
(Dollars in millions)			2006		2005		$	%
Total sales		$	2,007	$	1,944	$	63	3 %
Sales - assets held for sale			517		442		75	17 %
Sales - continuing product lines			1,490		1,502		(12)	(1) %
	Volume effect						--	-- %
	Price effect						58	3 %
	Product mix effect						11	-- %
	Exchange rate effect						(6)	-- %
Total operating earnings			46		166		(120)	(72) %
Operating earnings - assets held for sale (1)			52		56		(4)	(7) %
Operating earnings - continuing product lines			(6)		110		(116)	>(100) %

⁽¹⁾ Includes allocated costs consistent with the Company’s historical practices, some of which may remain and could be reallocated to the remainder of the segment and other segments.

In October 2006, the Company announced a definitive agreement for the sale of the Performance Polymer segment's polyethylene businesses and related assets located at the Longview, Texas site and the Company's ethylene pipeline. Subject to regulatory approval and satisfaction of customary conditions, the divestiture is expected to be completed in fourth quarter 2006.

Sales revenue increased $61 million in third quarter 2006 compared to third quarter 2005 primarily due to higher selling prices in all product lines in response to higher raw material and energy costs, partially offset by lower sales volume, particularly for PET polymers in North America due to sustained levels of Asian imports and for polyethylene due to operational disruptions. Excluding the product lines being divested, sales revenue increased $56 million.

Sales revenue increased $63 million in first nine months 2006 compared to first nine months 2005 primarily due to higher selling prices in polyethylene. Excluding the product lines being divested, sales revenue decreased $12 million.

35

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Operating earnings decreased $15 million in third quarter 2006 compared to third quarter 2005 primarily due to higher raw material costs and lower sales volume, particularly for PET polymers in North America, more than offsetting higher selling prices. Excluding product lines expected to be divested in fourth quarter, operating earnings decreased $19 million.

Operating earnings decreased $120 million in the first nine months 2006 compared to the first nine months 2005 primarily due to higher raw material and energy costs and lower selling prices for PET polymers globally. Excluding the product lines being divested, operating earnings decreased $116 million.

In early March, 2005, the Company broke ground on the first commercial scale PET polymers plant based upon Eastman's IntegRex technology. The plant will be a 350,000 metric ton facility and the Company continues to expect to begin production in fourth quarter 2006. Research and development efforts continue to enhance IntegRex technology in parallel with construction of the first IntegRex manufacturing facility. The Company is evaluating the possible construction of a full IntegRex facility in North America utilizing these further refinements to IntegRex technology.

The Company is continuing to evaluate its strategic and operational options related to certain PET assets to improve profitability of the segment.

SP Segment
			Third Quarter							First Nine Months
							Change							Change
(Dollars in millions)			2006		2005		$	%		2006		2005		$	%
Sales		$	207	$	179	$	28	16 %	$	596	$	536	$	60	11 %
	Volume effect						26	15 %						47	9 %
	Price effect						7	4 %						27	5 %
	Product mix effect						(5)	(3) %						(9)	(2) %
	Exchange rate effect						--	-- %						(5)	(1) %
Operating earnings			18		17		1	6 %		50		59		(9)	(15)%

Sales revenue for the third quarter and first nine months 2006 compared to the third quarter and first nine months 2005 increased $28 million and $60 million, respectively, due to increased sales volume. The higher sales volume was primarily attributed to continued market development efforts, particularly in copolyester product lines. Selling prices increased to offset higher raw material and energy costs with increases limited by competitive industry dynamics.

Operating earnings for third quarter 2006 increased $1 million compared with third quarter 2005 due to increased sales volume and higher selling prices which more than offset higher raw material and energy costs.

Operating earnings for the first nine months 2006 declined $9 million compared with the first nine months 2005 primarily due to higher raw material and energy costs and increased expenditures related to growth initiatives more than offsetting increased sales volume and higher selling prices.

Eastman continues to be a market leading supplier of cyclohexane dimethanol ("CHDM") modified polymers. In October 2006, the Company decided to cease production of CHDM, an intermediate product primarily used internally, in San Roque, Spain to gain operational efficiencies at other facilities, which will result in asset impairment and restructuring charges in the fourth quarter 2006.

36

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

SUMMARY BY CUSTOMER LOCATION

Sales Revenue

	Third Quarter
(Dollars in millions)		2006		2005	Change	Volume Effect	Price Effect	Product Mix Effect	Exchange Rate Effect
United States and Canada	$	1,111	$	1,052	6 %	(3) %	9 %	-- %	-- %
Europe, Middle East, and Africa		371		332	12 %	2 %	9 %	(3) %	4 %
Asia Pacific		243		235	3 %	(3) %	9 %	(3) %	-- %
Latin America		241		197	22 %	14 %	6 %	2 %	-- %
	$	1,966	$	1,816	8 %	-- %	9 %	(1) %	-- %

Sales revenue in the United States and Canada increased for third quarter 2006 compared to third quarter 2005 primarily due to higher selling prices, particularly in the Performance Polymers segment, which had a $47 million positive impact on sales revenue. The higher selling prices were primarily in response to increases in raw material and energy costs.

Sales revenue in Europe, Middle East and Africa increased for third quarter 2006 compared to third quarter 2005 primarily due to higher selling prices, particularly in the Performance Polymers segment. The higher selling prices were primarily in response to increases in raw material and energy costs.

Sales revenue in Asia Pacific increased for third quarter 2006 compared to third quarter 2005 primarily due to higher selling prices, particularly in the PCI segment.

Sales revenue in Latin America increased for third quarter 2006 compared to third quarter 2005 primarily due to higher sales volume, particularly in the Performance Polymers segment.

	First Nine Months
(Dollars in millions)		2006		2005	Change	Volume Effect	Price Effect	Product Mix Effect	Exchange Rate Effect
United States and Canada	$	3,278	$	3,068	7 %	-- %	8 %	(1) %	-- %
Europe, Middle East, and Africa		1,080		1,051	3 %	-- %	4 %	-- %	(1) %
Asia Pacific		702		685	2 %	(4) %	8 %	(1) %	(1) %
Latin America		638		526	21 %	21 %	(2) %	2 %	-- %
	$	5,698	$	5,330	7 %	1 %	7 %	(1) %	-- %

Sales revenue in the United States and Canada increased for the first nine months 2006 compared to the first nine months 2005 primarily due to higher selling prices, particularly in the PCI segment, which had an $87 million positive impact on sales revenue. The higher selling prices were primarily in response to increases in raw material and energy costs.

37

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Sales revenue in Europe, Middle East and Africa increased for the first nine months 2006 compared to the first nine months 2005 primarily due to higher selling prices.

Sales revenue in Asia Pacific increased for the first nine months 2006 compared to the first nine months 2005 primarily due to increased selling prices, particularly in the Fibers and PCI segments, which were partially offset by lower sales volume, particularly in the Fibers and Performance Polymers segments.

Sales revenue in Latin America increased for the first nine months 2006 compared to the first nine months 2005 primarily due to higher sales volume, particularly in the Performance Polymers segment.

With a substantial portion of sales to customers outside the United States, Eastman is subject to the risks associated with operating in international markets. To mitigate its exchange rate risks, the Company frequently seeks to negotiate payment terms in U.S. dollars. In addition, where it deems such actions advisable, the Company engages in foreign currency hedging transactions and requires letters of credit and prepayment for shipments where its assessment of individual customer and country risks indicates their use is appropriate. For additional information, see Note 9 to the consolidated financial statements in Part II, Item 8 and Part II, Item 7A of the Company’s 2005 Annual Report on Form 10-K and Forward-Looking Statements and Risk Factors of this Quarterly Report on Form 10-Q.

LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL INFORMATION

Cash Flows

		First Nine Months
(Dollars in millions)		2006		2005
Net cash provided by (used in)
Operating activities	$	233	$	377
Investing activities		(279)		230
Financing activities		(50)		(643)
Effect of exchange rate changes on cash and cash equivalents		2		(3)
Net change in cash and cash equivalents		(94)		(39)
Cash and cash equivalents at beginning of period		524		325
Cash and cash equivalents at end of period	$	430	$	286

Cash provided by operating activities decreased $144 million in the first nine months 2006 compared to the first nine months 2005 due to the prior year's higher net earnings and the current year's increase in working capital, partially offset by lower pension contributions in the current year. In the first nine months 2006, the Company's working capital increased, consistent with a more normal level, following a reduction of working capital requirements in the fourth quarter 2005 due to the impact of the Gulf Coast hurricanes on sales volume, especially in the Performance Polymers segment. The Company contributed $75 million and $165 million to its U.S. defined benefit pension plans in the first nine months 2006 and 2005, respectively.

Cash used in investing activities totaled $279 million in the first nine months 2006 and cash provided by investing activities totaled $230 million in the first nine months 2005. In the first nine months 2005, the Company received $417 million in net cash proceeds from the sale of its equity investment in Genencor. Capital spending was higher in the first nine months 2006 and included expenditures related to the construction of the IntegRex facility.

38

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Cash used in financing activities in the first nine months 2006 totaled $50 million compared to $643 million in the first nine months 2005. Cash used in financing activities in the first nine months 2005 includes the Company's early repayment of $500 million of its outstanding long-term debt and a decrease in commercial paper, credit facility, and other borrowings including bank overdrafts of $84 million, offset by cash received from stock option exercises of $91 million. The payment of dividends is also reflected in financing activities in all periods.

Liquidity

At September 30, 2006, the Company had credit facilities with various U.S. and non-U.S. banks totaling approximately $880 million as disclosed in Note 7 to the consolidated financial statements in Part II, Item 8 of the Company's 2005 Annual Report on Form 10-K. These credit facilities consist of a $700 million revolving credit facility (the "Credit Facility"), which was amended in April 2006 to extend the expiration date to April 2011, and a 144 million euro credit facility ("Euro Facility") which expires in December 2010. Borrowings under these credit facilities are subject to interest at varying spreads above quoted market rates. These credit facilities require facility fees on the total commitment that are based on Eastman's credit rating. In addition, these credit facilities contain a number of covenants and events of default, including the maintenance of certain financial ratios. The Company was in compliance with all such covenants for all periods presented. The Company's combined credit facility borrowings at September 30, 2006 and December 31, 2005 were $182 million and $214 million at weighted average interest rates of 3.49 percent and 3.01 percent, respectively.

The Credit Facility provides liquidity support for commercial paper borrowings and general corporate purposes. Accordingly, any outstanding commercial paper borrowings reduce borrowings available under the Credit Facility. Since the Credit Facility expires in April 2011, any commercial paper borrowings supported by the Credit Facility are classified as long-term borrowings because the Company has the ability to refinance such borrowings on a long-term basis.

For more information regarding interest rates, refer to Note 8 to the Company's unaudited consolidated financial statements.

The Company has effective shelf registration statements filed with the Securities and Exchange Commission ("SEC") to issue a combined $1.1 billion of debt or equity securities.

The Company contributed $75 million to its U.S. defined benefit pension plan in the first nine months 2006 and expects no further contributions during 2006.

Cash flows from operations and the sources of capital described above are expected to be available and sufficient to meet foreseeable cash flow requirements. However, the Company’s cash flows from operations can be affected by numerous factors including risks associated with global operations, raw material availability and cost, demand for and pricing of Eastman’s products, capacity utilization, and other factors described under "Forward-Looking Statements and Risk Factors" below. The Company believes maintaining a financial profile consistent with an investment grade company is important to its long term strategic and financial flexibility.

Capital Expenditures

Capital expenditures were $279 million and $224 million for the first nine months 2006 and 2005, respectively. The Company expects capital spending in 2006 will be approximately $400 million which includes the expected completion of the new PET facility in South Carolina utilizing IntegRex technology and a copolyester intermediates expansion and to other targeted growth initiatives.

39

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Commitments

At September 30, 2006, the Company’s obligations related to notes and debentures totaled approximately $1.4 billion to be paid over a period of up to 21 years. Other borrowings, related primarily to credit facility borrowings, totaled approximately $200 million.

The Company had various purchase obligations at September 30, 2006 totaling approximately $2.1 billion over a period of approximately 15 years for materials, supplies and energy incident to the ordinary conduct of business. For information regarding the Company's lease commitments, refer to Note 13 to the Company's unaudited consolidated financial statements.

In addition, the Company had other liabilities at September 30, 2006 totaling approximately $1.1 billion primarily related to pension, retiree medical, and other post-employment obligations.

Off-Balance Sheet and Other Financing Arrangements

If certain operating leases are terminated by the Company, it guarantees a portion of the residual value loss, if any, incurred by the lessors in disposing of the related assets. For information on the Company's residual value guarantees, refer to Note 13 to the Company's unaudited consolidated financial statements.

Eastman entered into an agreement in 1999 that allows it to generate cash by reducing its working capital through the sale of undivided interests in certain domestic trade accounts receivable under a planned continuous sale program to a third party. For information on the Company's accounts receivable securitization program, refer to Note 13 to the Company's unaudited consolidated financial statements.

The Company did not have any other material relationships with unconsolidated entities or financial partnerships, including special purpose entities, for the purpose of facilitating off-balance sheet arrangements with contractually narrow or limited purposes. Thus, Eastman is not materially exposed to any financing, liquidity, market, or credit risk related to the above or any other such relationships.

The Company has evaluated material relationships and has concluded that the legal entities involved with these material relationships are not Variable Interest Entities ("VIEs") or, in the case of Primester, a joint venture that manufactures cellulose acetate at its Kingsport, Tennessee plant, the Company is not the primary beneficiary of the VIE. As such, in accordance with Interpretation No. 46R ("FIN 46R"), "Consolidation of Variable Interest Entities" the Company is not required to consolidate these entities. In addition, the Company has evaluated long-term purchase obligations with two entities that may be VIEs at September 30, 2006. These potential VIEs are joint ventures from which the Company has purchased raw materials and utilities for several years and purchases approximately $70 million of raw materials and utilities on an annual basis. The Company has no equity interest in these entities and has confirmed that one party to each of these joint ventures consolidates the potential VIE. However, due to competitive and other reasons, the Company has not been able to obtain the necessary financial information to determine whether the entities are VIEs, and if one or both are VIEs, whether or not the Company is the primary beneficiary.

Guarantees and claims also arise during the ordinary course of business from relationships with suppliers, customers, and non-consolidated affiliates when the Company undertakes an obligation to guarantee the performance of others if specified triggering events occur. Non-performance under a contract could trigger an obligation of the Company. These potential claims include actions based upon alleged exposures to products, intellectual property and environmental matters, and other indemnifications. The ultimate effect on future financial results is not subject to reasonable estimation because considerable uncertainty exists as to the final outcome of these claims. However, while the ultimate liabilities resulting from such claims may be significant to results of operations in the period recognized, management does not anticipate they will have a material adverse effect on the Company's consolidated financial position or liquidity.

40

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Dividends

The Company declared cash dividends of $0.44 per share in the third quarter 2006 and 2005 and $1.32 per share in the first nine months 2006 and 2005.

RECENTLY ISSUED ACCOUNTING STANDARDS

In February 2006, the Financial Accounting Standards Board ("FASB") issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments,” an amendment of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities." SFAS No. 155 simplifies accounting for certain hybrid instruments under SFAS No. 133 by permitting fair value remeasurement for financial instruments containing an embedded derivative that otherwise would require bifurcation. SFAS No. 155 eliminates both the previous restriction under SFAS No. 140 on passive derivative instruments that a qualifying special-purpose entity may hold and SFAS No. 133 Implementation Issue No. D1, “Application of Statement 133 to Beneficial Interests in Securitized Financial Assets,” which provides that beneficial interests are not subject to the provisions of SFAS No. 133. SFAS No. 155 also establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation, and clarifies that concentrations of credit risk in the form of subordination are not imbedded derivatives. SFAS No. 155 is effective for all financial instruments acquired, issued, or subject to a remeasurement event occurring after the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company has evaluated the effect of SFAS No. 155 and determined that it does not expect a material impact from the adoption to its consolidated financial position, liquidity, or results from operations.

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” an amendment of SFAS No. 140. SFAS No. 156 permits entities to choose to either subsequently measure servicing rights at fair value and report changes in fair value in earnings or amortize servicing rights in proportion to and over the estimated net servicing income or loss and assess to rights for impairment or the need for an increased obligation. SFAS No. 156 also clarifies when a servicer should separately recognize servicing assets and liabilities; requires all separately recognized assets and liabilities to be initially measured at fair value, if practicable; permits a one-time reclassification of available-for-sales securities to trading securities by an entity with recognized servicing rights and requires additional disclosures for all separately recognized servicing assets and liabilities. SFAS No. 156 is effective as of the beginning of an entity’s fiscal year that begins after September 15, 2006. The Company has evaluated the effect of SFAS No. 156 and determined that it does not expect a material impact from the adoption to its consolidated financial position, liquidity, or results from operations.

In July 2006, the FASB issued Interpretation No. 48 ("FIN 48"), "Accounting for Uncertainty in Income Taxes—an Interpretation of SFAS 109 "Accounting for Income Taxes". FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that a company has taken or expects to take on a tax return. Under FIN 48, the financial statements will reflect expected future tax consequences of such positions presuming the taxing authorities' full knowledge of the position and all relevant facts, but without considering time values. FIN 48 also revises disclosure requirements and introduces a prescriptive, annual, tabular roll-forward of the unrecognized tax benefits. FIN 48 is effective for fiscal years beginning after December 15, 2006. The Company is currently evaluating the effect FIN 48 will have on its consolidated financial position, liquidity, or results of operations.

In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements," which addresses the measurement of fair value by companies when they are required to use a fair value measure for recognition or disclosure purposes under GAAP. SFAS No. 157 provides a common definition of fair value to be used throughout GAAP which is intended to make the measurement of fair value more consistent and comparable and improve disclosures about those measures. SFAS No. 157 will be effective for an entity's financial statements issued for fiscal years beginning after November 15, 2007. The Company is currently evaluating the effect SFAS No. 157 will have on its consolidated financial position, liquidity, or results of operations.

41

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

In September 2006, the FASB issued SFAS No. 158, "Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)". One objective of this new standard is to make it easier for investors, employees, retirees and other parties to understand and assess an employer’s financial position and its ability to fulfill the obligations under its benefit plans. SFAS No. 158 requires employers to fully recognize in their financial statements the obligations associated with single-employer defined benefit pension plans, retiree healthcare plans, and other postretirement plans. SFAS No. 158 requires an employer to fully recognize in its statement of financial position the overfunded or underfunded status of a defined benefit postretirement plan (other than a multiemployer plan) as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income. This Statement also improves financial reporting by requiring an employer to measure the funded status of a plan as of the date of its year-end statement of financial position, with limited exceptions. SFAS No. 158 requires an entity to recognize as a component of other comprehensive income, net of tax, the gains or losses and prior service costs or credits that arise during the period but are not recognized as components of net periodic benefit cost pursuant to SFAS No. 87. This Statement requires an entity to disclose in the notes to financial statements additional information about certain effects on net periodic benefit cost for the next fiscal year that arise from delayed recognition of the gains or losses, prior service costs or credits, and transition asset or obligation. The Company is required to initially recognize the funded status of a defined benefit postretirement plan and to provide the required disclosures for fiscal years ending after December 15, 2006. Based on the funded status of Eastman's pension and postretirement benefit plans in the December 31, 2005 Annual Report on Form 10-K, the adoption of SFAS No. 158 will result in a $128 million reduction to stockholders' equity.

In September 2006, the SEC published Staff Accounting Bulletin No. 108 ("SAB 108") which expresses the SEC staff's views regarding the process to be applied in considering the effects of prior years' misstatements when quantifying misstatements in the current year's financial statements. Registrants must quantify the impact on the current year's financial statements of correcting all misstatements, including the carryover and reversing effects of prior years' misstatements, as well as the effects of errors arising in the current year. If material to the current year's income statement, correction of existing accumulated balance sheet misstatements (i.e., from immaterial errors in prior years) should be accomplished by correcting the financial statements of affected previous years. However, in such case, previously filed reports would not require amendment; rather, corrections should be made the next time such prior years' statements are filed with the SEC. The Company does not expect to change its current practice regarding accounting for misstatements and does not expect the need for restatement of prior periods as a result of SAB 108.

In September 2006, the FASB issued Staff Position No. AUG AIR-1 ("FSP No. AUG AIR-1") which addresses the accounting for planned major maintenance activities. FSP No. AUG AIR-1 amends certain provisions in the American Institute of Certified Public Accountants ("AICPA") Industry Audit Guide and Accounting Principles Board ("APB") Opinion No. 28, "Interim Financial Reporting". Four alternative methods of accounting for planned major maintenance activities were permitted: direct expense, built-in overhaul, deferral, and accrual ("accrue-in-advance"). This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities because it results in the recognition of a liability in a period prior to the occurrence of the transaction or event obligating the entity. FSP No. AUG AIR-1 is effective for an entity's financial statements issued for fiscal years beginning after December 15, 2006. The Company does not utilize the accrue-in-advance method of accounting and therefore expects this FSP to have no impact on its consolidated financial position, liquidity, or results of operations.

42

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

OUTLOOK

For 2006, the Company expects:

·   the volatility of raw material and energy costs will continue and the Company will continue to pursue pricing strategies and ongoing cost control initiatives to offset the effects on gross profit;

·   strong volume will be maintained due to continued economic strength, continued substitution of Eastman products for other materials, and new applications for existing products;

·   pension and other post-employment benefit expenses will be similar to 2005 levels;

·   to make no further contributions to the Company’s U.S. defined benefit pension plan during 2006; $75 million has been contributed for the nine months ending September 30, 2006;

·   net interest expense to decrease compared with 2005 primarily as a result of anticipated lower average borrowings, increased capitalized interest and higher interest income;

·   R&D expenses will be approximately 3 percent of revenue;

·   the effective tax rate to be approximately 34 percent;

·   to complete the sale of its Batesville, Arkansas manufacturing facility and related assets and specialty organic chemicals product lines and of its polyethylene and Epolene polymer businesses and the ethylene pipeline;

·   to continue to evaluate its portfolio, which could lead to further restructuring, divestiture, or consolidation of assets and product lines;

·   capital expenditures to be approximately $400 million and exceed estimated depreciation and amortization of approximately $300 million;

·   to complete construction of the new PET facility in South Carolina utilizing IntegRex technology and a copolyester intermediates expansion, and to pursue other targeted growth initiatives; and

·   priorities for use of available cash will be to pay the quarterly cash dividends, fund targeted growth initiatives and fund the defined benefit pension plans.

The Company expects normal seasonality will reduce demand in some of its businesses and product lines during the fourth quarter and; therefore, expects fourth quarter 2006 earnings per share excluding gains and charges related to ongoing strategic decisions to be at or above fourth quarter 2005 earnings per share excluding asset impairments and restructuring charges.

See “Forward-Looking Statements and Risk Factors below.”

43

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS AND RISK FACTORS

The expectations under "Outlook" and certain other statements in this Quarterly Report may be forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. These statements and other written and oral forward-looking statements made by the Company from time to time may relate to, among other things, such matters as planned and expected capacity increases and utilization; anticipated capital spending; expected depreciation and amortization; environmental matters; legal proceedings; exposure to, and effects of hedging of, raw material and energy costs, foreign currencies and interest rates; global and regional economic, political, and business conditions; competition; growth opportunities; supply and demand, volume, price, cost, margin, and sales; earnings, cash flow, dividends and other expected financial conditions; expectations, strategies, and plans for individual assets and products, businesses and segments as well as for the whole of Eastman Chemical Company; cash requirements and uses of available cash; financing plans; pension expenses and funding; credit ratings; anticipated restructuring, divestiture, and consolidation activities; cost reduction and control efforts and targets; integration of acquired businesses; development, production, commercialization and acceptance of new products, services and technologies and related costs; asset, business and product portfolio changes; and expected tax rates and net interest costs.

These plans and expectations are based upon certain underlying assumptions, including those mentioned with the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors described in this report, the following are some of the important factors that could cause the Company's actual results to differ materially from those in any such forward-looking statements:

·   The Company is reliant on certain strategic raw materials for its operations and utilizes risk management tools, including hedging, as appropriate, to mitigate short-term market fluctuations in raw material costs. There can be no assurance, however, that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, natural disasters, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which the Company operates or does business, or in countries or regions that are key suppliers of strategic raw materials, could affect availability and costs of raw materials.

·   While temporary shortages of raw materials and energy may occasionally occur, these items have historically been sufficiently available to cover current and projected requirements. However, their continuous availability and price are impacted by natural disasters, plant interruptions occurring during periods of high demand, domestic and world market and political conditions, changes in government regulation, and war or other outbreak of hostilities. Eastman’s operations or products may, at times, be adversely affected by these factors.

·   The Company's competitive position in the markets in which it participates is, in part, subject to external factors in addition to those that the Company can impact. Natural disasters, changes in laws or regulations, war or other outbreak of hostilities, or other political factors in any of the countries or regions in which the Company operates or does business, or in countries or regions that are key suppliers of strategic raw materials, could negatively impact the Company’s competitive position and its ability to maintain market share. For example, supply and demand for certain of the Company's products is driven by end-use markets and worldwide capacities which, in turn, impact demand for and pricing of the Company's products.

44

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

·   Limitation of the Company's available manufacturing capacity due to significant disruption in its manufacturing operations, including natural disasters, could have a material adverse affect on sales revenue, costs and results of operations and financial condition.

·   The Company has an extensive customer base; however, loss of, or material financial weakness of, certain of the largest customers could adversely affect the Company's financial condition and results of operations until such business is replaced and no assurances can be made that the Company would be able to regain or replace any lost customers.

·   The Company's competitive position has recently been adversely impacted by low cost competitors in certain regions and customers developing internal or alternative sources of supply.

·   The Company has efforts underway to exploit growth opportunities in certain core businesses by developing new products, expanding into new markets, and tailoring product offerings to customer needs. There can be no assurance that such efforts will result in financially successful commercialization of such products or acceptance by existing or new customers or new markets.

·   The Company has made, and intends to continue making, strategic investments, including IntegRex technology, and has entered, and expects to continue to enter, into strategic alliances in technology, services businesses, and other ventures in order to build, diversify, and strengthen certain Eastman capabilities and to maintain high utilization of manufacturing assets. There can be no assurance that such investments and alliances will achieve their underlying strategic business objectives or that they will be beneficial to the Company's results of operations.

·   In addition to productivity and cost reduction initiatives, the Company is striving to improve margins on its products through price increases where warranted and accepted by the market; however, the Company's earnings could be negatively impacted should such increases be unrealized, not be sufficient to cover increased raw material and energy costs, or have a negative impact on demand and volume. There can be no assurances that price increases will be realized or will be realized within the Company’s anticipated timeframe.

·   The Company has undertaken and expects to continue to undertake productivity and cost reduction initiatives and organizational restructurings to improve performance and generate cost savings. There can be no assurance that these will be completed as planned or beneficial or that estimated cost savings from such activities will be realized.

·   The Company's facilities and businesses are subject to complex health, safety and environmental laws and regulations, which require and will continue to require significant expenditures to remain in compliance with such laws and regulations currently and in the future. The Company's accruals for such costs and associated liabilities are subject to changes in estimates on which the accruals are based. The amount accrued reflects the Company’s assumptions about remediation requirements at the contaminated site, the nature of the remedy, the outcome of discussions with regulatory agencies and other potentially responsible parties at multi-party sites, and the number and financial viability of other potentially responsible parties. Changes in the estimates on which the accruals are based, unanticipated government enforcement action, or changes in health, safety, environmental, chemical control regulations and testing requirements could result in higher or lower costs.

·   The Company and its operations from time to time are parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are handled and defended in the ordinary course of business. The Company believes amounts reserved are adequate for such pending matters; however, results of operations could be affected by significant litigation adverse to the Company.

45

MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

·   The Company has deferred tax assets related to capital and operating losses. The Company establishes valuation allowances to reduce these deferred tax assets to an amount that is more likely than not to be realized. The Company’s ability to utilize these deferred tax assets depends on projected future operating results, the reversal of existing temporary differences, and the availability of tax planning strategies. Realization of these assets is expected to occur over an extended period of time. As a result, changes in tax laws, assumptions with respect to future taxable income and tax planning strategies could result in adjustments to these assets.

·   Due to the Company's global sales, earnings, and asset profile, it is exposed to volatility in foreign currency exchange rates and interest rates. The Company may use derivative financial instruments, including swaps, options and forwards, to mitigate the impact of changes in exchange rates and interest rates on its financial results. However, there can be no assurance that these efforts will be successful and operating results could be affected by significant adverse changes in currency exchange rates and/or interest rates.

The foregoing list of important factors does not include all such factors nor necessarily present them in order of importance. This disclosure, including that under "Outlook" and "Forward-Looking Statements and Risk Factors," and other forward-looking statements and related disclosures made by the Company in this Quarterly Report and elsewhere from time to time, represents management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise, except as required by law. Investors are advised, however, to consult any further public Company disclosures (such as in filings with the Securities and Exchange Commission or in Company press releases) on related subjects.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material changes to the Company's market risks since December 31, 2005. For more information regarding the Company's disclosure about market risks, see Part II, Item 7A of the Company's 2005 Annual Report on Form 10-K.

46

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by the Company in reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934 is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. An evaluation was carried out under the supervision and with the participation of the Company's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company’s disclosure controls and procedures. Based on that evaluation, the CEO and CFO have concluded that the Company's disclosure controls and procedures are effective as of September 30, 2006.

Changes in Internal Control Over Financial Reporting

There has been no change in the Company’s internal control over financial reporting that occurred during the third quarter of 2006 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

47

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

General

From time to time, the Company and its operations are parties to, or targets of, lawsuits, claims, investigations and proceedings, including product liability, personal injury, asbestos, patent and intellectual property, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any such pending matters, including the sorbates litigation and the asbestos litigation, will have a material adverse effect on its overall financial condition, results of operations or cash flows. However, adverse developments could negatively impact earnings or cash flows in a particular future period. For additional information about the sorbates and asbestos litigation, refer to Note 19 to the Company's unaudited consolidated financial statements.

In June 2005, Eastman Chemical Middelburg, B.V., a wholly owned subsidiary of the Company, (the "Subsidiary") received a summons from the Middelburg (Netherlands) District Court Office to appear before the economic magistrate of that District and respond to allegations that the Subsidiary's manufacturing facility in Middelburg has exceeded certain conditions in the permit that allows the facility to discharge wastewater into the municipal wastewater treatment system. The summons proposed penalties in excess of $100,000 (USD) as a result of the alleged violations. A hearing in this matter took place on July 28, 2005, at which time the magistrate bifurcated the proceeding into two phases: a compliance phase and an economic benefit phase. With respect to the compliance phase, the magistrate levied a fine of less than $100,000. With respect to the economic benefit phase, where the prosecutor's proposed penalty in excess of $100,000 remains pending, the parties have submitted their respective written positions to the magistrate. On October 27, 2006, the parties appeared before the district court to present their positions. At this hearing, the Subsidiary vigorously contested the assessment of an economic benefit penalty. The district court will likely render its decision in this matter before the end of this year. This disclosure is made pursuant to SEC Regulation S-K, Item 103, Instruction 5.C., which requires disclosure of administrative proceedings commenced under environmental laws that involve governmental authorities as parties and potential monetary sanctions in excess of $100,000. The Company believes that the ultimate resolution of this proceeding will not have a material impact on the Company’s financial condition, results of operations, or cash flows.

ITEM 1A. RISK FACTORS

For identification and discussion of the most significant risks applicable to the Company and its business, see Part I - Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations - Forward-Looking Statements and Risk Factors of this Quarterly Report on Form 10-Q.

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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c) Purchases of Equity Securities by the Issuer

Period	Total Number of Shares Purchased (1)		Average Price Paid Per Share (2)	Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (3)		Approximate Dollar Value (in millions) that May Yet Be Purchased Under the Plans or Programs (3)
July 1- 31, 2006	102	$	52.18	0	$	288
August 1-31, 2006	137	$	51.02	0	$	288
September 1-30, 2006	265	$	52.42	0	$	288
Total	504	$	51.99	0

(1)   Shares surrendered to the Company by employees to satisfy individual tax withholding obligations upon vesting of previously issued shares of restricted common stock. Shares are not part of any Company repurchase plan.

(2)   Average price paid per share reflects the weighted average closing price of Eastman stock on the business date the shares were surrendered by the employee stockholder.

(3)   The Company was authorized by the Board of Directors on February 4, 1999 to repurchase up to $400 million of its common stock. Common share repurchases under this authorization in 1999, 2000 and 2001 were $51 million, $57 million and $4 million, respectively. The Company has not repurchased any common shares under this authorization after 2001. For additional information see Note 14 to the Company's consolidated financial statements in Part II, Item 8 of the 2005 Annual Report on Form 10-K.

ITEM 6. EXHIBITS

Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 51.

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SIGNATURES

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

		Eastman Chemical Company
Date:  October 31, 2006	By:	/S/  Richard A. Lorraine
		Richard A. Lorraine
		Senior Vice President and Chief Financial Officer

50

	EXHIBIT INDEX	Sequential
Exhibit		Page
Number	Description	Number
3.01	Amended and Restated Certificate of Incorporation of Eastman Chemical Company, (incorporated by reference to Exhibit 3.01 to Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2001)
3.02	Amended and Restated Bylaws of Eastman Chemical Company, as amended October 4, 2006 (incorporated herein by reference to Exhibit 9.01(D)3(II) to Eastman Chemical Company's Current Report on Form 8-K dated October 10, 2006)	53
4.01	Form of Eastman Chemical Company common stock certificate as amended February 1, 2001 (incorporated herein by reference to Exhibit 4.01 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2001)
4.02	Stockholder Protection Rights Agreement dated as of December 13, 1993, between Eastman Chemical Company and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.4 to Eastman Chemical Company's Registration Statement on Form S-8 relating to the Eastman Investment Plan, File No. 33-73810)
4.03	Indenture, dated as of January 10, 1994, between Eastman Chemical Company and The Bank of New York, as Trustee (the "Indenture") (incorporated herein by reference to Exhibit 4(a) to Eastman Chemical Company's Current Report on Form 8-K dated January 10, 1994 (the "8-K"))
4.04	Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the 8-K)
4.05	Officers’ Certificate pursuant to Sections 201 and 301 of the Indenture (incorporated herein by reference to Exhibit 4(a) to Eastman Chemical Company's Current Report on Form 8-K dated June 8, 1994 (the "June 8-K"))
4.06	Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the June 8-K)
4.07	Form of 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 10-K"))
4.08	Form of 7% Notes due April 15, 2012 (incorporated herein by reference to Exhibit 4.09 to Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 2002)
4.09	Officer's Certificate pursuant to Sections 201 and 301 of the Indenture related to 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.09 to the 1996 10-K)
4.10	$200,000,000 Accounts Receivable Securitization agreement dated April 13, 1999 (amended April 11, 2000), between the Company and Bank One, N.A., as agent. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of filing a copy of such agreement, the Company agrees to furnish a copy of such agreement to the Commission upon request
4.11	Amended and Restated Credit Agreement, dated as of April 3, 2006 (the "Credit Agreement") among Eastman Chemical Company, the Lenders named therein, and Citigroup Global Markets Inc. and J.P. Morgan Securities Inc., as joint lead arrangers (incorporated herein by reference to Exhibit 4.11 to Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2006)

51

	EXHIBIT INDEX	Sequential
Exhibit		Page
Number	Description	Number
4.12	Form of 3 ¼% Notes due June 16, 2008 (incorporated herein by reference to Exhibit 4.13 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2003)
4.13	Form of 6.30% Notes due 2018 (incorporated herein by reference to Exhibit 4.14 to Eastman Chemical Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2003)
4.14	Amendments to Stockholder Protection Rights Agreement (incorporated herein by reference to Exhibits 4.1 and 4.2 to Eastman Chemical Company’s Current Report on Form 8-K dated December 4, 2003)
10.01	Form of Award Notice for Stock Options Granted to Executive Officers under the 2002 Omnibus Long-Term Compensation Plan	54
10.02	Form of Award Notice for Stock Options Granted to Mark J. Costa, Senior Vice-President, Corporate Strategy and Marketing	55
10.03	Form of Performance Share Award to Executive Officers under the 2002 Omnibus Long-Term Compensation Plan (2007 - 2009 Performance Period)	56
10.04	Form of Performance Share Award to Mark J. Costa, Senior Vice-President, Corporate Strategy and Marketing under the 2002 Omnibus Long-Term Compensation Plan (2007 - 2009 Performance Period)	57
12.01	Statement re: Computation of Ratios of Earnings to Fixed Charges	58
31.01	Rule 13a - 14(a) Certification by J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, for the quarter ended September 30, 2006	59
31.02	Rule 13a - 14(a) Certification by Richard A. Lorraine, Senior Vice President and Chief Financial Officer, for the quarter ended September 30, 2006	60
32.01	Section 1350 Certification by J. Brian Ferguson, Chairman of the Board and Chief Executive Officer, for the quarter ended September 30, 2006	61
32.02	Section 1350 Certification by Richard A. Lorraine, Senior Vice President and Chief Financial Officer, for the quarter ended September 30, 2006	62
99.01	Eastman Chemical Company Detail of Sales Revenue (Assets Held for Sale by Segment)	63

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EX-3.02

EXHIBIT 3.02

EASTMAN CHEMICAL COMPANY BYLAWS

SECTION I

Capital Stock

Section 1.1. Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman of the Board of Directors or the Vice Chairman or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation certifying the number of shares in the Corporation owned by such holder. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent, or registrar at the date of issue.

Section 1.2. Record Ownership. A record of the name and address of the holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation's books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by the laws of the State of Delaware.

Section 1.3. Transfer of Record Ownership. Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefore and a written assignment of the shares evidenced thereby, which certificate shall be canceled before the new certificate is issued.

Section 1.4. Lost Certificates. Any person claiming a stock certificate in lieu of one lost, stolen or destroyed shall give the Corporation an affidavit as to such person's ownership of the certificate and of the facts which go to prove its loss, theft or destruction. Such person shall also, if required by policies adopted by the Board of Directors, give the Corporation a bond, in such form as may be approved by the Corporation, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of the certificate or the issuance of a new certificate.

Section 1.5. Transfer Agents; Registrars; Rules Respecting Certificates. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. The Board of Directors may make such further rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates of the Corporation.

Section 1.6. Record Date. The Board of Directors may fix in advance a future date, not exceeding 60 days (nor, in the case of a stockholders' meeting, less than ten days) preceding the date of any meeting of stockholders, payment of dividend or other distribution, allotment of rights, or change, conversion or exchange of capital stock or for the purpose of any other lawful action, as the record date for determination of the stockholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or other distribution or allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to participate in any such other lawful action, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or other distribution or allotment of rights, or to exercise such rights, or to participate in any such other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid.

SECTION II

Meetings of Stockholders

Section 2.1. Annual. The annual meeting of stockholders for the election of directors and the transaction of such other proper business shall be held on the first Thursday in May, unless otherwise specified by resolution adopted by the Board of Directors, and at the time and place, within or without the State of Delaware, as determined by the Board of Directors.

Section 2.2. Special. Special meetings of stockholders for any purpose or purposes may be called only by the Board of Directors, pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office. Special meetings may be held at any place, within or without the State of Delaware, as determined by the Board of Directors. The only business which may be conducted at such a meeting, other than procedural matters and matters relating to the conduct of the meeting, shall be the matter or matters described in the notice of the meeting.

Section 2.3. Notice. Notice of each meeting of stockholders, shall be made in writing, or electronically to such stockholders as have consented to the receipt of such notice by electronic means, or by any such other means permitted by the Delaware General Corporation Law. Such notice shall state the date, time, place and, in the case of a special meeting, the purpose thereof, shall be given as provided by law by the Secretary or an Assistant Secretary not less than ten days nor more than 60 days before such meeting (unless a different time is specified by law) to every stockholder entitled by law to notice of such meeting.

Section 2.4. List of Stockholders. A complete list of the stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary. Such list shall be available for examination of any stockholder, for any purpose germane to the meeting, either on a reasonably accessible electronic network or, during normal business hours, at the Corporation’s principal place of business, for at least ten days before the meeting and at the place of the meeting during the whole time of the meeting. In the event that such list is to be made available on an electronic network, the notice of meeting given under Section 2.3 hereof shall provide the information required to gain access to such list.

Section 2.5. Quorum. The holders of shares of stock entitled to cast a majority of the votes on the matters at issue at a meeting of stockholders, present in person or represented by proxy, shall constitute a quorum, except as otherwise required by the Delaware General Corporation Law. In the event of a lack of a quorum, the chairman of the meeting or a majority in interest of the stockholders present in person or represented by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be obtained. At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the meeting originally called.

Section 2.6. Organizationand Procedure. (a) The Chairman of the Board, or such other officer of the Corporation designated by a majority of the directors that the Corporation would have if there were no vacancies on the Board of Directors (the “Whole Board”), will call meetings of the stockholders to order and will act as presiding officer thereof. Unless otherwise determined prior to the meeting by a majority of the Whole Board, the presiding officer of the meeting of the stockholders will have the right and the authority to determine and maintain the rules, regulations and procedures for the proper conduct of the meeting, including, without limitation, restricting entry to the meeting after it has commenced, maintaining order and the safety of those in attendance, opening and closing the polls for voting, dismissing business or proposals not properly submitted, limiting the time allowed for discussion of the business of the meeting, restricting the persons (other than stockholders of the Corporation or their duly appointed proxies) that may attend the meeting, and ascertaining whether any stockholder or proxy holder may be excluded from the meeting based upon any determination by the presiding officer, in his or her sole discretion, that the stockholder or proxy holder is unduly disruptive or is likely to disrupt the meeting. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary.

(b) At an annual meeting of the stockholders, only such business will be conducted or considered as is properly brought before the meeting. To be properly brought before an annual meeting, business must be (i) specified in the notice of meeting (or any supplement thereto) given in accordance with these bylaws, (ii) brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board, or (iii) otherwise properly requested to be brought before the meeting by a stockholder of the Corporation in accordance with these bylaws.

(c) At a special meeting of stockholders, only such business may be conducted or considered as is properly brought before the meeting. To be properly brought before a special meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given in accordance with these bylaws or (ii) brought before the meeting by the presiding officer or by or at the direction of a majority of the Whole Board. The determination of whether any business sought to be brought before any annual or special meeting of the stockholders is properly brought before such meeting will be made by the presiding officer of the meeting. If the presiding officer determines that any business is not properly brought before such meeting, he or she will so declare at the meeting and any such business will not be conducted or considered.

Section 2.7. Stockholder Nominations and Proposals. (a) No proposal for a stockholder vote shall be submitted by a stockholder (a "Stockholder Proposal") to the Corporation's stockholders unless the stockholder submitting such proposal (the "Proponent") shall have filed a written notice setting forth with particularity (i) the names and business addresses of the Proponent and all Persons (as such term is defined in Article V of the Certificate of Incorporation) acting in concert with the Proponent; (ii) the name and address of the Proponent and the Persons identified in clause (i), as they appear on the Corporation's books (if they so appear); (iii) the class and number of shares of the Corporation beneficially owned by the Proponent and the Persons identified in clause (i); (iv) a description of the Stockholder Proposal containing all material information relating thereto; and (v) such other information as the Board of Directors reasonably determines is necessary or appropriate to enable the Board of Directors and stockholders of the Corporation to consider the Stockholder Proposal. The presiding officer at any stockholders' meeting may determine that any Stockholder Proposal was not made in accordance with the procedures prescribed in these Bylaws or is otherwise not in accordance with law, and if it is so determined, such officer shall so declare at the meeting and the Stockholder Proposal shall be disregarded.

(b) Only persons who are selected and recommended by the Board of Directors or the committee of the Board of Directors designated to make nominations, or who are nominated by stockholders in accordance with the procedures set forth in this Section 2.7, shall be eligible for election, or qualified to serve, as directors. Nominations of individuals for election to the Board of Directors of the Corporation at any annual meeting or any special meeting of stockholders at which directors are to be elected may be made by any stockholder of the Corporation entitled to vote for the election of directors at that meeting by compliance with the procedures set forth in this Section 2.7. Nominations by stockholders shall be made by written notice (a "Nomination Notice"), which shall set forth (i) as to each individual nominated, (A) the name, date of birth, business address and residence address of such individual; (B) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience; (C) whether the nominee is or has ever been at any time a director, officer or owner of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity; (D) any directorships held by such nominee in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended; (E) whether, in the last five years, such nominee has been convicted in a criminal proceeding or has been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee; and (F) all information relevant to a determination of the nominee's status as to "independence," including references to the criteria established by the New York Stock Exchange (or any other exchange or quotation system on which the Corporation's equity securities are then listed or quoted) and the Corporation's Corporate Governance Guidelines, in each case as in effect at the time of such Stockholder Nomination; and (ii) as to the Person submitting the Nomination Notice and any Person acting in concert with such Person, (x) the name and business address of such Person, (y) the name and address of such Person as they appear on the Corporation's books (if they so appear), and (z) the class and number of shares of the Corporation that are beneficially owned by such Person. A written consent to being named in a proxy statement as a nominee, and to serve as a director if elected, signed by the nominee, shall be filed with any Nomination Notice. If the presiding officer at any stockholders' meeting determines that a nomination was not made in accordance with the procedures prescribed by these Bylaws, he shall so declare to the meeting and the defective nomination shall be disregarded.

(c) In the case of an annual meeting of stockholders, Nomination Notices and Stockholder Proposals shall be delivered to the Secretary at the principal executive office of the Corporation not less than 45 days prior to the date on which the notice of the immediately preceding year's annual meeting of stockholders was first sent to the stockholders of the Corporation. In the case of a special meeting of stockholders, Nomination Notices and Stockholder Proposals shall be delivered to the Secretary at the principal executive office of the Corporation no later than the close of business on the 15th day following the day on which notice of the date of a special meeting of stockholders was given.

Section 2.8. Voting. Unless otherwise provided in a resolution or resolutions providing for any class or series of Preferred Stock pursuant to Article IV of the Certificate of Incorporation or by the Delaware General Corporation Law, each stockholder shall be entitled to one vote, in person or by proxy, for each share held of record by such stockholder who is entitled to vote generally in the election of directors. Each stockholder voting by proxy shall grant such authority in writing, by electronic or telephonic transmission or communication, or by any such other means permitted by the Delaware General Corporation Law. All questions, including elections for the Board of Directors, shall be decided by a majority of the votes cast, except as otherwise required by the Delaware General Corporation Law or as provided for in the Certificate of Incorporation or these Bylaws. Abstentions shall not be considered to be votes cast. For purposes of this Bylaw, a majority of votes cast shall mean that the number of shares voted "for" a director's election exceeds 50% of the number of votes cast with respect to that director's election or, in the case where the number of nominees exceeds the number of directors to be elected, cast with respect to election of directors generally. Votes cast shall include votes to withhold authority in each case and exclude abstentions with respect to that director's election, or, in the case where the number of nominees exceeds the number of directors to be elected, abstentions with respect to election of directors generally.

If a nominee for director who is an incumbent director is not elected and no successor has been elected at such meeting, the director shall promptly tender his or her resignation to the Board of Directors. The Nominating and Corporate Governance Committee of the Board of Directors shall make a recommendation to the Board of Directors as to whether to accept or reject the tendered resignation, or whether other action should be taken. The Board of Directors shall act on the tendered resignation, taking into account the Nominating and Corporate Governance Committee's recommendation, and publicly disclose (by a press release, a filing with the Securities and Exchange Commission, or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale for the decision within 90 days from the date of the certification of the election results. The Nominating and Corporate Governance Committee in making its recommendation, and the Board of Directors in making its decision, may each consider any factors or other information that it considers appropriate and relevant. The director who tenders his or her resignation will not participate in the recommendation of the Nominating and Corporate Governance Committee or the decision of the Board of Directors with respect to his or her resignation. If such incumbent director's resignation is not accepted by the Board of Directors, such director shall continue to serve until the next annual meeting of stockholders at which the class in which he or she is serving is nominated and re-elected and until his or her successor is duly elected, or his or her earlier resignation and removal. If a director's resignation is accepted by the Board of Directors pursuant to this Bylaw, or if a nominee for director is not elected and the nominee is not an incumbent director, then the Board of Directors, in its sole discretion, may fill any resulting vacancy or may decrease the size of the Board of Directors pursuant to the Delaware General Corporation Law and the Certificate of Incorporation and these Bylaws of the Company.

Section 2.9. Inspectors. The Board of Directors by resolution shall, in advance of any meeting of stockholders, appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation, to act at the meeting and make a written report thereof. One or more persons may be designated by the Board of Directors as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by the Delaware General Corporation Law.

SECTION III

Board of Directors

Section 3.1. Number and Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors. The number of directors constituting the Board of Directors shall be as authorized from time to time exclusively by a vote of a majority of the members of the Board of Directors then in office. The maximum number of consecutive three-year terms of office that may be served by any director is three, and for purposes of calculating such maximum number of terms there shall not be counted as a three-year term any service during a partial term for which such director is serving or during any initial term; provided, however, that the Board of Directors is authorized in circumstances it deems appropriate to nominate and thereby render eligible a person for a fourth or subsequent consecutive three-year term. Notwithstanding the foregoing, (i) a person who is not serving as a director shall not be eligible for nomination, appointment, or election if such person has or will have reached age 70 on the date of his or her appointment or election; and (ii) any director reaching the age of 70 during any term of office shall continue to be qualified to serve as a director only until the next annual meeting of stockholders following his or her 70th birthday, provided, however, that the Board of Directors is authorized, in circumstances it deems appropriate and by unanimous approval of all of the directors then in office (excepting the director whose qualification is the subject of the action), to render a director then in office eligible to serve until the next annual meeting of stockholders following his or her 71st birthday.

Section 3.2. Resignation. A director may resign at any time by giving notice, in writing, by electronic transmission or by any other means permitted by the Delaware General Corporation Law, to the Chairman of the Board or to the Secretary. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof.

Section 3.3. Regular Meetings. Regular meetings of the Board of Directors may be held without further notice at such time as shall from time to time be determined by the Board of Directors. Unless otherwise determined by the Board of Directors, the locations of the regular meetings of the Board of Directors shall be in Kingsport, Tennessee. A meeting of the Board of Directors for the election of officers and the transaction of such other business as may come before it may be held without notice immediately following the annual meeting of stockholders.

Section 3.4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, or the Vice Chairman or at the request in writing of one third of the members of the Board of Directors then in office.

Section 3.5. Notice of Special Meetings. Notice of the date, time and place of each special meeting shall be mailed by regular mail to each director at his designated address at least six days before the meeting; or sent by overnight courier to each director at his designated address at least two days before the meeting (with delivery scheduled to occur no later than the day before the meeting); or given orally by telephone or other means, or by telegraph or telecopy, or by any other means comparable to any of the foregoing, to each director at his designated address at least 24 hours before the meeting; provided, however, that if less than five days' notice is provided and one third of the members of the Board of Directors then in office object in writing prior to or at the commencement of the meeting, such meeting shall be postponed until five days after such notice was given pursuant to this sentence (or such shorter period to which a majority of those who objected in writing agree), provided that notice of such postponed meeting shall be given in accordance with this Section 3.5. The notice of the special meeting shall state the general purpose of the meeting, but other routine business may be conducted at the special meeting without such matter being stated in the notice.

Section 3.6. Place of Meetings. The Board of Directors may hold their meetings and have an office or offices inside or outside of the State of Delaware.

Section 3.7. Telephonic Meeting and Participation. Any or all of the directors may participate in a meeting of the Board of Directors or any committee thereof by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting.

Section 3.8. Action by Directors Without a Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, by electronic transmission, or by any other means permitted by the Delaware General Corporation Law, and the writing or writings or, if the consent action is taken by electronic transmission, paper reproductions of such electronic transmissions, are filed with the minutes of proceedings of the Board or committee.

Section 3.9. Quorum and Adjournment. A majority of the directors then holding office shall constitute a quorum. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Whether or not a quorum is present to conduct a meeting, any meeting of the Board of Directors (including an adjourned meeting) may be adjourned by a majority of the directors present, to reconvene at a specific time and place. It shall not be necessary to give to the directors present at the adjourned meeting notice of the reconvened meeting or of the business to be transacted, other than by announcement at the meeting that was adjourned; provided, however, notice of such reconvened meeting, stating the date, time, and place of the reconvened meeting, shall be given to the directors not present at the adjourned meeting in accordance with the requirements of Section 3.5 hereof.

Section 3.10. Organization. The Chairman of the Board, or, in the absence of the Chairman of the Board, the Vice Chairman, or in the absence of the Vice Chairman, a member of the Board selected by the members present, shall preside at meetings of the Board. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary.

Section 3.11. Compensation of Directors. Directors shall receive such compensation for their services as the Board of Directors may determine. Any director may serve the Corporation in any other capacity and receive compensation therefore.

Section 3.12. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors when a vote on any matter is taken is deemed to have assented to the action taken unless he votes against or abstains from the action taken, or unless at the beginning of the meeting or promptly upon arrival the director objects to the holding of the meeting or transacting specified business at the meeting. Any such dissenting votes, abstentions or objections shall be entered in the minutes of the meeting.

SECTION IV

Committees

Section 4.1. Committees. The Board of Directors may, by resolutions passed by a majority of the members of the Board of Directors, designate members of the Board of Directors to constitute other committees which shall in each case consist of such number of directors, and shall have and may execute such powers as may be determined and specified in the respective resolutions appointing them. Any such committee may fix its rules of procedure, determine its manner of acting and the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall otherwise by resolution provide. Unless otherwise provided by the Board of Directors or such committee, the quorum, voting and other procedures shall be the same as those applicable to actions taken by the Board of Directors. A majority of the members of the Board of Directors then in office shall have the power to change the membership of any such committee at any time, to fill vacancies therein and to discharge any such committee or to remove any member thereof, either with or without cause, at any time.

SECTION V

Officers

Section 5.1. Designation. The officers of the Corporation shall be a Chairman of the Board of Directors, a Chief Executive Officer, a Chief Financial Officer, a Treasurer, a Controller, and a Secretary, and such other officers as the Board of Directors may elect or appoint, or provide for the appointment of, as may from time to time appear necessary or advisable in the conduct of the business and affairs of the Corporation. Any number of offices may be held by the same persons, except that the Chairman of the Board must be a director of the Corporation and may also be the Chief Executive Officer.

Section 5.2. Election Term. At its first meeting after each annual meeting of stockholders, the Board of Directors shall elect the officers or provide for the appointment thereof. Subject to Section 5.3 and Section 5.4 hereof, the term of each officer elected by the Board of Directors shall be until the first meeting of the Board of Directors following the next annual meeting of stockholders and until such officer’s successor is chosen and qualified.

Section 5.3. Resignation. Any officer may resign at any time by giving written notice to the Secretary. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof.

Section 5.4. Removal. Any officer may be removed at any time with or without cause by affirmative vote of a majority of the members of the Board of Directors then in office. Any officer appointed by another officer may be removed with or without cause by such officer or the Chief Executive Officer.

Section 5.5. Vacancies. A vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors or, in the case of offices held by officers who may be appointed by other officers, by any officer authorized to appoint such officer.

Section 5.6. Chief Executive Officer. The Chief Executive Officer shall be responsible for carrying out the policies adopted by the Board of Directors.

Section 5.7. Chairman of the Board. The Chairman of the Board shall have such powers and perform such duties as may be provided for herein and as may be incident to the office and as may be assigned by the Board of Directors.

Section 5.8. Chief Financial Officer. The Chief Financial Officer shall act in an executive financial capacity, and assist the Chief Executive Officer in the general supervision of the Corporation’s financial policies and affairs, and shall perform all acts incident to the position of Chief Financial Officer, subject to the control of the Board of Directors.

Section 5.9. Treasurer. The Treasurer shall have charge of all funds of the Corporation and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors.

Section 5.10. Controller. The Controller shall serve as principal accounting officer of the Corporation, having the custody and operation of the accounting books and records of the Corporation, and shall perform all acts incident to the position of Controller, subject to the control of the Board of Directors.

Section 5.11. Secretary. The Secretary shall keep the minutes, and give notices, of all meetings of stockholders and directors and of such committees as directed by the Board of Directors. The Secretary shall have charge of such books and papers as the Board of Directors may require. The Secretary (or any Assistant Secretary) is authorized to certify copies of extracts from minutes and of documents in the Secretary’s charge and anyone may rely on such certified copies to the same effect as if such copies were originals and may rely upon any statement of fact concerning the Corporation certified by the Secretary (or any Assistant Secretary). The Secretary shall perform all acts incident to the office of Secretary, subject to the control of the Board of Directors.

Section 5.12. Compensation of Officers. The officers of the Corporation shall receive such compensation for their services as the Board of Directors or the appropriate committee thereof may determine. The Board of Directors may delegate its authority to determine compensation to designated officers of the Corporation.

Section 5.13. Execution of Instruments. Checks, notes, drafts, other commercial instruments, assignments, guarantees of signatures and contracts (except as otherwise provided herein or by law) shall be executed by the Chief Executive Officer or other officers or employees or agents, in any such case as the Board of Directors may direct or authorize.

Section 5.14. Mechanical Endorsements. The Chief Executive Officer, the Secretary, or other authorized officers may authorize any endorsement on behalf of the Corporation to be made by such mechanical means or stamps as any of such officers may deem appropriate.

SECTION VI

Indemnification

Section 6.1. Indemnification Provisions in Certificate of Incorporation. The provisions of this Section VI are intended to supplement Article VII of the Certificate of Incorporation pursuant to Sections 7.2 and 7.3 thereof. To the extent that this Section VI contains any provisions inconsistent with said Article VII, the provisions of the Certificate of Incorporation shall govern. Terms defined in such Article VII shall have the same meaning in this Section VI.

Section 6.2. Indemnification of Employees. The Corporation shall indemnify and advance expenses to its employees to the same extent as to its directors and officers, as set forth in the Certificate of Incorporation and in this Section VI of the Bylaws of the Corporation.

Section 6.3. Undertakings for Advances of Expenses. If and to the extent the Delaware General Corporation Law requires, an advancement by the Corporation of expenses incurred by an indemnitee pursuant to clause (iii) of the last sentence of Section 7.1 of the Certificate of Incorporation (hereinafter an "advancement of expenses") shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under Article VII of the Certificate of Incorporation or otherwise.

Section 6.4. Claims for Indemnification. If a claim for indemnification under Section 7.1 of the Certificate of Incorporation is not paid in full by the Corporation within 60 days after it has been received in writing by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses only upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in Section 145 of the Delaware General Corporation Law (or any successor provision or provisions). Neither the failure of the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in Section 145 of the Delaware General Corporation Law (or any successor provision or provisions), nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to have or retain such advancement of expenses, under Article VII of the Certificate of Incorporation or this Section VI or otherwise, shall be on the Corporation.

Section 6.5. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, trustee, officer, employee or agent of the Corporation or another enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law.

Section 6.6. Severability. In the event that any of the provisions of this Section VI (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law.

SECTION VII

Miscellaneous

Section 7.1. Seal. The Corporation shall have a suitable seal, containing the name of the Corporation. The Secretary shall be in charge of the seal and may authorize one or more duplicate seals to be kept and used by any other officer or person.

Section 7.2. Waiver of Notice. Whenever any notice is required to be given, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened.

Section 7.3. Voting of Stock Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board, the Vice Chairman, any Vice President or such officers or employees or agents as the Board of Directors or any of such designated officers may direct. Any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may from time to time confer like powers upon any other person or persons.

SECTION VIII

Amendment of Bylaws

Section 8.1. Power to Amend. Except as otherwise provided by law or by the certificate of incorporation or these bylaws, these bylaws or any of them may be amended in any respect or repealed at any time, either (i) at any meeting of stockholders, subject to these bylaws, provided that any amendment or supplement proposed to be acted upon at any such meeting has been described in reasonable detail in the notice of such meeting, or (ii) at any meeting of the Board of Directors, provided in all events that any action relating to the last sentence of Section 3.1 hereof concerning the age 70 qualification limitation on Board service shall require the vote of 100% of the directors then in office, and provided further in all events that no amendment to any by-law that conflicts or varies with, or frustrates the purposes or effect of, any provision of the certificate of incorporation or other provisions of these bylaws may be adopted (including, without limitation, any bylaw the purpose or effect of which is to require approvals of matters by supermajority vote of the Board of Directors or a committee) without amendment of such provision of the certificate of incorporation or other provision of the bylaws in accordance with applicable law and, to the extent otherwise applicable, these bylaws.

Section 8.2. Approval of Amendments. Notwithstanding the foregoing and anything contained in these bylaws to the contrary, these bylaws may not be amended, supplemented, or repealed by the stockholders, and no provision inconsistent in intent, operation, or effect therewith may be adopted by the stockholders, without the affirmative vote of the holders of at least 80% of the stock of the Corporation of any class or series entitled to vote generally in the election of the directors of the Board of Directors, voting together as a single class. Notwithstanding anything contained in these bylaws to the contrary, the affirmative vote of the holders of at least 80% of the stock of the Corporation of any class or series entitled to vote generally in the election of the directors of the Board of Directors, voting together as a single class, is required to amend, supplement or repeal, or to adopt any provisions inconsistent with, this section.

EX-10.01

EXHIBIT 10.01

AWARD NOTICE

NOTICE OF NONQUALIFIED STOCK OPTION

GRANTED PURSUANT TO THE

EASTMAN CHEMICAL COMPANY

2002 OMNIBUS LONG-TERM COMPENSATION PLAN

Grantee:

Number of Shares:

Option Price: $____

Date of Grant: October 31, 2006

1.Grant of Option. This Award Notice serves to notify you that the Compensation and Management Development Committee (the “Committee”) of the Board of Directors of Eastman Chemical Company ("Company") has granted to you, under the Company’s 2002 Omnibus Long-Term Compensation Plan (the "Plan"), a nonqualified stock option ("Option") to purchase, on the terms and conditions set forth in this Award Notice and the Plan, up to the number of shares of its $.01 par value Common Stock ("Common Stock") set forth above, at a price equal to $______ per share. The Plan is incorporated herein by reference and made a part of this Award Notice. Capitalized terms not defined herein have the respective meanings set forth in the Plan. The principal terms of the Plan, and of the offer by the Company of the shares of Common Stock covered by the Option, are described in the Prospectus for the Plan, which Prospectus will be delivered to you by the Company.

2.Period of Option and Limitations on Right to Exercise. Subject to earlier cancellation of all or a portion of the Option as described in Sections 6 and 7 of this Award Notice, the Option will expire at 4:00 p.m., Eastern Standard Time, on October 30, 2016 ("Expiration Date").

3.Exercise of Option.

(a)Subject to the terms set forth in this Award Notice, the Option will become exercisable as to one-third of the shares covered hereby on October 31, 2007, and one-third of the shares covered hereby on October 31, 2008, and as to the remaining shares on October 31, 2009.

(b)Upon your death, your personal representative may exercise the Option, subject to the terms set forth in Section 6 of this Award Notice.

(c)The Option may be exercised in whole or in part. The exercise generally must be accompanied by, or make provision for, full payment in cash; by check; by a broker-assisted cashless method; or by surrendering unrestricted shares of Common Stock having a value on the date of exercise equal to the exercise price, or in any combination of the foregoing; however, if you wish to pay with shares of Common Stock already held by you, you may submit an Affidavit of Ownership form attesting to the ownership of the shares instead of sending in actual share certificates.

4.Nontransferability. The Option is not transferable except by will or by the laws of descent and distribution, and may not be sold, assigned, pledged or encumbered in any way, whether by operation of law or otherwise. The Option may be granted only to, and exercised only by you during your lifetime, except in the case of a permanent disability involving mental incapacity.

5.Limitation of Rights. You will not have any rights as a stockholder with respect to the shares covered by the Option until you become the holder of record of such shares by exercising the Option. Neither the Plan, the granting of the Option nor this Award Notice gives you any right to remain employed by the Company and its Subsidiaries.

6. Termination. Upon termination of your employment with the Company and its Subsidiaries ("termination") by reason of death, disability, or retirement, the Option will remain exercisable for the lesser of: 1) five (5) years following your date of termination, or, 2) the Expiration Date. Upon terminationdue to resignation, the Option will remain exercisable for the lesser of: 1) ninety (90) days following your date of termination, or, 2) the Expiration Date. Upon termination for cause, any portion of the Option not previously exercised by you will be canceled and forfeited by you, without payment of any consideration by the Company. Upon termination for a reason other than those described in this Section (e. g., reduction in force, divestiture, special separation, termination by mutual consent), the Option will remain exercisable until the Expiration Date, unless the Committee determines that any portion of the Option will not be exercisable, or the Option will be exercisable for a period less than the Expiration Date.

7.Noncompetition; Confidentiality. You will forfeit all rights under the Option if you violate the noncompetition and confidentiality provisions contained in Section 20 of the Plan.

8.Restrictions on Issuance of Shares. If at any time the Company determines that listing, registration or qualification of the shares covered by the Option upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

9.Change in Ownership; Change in Control. Sections 25 and 26 of the Plan contain certain special provisions that will apply to the Option in the event of a Change in Ownership or Change in Control, respectively.

10.Adjustment of Option Terms. The adjustment provisions of Section 18 of the Plan will control in the event of a nonreciprocal transaction between the company and its stockholders that causes the per-share value of the Common Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend) or upon the occurrence of in anticipation of any other corporate event or transaction involving the Company (including, without limitation, any merger, combination, or exchange of shares).

11.Plan Controls. In the event of any conflict between the provisions of the Plan and the provisions of this Award Notice, the provisions of the Plan will be controlling and determinative.

EX-10.02

EXHIBIT 10.02

AWARD NOTICE

NOTICE OF NONQUALIFIED STOCK OPTION

GRANTED PURSUANT TO THE

EASTMAN CHEMICAL COMPANY

2002 OMNIBUS LONG-TERM COMPENSATION PLAN

Grantee: Mark J. Costa

Number of Shares: 28,000

Option Price: $____

Date of Grant: October 31, 2006

1.Grant of Option. This Award Notice serves to notify you that the Compensation and Management Development Committee (the “Committee”) of the Board of Directors of Eastman Chemical Company ("Company") has granted to you, under the Company’s 2002 Omnibus Long-Term Compensation Plan (the "Plan"), a nonqualified stock option ("Option") to purchase, on the terms and conditions set forth in this Award Notice and the Plan, up to the number of shares of its $.01 par value Common Stock ("Common Stock") set forth above, at a price equal to $______ per share. The Plan is incorporated herein by reference and made a part of this Award Notice. Capitalized terms not defined herein have the respective meanings set forth in the Plan. The principal terms of the Plan, and of the offer by the Company of the shares of Common Stock covered by the Option, are described in the Prospectus for the Plan, which Prospectus will be delivered to you by the Company.

2.Period of Option and Limitations on Right to Exercise. Subject to earlier cancellation of all or a portion of the Option as described in Sections 6 and 7 of this Award Notice, the Option will expire at 4:00 p.m., Eastern Standard Time, on October 30, 2016 ("Expiration Date").

3.Exercise of Option.

(a)Subject to the terms set forth in this Award Notice, the Option will become exercisable as to one-third of the shares covered hereby on October 31, 2007, and one-third of the shares covered hereby on October 31, 2008, and as to the remaining shares on October 31, 2009.

(b)Upon your death, your personal representative may exercise the Option, subject to the terms set forth in Section 6 of this Award Notice.

(c)The Option may be exercised in whole or in part. The exercise generally must be accompanied by, or make provision for, full payment in cash; by check; by a broker-assisted cashless method; or by surrendering unrestricted shares of Common Stock having a value on the date of exercise equal to the exercise price, or in any combination of the foregoing; however, if you wish to pay with shares of Common Stock already held by you, you may submit an Affidavit of Ownership form attesting to the ownership of the shares instead of sending in actual share certificates.

4.Nontransferability. The Option is not transferable except by will or by the laws of descent and distribution, and may not be sold, assigned, pledged or encumbered in any way, whether by operation of law or otherwise. The Option may be granted only to, and exercised only by you during your lifetime, except in the case of a permanent disability involving mental incapacity.

5.Limitation of Rights. You will not have any rights as a stockholder with respect to the shares covered by the Option until you become the holder of record of such shares by exercising the Option. Neither the Plan, the granting of the Option nor this Award Notice gives you any right to remain employed by the Company and its Subsidiaries.

6. Termination. Upon termination of your employment with the Company and its Subsidiaries ("termination") by reason of death, disability, or retirement, the Option will remain exercisable for the lesser of: 1) five (5) years following your date of termination, or, 2) the Expiration Date. Upon termination of your employment with the Company and its Subsidiaries without "Cause" or for "Good Reason" (as such terms are defined in your Employment Agreement dated May 4, 2006), the Option shall immediately vest and remain exercisable for the lesser of: 1) five (5) years following your date of termination, or, 2) the Expiration Date. Upon termination due to voluntary resignation, the Option will remain exercisable for the lesser of: 1) ninety (90) days following your date of termination, or, 2) the Expiration Date. Upon termination for Cause, any portion of the Option not previously exercised by you will be canceled and forfeited by you, without payment of any consideration by the Company. Upon termination for a reason other than those described in this Section, the Committee will determine if all or any portion of the Option will remain exercisable and if so, the period of time the Option may be exercised, up to, but not to exceed the Expiration Date.

7.Noncompetition; Confidentiality. You will forfeit all rights under the Option if you violate the noncompetition and confidentiality provisions contained in Section 20 of the Plan.

8.Restrictions on Issuance of Shares. If at any time the Company determines that listing, registration or qualification of the shares covered by the Option upon any securities exchange or under any state or federal law, or the approval of any governmental agency, is necessary or advisable as a condition to the exercise of the Option, the Option may not be exercised in whole or in part unless and until such listing, registration, qualification or approval shall have been effected or obtained free of any conditions not acceptable to the Company.

9.Change in Ownership; Change in Control. Sections 25 and 26 of the Plan contain certain special provisions that will apply to the Option in the event of a Change in Ownership or Change in Control, respectively.

10.Adjustment of Option Terms. The adjustment provisions of Section 18 of the Plan will control in the event of a nonreciprocal transaction between the company and its stockholders that causes the per-share value of the Common Stock to change (including, without limitation, any stock dividend, stock split, spin-off, rights offering, or large nonrecurring cash dividend) or upon the occurrence of in anticipation of any other corporate event or transaction involving the Company (including, without limitation, any merger, combination, or exchange of shares).

11.Plan Controls. In the event of any conflict between the provisions of the Plan and the provisions of this Award Notice, the provisions of the Plan will be controlling and determinative.

EX-10.03

EXHIBIT 10.03

PERFORMANCE SHARE AWARD SUBPLAN

OF THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

2007-2009 PERFORMANCE PERIOD

EASTMAN CHEMICAL COMPANY

PERFORMANCE SHARE AWARD SUBPLAN

OF THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

2007-2009 PERFORMANCE PERIOD

TABLE OF CONTENTS

SectionTitlePage

Section 1. Background 1

Section 2. Definitions 1

Section 3. Administration 2

Section 4. Eligibility 3

Section 5. Form of Awards 3

Section 6. Size of Awards 3

Section 7. Composition of Comparison Group 4

Section 8. Preconditions to Receipt of an Award 5

Section 9. Manner and Timing of Award Payments 5

Section 10. No Rights as Stockholder 6

Section 11. Application of Plan 6

Section 12. Adjustment of Actual Grant Amount 7

Section 13. Amendments 7

Exhibit A 8

Exhibit B 9

EASTMAN CHEMICAL COMPANY

PERFORMANCE SHARE AWARD SUBPLAN

OF THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

2007-2009 PERFORMANCE PERIOD

Section 1. Background. Under Section 11 of the Eastman Chemical Company 2002 Omnibus Long-Term Compensation Plan (the "Plan"), the "Committee" (as defined in the Plan), may, among other things, award shares of the $.01 par value common stock ("Common Stock") of Eastman Chemical Company (the "Company") to "Employees" (as defined in the Plan), and such awards may take the form of performance shares, which are contingent upon the attainment of certain performance objectives during a specified period, and subject to such other terms, conditions, and restrictions as the Committee deems appropriate. The purpose of this Performance Share Award Subplan (this "Subplan") is to set forth the terms of the grant of performance shares for the 2007-2009 Performance Period specified herein, effective as of January 1, 2007 (the "Effective Date").

Section 2. Definitions.

(a) The following definitions shall apply to this Subplan:

(i)   "Actual Grant Amount" means the number of shares of Common Stock to which a participant is entitled under this Subplan, calculated in accordance with Section 6 of this Subplan.

(ii)   “Award Amount” means the performance shares awarded to the participant under this Subplan at the beginning of the Performance Period.

 (iii) "Award Payment Date" means the date the Compensation Committee approves the payout of Common Stock covered by an award under this Subplan to a participant.

 (iv) "Comparison Group" is the group of companies comprising the “Materials Sector” from Standard and Poor’s Super Composite 1500 Index, identified as Global Industry Classification Standard (“GICS”) 15.

      (v) “Cost of Capital” reflects the cost of debt and the cost of equity, expressed as a percentage, reflecting the percentage of interest charged on debt and the percentage of expected return on equity.

     (vi) “Earnings from Continuing Operations” shall be defined as the total sales of the Company minus the costs of all operations of any nature used to produce such sales, including taxes, plus after-tax interest associated with the Company's capital debt.

      (vii)   "Maximum Deductible Amount" means the maximum amount deductible by the Company under Section 162(a), taking into consideration the limitations under Section 162(m), of the Internal Revenue Code of 1986, as amended, or any similar or successor provisions thereto.

(viii) “Participation Date” means October 31, 2006.

 (ix) “Performance Period" means January 1, 2007 through December 31, 2009.

  (x) “Performance Year” means one of the three calendar years in the Performance Period.

 (xi) “Return on Capital” shall mean the return produced by funds invested in the Company and shall be determined as Earnings from Continuing Operations, as defined in Section 2.a.(vi), divided by the Average Capital Employed. Average Capital Employed shall be derived by adding the Company's capital debt plus equity at the close of the last day of the year preceding the Performance Year, to the Company's capital debt plus equity at the close of the last day of the present Performance Year, with the resulting sum being divided by two. Capital debt is defined as the sum of borrowing by the Company due within one year and long-term borrowing, as designated on the Company's balance sheet. The resulting ratio shall be multiplied by One Hundred (100) in order to convert such to a percentage. Such percentage shall be calculated to the third place after the decimal point (i.e., xx.xxx%), and then rounded to the second place after the decimal point (i.e., xx.xx%).

(xii) "Target Award Range" means, with respect to any eligible Employee, the number of performance shares within the range specified on Exhibit A hereto for the Salary Grade applicable to such Employee.

(xiii) “TSR” means total stockholder return, as reflected by the sum of (A) change in stock price (measured as the difference between (I) the average of the closing prices of a company’s common stock on the New York Stock Exchange, or of the last sale prices or closing prices of such stock on another national trading exchange, as applicable, in the period beginning on the tenth trading day preceding the beginning of the Performance Period and ending on the tenth trading day of the Performance Period and (II) the average of such closing or last sale prices for such stock in the period beginning on the tenth trading day preceding the end of the Performance Period and ending on the tenth trading day following the end of the Performance Period) plus (B) dividends declared, assuming reinvestment of dividends, and expressed as a percentage return on a stockholder’s hypothetical investment.

(b) Any capitalized terms used but not otherwise defined in this Subplan shall have the respective meanings set forth in the Plan.

Section 3. Administration. This Subplan shall be administered by the Committee. The Committee shall have authority to interpret this Subplan, to prescribe rules and regulations relating to this Subplan, and to take any other actions it deems necessary or advisable for the administration of this Subplan, and shall retain all general authority granted to it under Section 3 of the Plan. At the end of the Performance Period, the Committee shall approve Actual Grant Amounts awarded to participants under this Subplan.

Section 4. Eligibility. The Employees who are eligible to participate in this Subplan are those Employees who, as of the Participation Date, are at Salary Grade 120 and above. These Salary Grades generally include Employees who, as of the Participation Date, have been designated as "officers" of the Company for purposes of Section 16 of the Exchange Act, and held positions with the Company considered carrying responsibilities and functions generally associated with a vice-president-level position. Employees who are promoted during the Performance Period to a position that would meet the above criteria, but who do not hold such position as of the Participation Date, are not eligible to participate in this Subplan.

Section 5. Form of Awards. Subject to the terms and conditions of the Plan and this Subplan, Awards under this Subplan shall be paid in the form of unrestricted shares of Common Stock, except for conversions to cash and deferrals under Section 9 of this Subplan, and except that if a participant is entitled to any fraction of a share of Common Stock, as a result of Section 10 of this Subplan or otherwise, then in lieu of receiving such fraction of a share, the participant shall be paid a cash amount representing the market value, as determined by the Committee, of such fraction of a share at the time of payment.

Section 6. Size of Awards.

(a) Target Award Range. Exhibit A hereto shows by Salary Grade the Target Award Range. The Salary Grade to be used in determining the size of any Award Amount to a participant under this Subplan shall be the Salary Grade applicable to the position held by the participant on the Participation Date. The actual size of the Award Amount to the participant shall be determined based on an assessment by his or her senior management of the participant’s past performance and potential for contributions to the Company’s future long term success. Based on this assessment, the participant may receive no award, the target award amount, or any amount within the Target Award Range to the nearest 10 performance shares. Each member of senior management will have a performance share budget, based on the cumulative award targets for their reports, which must be balanced for their organizations.

(b)               Stock Option Grants for Employees Named After the Participation Date. Employees who are hired into, or promoted to a Salary Grade 120 or above position after the Participation Date but prior to the Performance Period, will be eligible to receive an additional number of options to purchase Company stock as of the next scheduled meeting of the Compensation Committee following their hire or promotion. The additional grant of options will be determined based on several factors, including timing of the promotion or hire, number of options received in the previous assignment, stock option target ranges for the employee’s new salary grade, and considerations of performance assessment. The amount of the award will be recommended by the Company’s Chief Executive Officer for approval by the Compensation Committee for officers of the Company for purposes of Section 16 of the Exchange Act. For non-Section 16 employees, the amount of the award will be approved by the Chief Executive Officer. The option grant price will be the closing price of Company Common Stock on the New York Stock Exchange on the meeting date of the Compensation Committee.

(c)            Actual Grant Amount. Subject to the Committee’s authority to adjust the Actual Grant Amount described in Section 12, the Actual Grant Amount awarded to the participant at the end of the Performance Period is determined by applying a multiplier to the participant’s Award Amount. The multiplier shall be determined by comparing Company performance relative to two measures:

(i)   The Company's TSR during the Performance Period relative to the TSRs of the companies in the Comparison Group during the Performance Period. The Company and each company in the Comparison Group shall be ranked by TSR, in descending order, with the company having the highest TSR during the Performance Period being ranked number one. The Comparison Group shall further be separated into quintiles (first 20%, second 20%, etc.) and the Company's position, in relation to the Comparison Group, shall be expressed as a position in the applicable quintile ranking; and

             (ii) The arithmetic average, for each of the Performance Years during the Performance Period, of the Company’s average Return on Capital minus a Return on Capital target. The Return on Capital target will be determined by the Committee.

An award multiplier table is shown in Exhibit B. The award multiplier is based on the Company’s performance relative to its quintile ranking relative to the Comparison Group, and its average Return on Capital relative to a target during the Performance Period. The award multipliers range from 3.0 (i.e. 300%), if the Company's TSR is in the top performing quintile (top 20%) of companies in the Comparison Group, and the average Return on Capital minus the target Return on Capital is greater than 10 percentage points, to 0.0 (with no shares of Common Stock being delivered to participants under this Subplan), if the Company does not meet certain levels of performance relative to the two measures.

Section 7. Composition of Comparison Group. The Comparison Group is composed of companies relevant for purposes of TSR comparisons under this Subplan. However, during the Performance Period, a company in the Comparison Group may be dropped from the Comparison Group if a company's common stock ceases to be publicly traded on a national stock exchange or market; or a company is a party to a significant merger, acquisition, or other reorganization. Under these, or similar circumstances, the company or companies may be removed from the Comparison Group, and may be replaced with another company or companies by Standard & Poor’s, consistent with their established criteria for selection of companies for the Comparison Group. In any case where the Comparison Group ceases to exist, or is otherwise determined to no longer be appropriate as the basis for a measure under this Subplan, the Committee may designate a replacement Comparison Group. In any such case, the Committee shall have authority to determine the appropriate method of calculating the TSR of such former and/or replacement Comparison Group, whether by complete substitution of the replacement Comparison Group (and disregard of the former Comparison Group) over the entire Performance Period or by pro rata calculations for each Comparison Group or otherwise.

Section 8. Preconditions to Receipt of an Award.

(a) Continuous Employment. Except as specified in paragraph (b) below, to remain eligible for an Award under this Subplan, an eligible Employee must remain continuously employed with the Company or a Subsidiary at all times from the Effective Date through the Award Payment Date.

(b) Death, Disability, Retirement, or Termination for an Approved Reason Before the Award Payment Date. If a participant's employment with the Company or a Subsidiary is terminated due to death, disability, retirement, or any approved reason (e. g., reduction in force, divestiture, special separation, termination by mutual consent) prior to the Award Payment Date, the participant shall receive, subject to the terms and conditions of the Plan and this Subplan, an Award representing a prorated portion of the Actual Grant Amount to which such participant otherwise would be entitled, with the precise amount of such Award to be determined by multiplying the Actual Grant Amount by a fraction, the numerator of which is the number of full calendar months employed in the Performance Period from the Effective Date through and including the effective date of such termination, and the denominator of which is 36 (the total number of months in the Performance Period).

Section 9. Manner and Timing of Award Payments.

(a) Timing of Award Payment. Except for deferrals under Sections 9(c) and 9(d), if any Awards are payable under this Subplan, the payment of such Awards to eligible Employees shall be made as soon as is administratively practicable after the end of the Performance Period and final approval by the Committee.

(b) Tax Withholding. The Company may withhold or require the grantee to remit a cash amount sufficient to satisfy federal, state, and local taxes (including the participant’s FICA obligation) required by law to be withheld. Further, either the Company or the grantee may elect to satisfy the withholding requirement by having the Company withhold shares of common stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

(c) Deferral of Award in Excess of the Maximum Deductible Amount. If payment of the Award would, or could in the reasonable estimation of the Committee, result in the participant's receiving compensation in excess of the Maximum Deductible Amount in a given year, then such portion (or all, as applicable) of the Award as would, or could in the reasonable estimation of the Committee, cause such participant to receive compensation from the Company in excess of the Maximum Deductible Amount may, at the sole discretion of the Committee, be converted into the right to receive a cash payment, which shall be deferred until after the participant retires or otherwise terminates employment with the Company and its Subsidiaries, provided that such deferral is compliant with the requirements of Internal Revenue Code Section 409A and Treasury Regulations and guidance there under.

(d) Election to Defer the Award. Any participant in this Subplan may elect to defer the Award until after the participant retires or otherwise terminates employment with the Company and its Subsidiaries under the terms and subject to the conditions of the Eastman Executive Deferred Compensation Plan, as the same now exists or may be amended hereafter (the "EDCP"). If the participant chooses to defer the Award, the Award shall be converted into the right to receive a cash payment.

(e) Award Deferral to the EDCP. In the event that all or any portion of an Award is converted into a right to receive a cash payment pursuant to Sections 9(c) or 9(d), except as otherwise provided in this Section with respect to Section 16 insiders, an amount representing the Fair Market Value, as of the date the Common Stock covered by the Award otherwise would be delivered to the participant, of the Actual Grant Amount (or the deferred portion thereof) will be credited to the Stock Account of the EDCP, and hypothetically invested in units of Common Stock. Notwithstanding the foregoing, for each Section 16 insider electing to defer the Award, the deferrable amount, when initially credited to the participant's EDCP Account, shall be held in a participant's Interest Account until the next date that dividends are paid on Common Stock, and on such date the deferrable amount that would have been initially credited to the participant's Stock Account but for this sentence shall be transferred, together with allocable interest thereon, to the participant's Stock Account, subject to provisions set forth in the EDCP. Thereafter, such amount shall be treated in the same manner as other investments in the EDCP and shall be subject to the terms and conditions thereof.

Section 10. No Rights as Stockholder. No certificates for shares of Common Stock shall be issued under this Subplan nor shall any participant have any rights as a stockholder as a result of participation in this Subplan, until the Actual Grant Amount has been determined and such participant has otherwise become entitled to an Award under the terms of the Plan and this Subplan. In particular, no participant shall have any right to vote or to receive dividends on any shares of Common Stock under this Subplan, until certificates for such shares have been issued as described above; provided, however, that if payment of all or any portion of an Award under this Subplan has been deferred pursuant to Section 9 of this Subplan or otherwise, but such Award otherwise has become payable hereunder, then during the period during which payment is deferred, the deferred Award shall be credited with additional units of Common Stock, and (if applicable) fractions thereof, based on any dividends declared on the Common Stock, in accordance with the terms of the EDCP.

Section 11. Application of Plan. The provisions of the Plan shall apply to this Subplan, except to the extent that any such provisions are inconsistent with specific provisions of this Subplan. In particular, and without limitation, Section 11 (relating to performance shares), Section 12 (relating to qualification of Awards as "performance-based" under Code Section 162(m)), Section 17 (relating to nonassignability), Section 18 (relating to adjustment of shares available), Section 19 (relating to withholding taxes), Section 20 (relating to noncompetition and confidentiality), Section 21 (relating to regulatory approvals and listings), Section 24 (relating to the governing law), Section 25 (relating to changes in ownership), Section 26 (relating to changes in control), Section 27 (relating to no rights to employment or participation), Section 28 (relating to no rights, title, or interest in Company assets), and Section 29 (relating to securities laws) shall apply to this Subplan.

Section 12. Adjustment of Actual Grant Amount. The Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect overall Company performance and business and financial conditions.

Section 13. Amendments. The Committee may, from time to time, amend this Subplan in any manner.

EXHIBIT A

Eastman Chemical Company

Performance Share Award Grant Table

2007-2009 Cycle

ON FILE IN GLOBAL COMPENSATIION

EXHIBIT B

Award Multiplier Table

Eastman TSR Relative to Comparison Companies	Differential from Target Return on Capital
	<-7%	-5% to -7%	-3 to -4.99%	-1 to -2.99%	-0.99 to +1%	+1.01 to +3%	+3.01 to +5%	+5.01 to +7%	+7.01 to +10%	>10%
0-19%( 5th quintile)	0.0	0.0	0.0	0.0	0.6	0.8	1.0	1.3	1.6	1.9
20-39%(4th quintile)	0.0	0.0	0.0	0.4	0.8	1.0	1.3	1.6	1.9	2.2
40-59%(3rd quintile)	0.0	0.0	0.4	0.6	1.0	1.3	1.6	1.9	2.2	2.5
60-79%(2nd quintile)	0.0	0.4	0.6	1.0	1.3	1.6	1.9	2.2	2.5	2.8
80-99%(1st quintile)	0.0	0.6	0.8	1.3	1.6	1.9	2.2	2.5	2.8	3.0

EX-10.04

EXHIBIT 10.04

 PERFORMANCE SHARE AWARD SUBPLAN

TO MARK J. COSTA, SENIOR VICE-PRESIDENT,

CORPORATE STRATEGY AND MARKETING

UNDER THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

(2007-2009 PERFORMANCE PERIOD)

EASTMAN CHEMICAL COMPANY

PERFORMANCE SHARE AWARD SUBPLAN

TO MARK J. COSTA, SENIOR VICE-PRESIDENT,

CORPORATE STRATEGY AND MARKETING

UNDER THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

(2007-2009 PERFORMANCE PERIOD)

TABLE OF CONTENTS

SectionTitlePage

Section 1. Background 1

Section 2. Definitions 1

Section 3. Administration 2

Section 4. Eligibility 3

Section 5. Form of Awards 3

Section 6. Size of Awards 3

Section 7. Composition of Comparison Group 4

Section 8. Preconditions to Receipt of an Award 4

Section 9. Manner and Timing of Award Payments 5

Section 10. No Rights as Stockholder 6

Section 11. Application of Plan 6

Section 12. Adjustment of Actual Grant Amount 7

Section 13. Amendments 7

Exhibit A 8

Exhibit B 9

PERFORMANCE SHARE AWARD SUBPLAN

TO MARK J. COSTA, SENIOR VICE-PRESIDENT,

CORPORATE STRATEGY AND MARKETING

UNDER THE 2002 OMNIBUS LONG-TERM COMPENSATION PLAN

(2007-2009 PERFORMANCE PERIOD)

Section 1. Background. Under Section 11 of the Eastman Chemical Company 2002 Omnibus Long-Term Compensation Plan (the "Plan"), the "Committee" (as defined in the Plan), may, among other things, award shares of the $.01 par value common stock ("Common Stock") of Eastman Chemical Company (the "Company") to "Employees" (as defined in the Plan), and such awards may take the form of performance shares, which are contingent upon the attainment of certain performance objectives during a specified period, and subject to such other terms, conditions, and restrictions as the Committee deems appropriate. The purpose of this Performance Share Award Subplan (this "Subplan") is to set forth the terms of the grant of performance shares for the 2007-2009 Performance Period specified herein, effective as of January 1, 2007 (the "Effective Date").

Section 2. Definitions.

(a) The following definitions shall apply to this Subplan:

(i)   "Actual Grant Amount" means the number of shares of Common Stock to which a participant is entitled under this Subplan, calculated in accordance with Section 6 of this Subplan.

(ii)   “Award Amount” means the performance shares awarded to the participant under this Subplan at the beginning of the Performance Period.

         (iii) "Award Payment Date" means the date the Compensation Committee approves the payout of Common Stock covered by an award under this Subplan to a participant.

         (iv) "Comparison Group" is the group of companies comprising the “Materials Sector” from Standard and Poor’s Super Composite 1500 Index, identified as Global Industry Classification Standard (“GICS”) 15.

              (v) “Cost of Capital” reflects the cost of debt and the cost of equity, expressed as a percentage, reflecting the percentage of interest charged on debt and the percentage of expected return on equity.

             (vi) “Earnings from Continuing Operations” shall be defined as the total sales of the Company minus the costs of all operations of any nature used to produce such sales, including taxes, plus after-tax interest associated with the Company's capital debt.

(vii)   "Maximum Deductible Amount" means the maximum amount deductible by the Company under Section 162(a), taking into consideration the limitations under Section 162(m), of the Internal Revenue Code of 1986, as amended, or any similar or successor provisions thereto.

                       (viii) “Participation Date” means October 31, 2006.

                          (ix) “Performance Period" means January 1, 2007 through December 31, 2009.

                           (x) “Performance Year” means one of the three calendar years in the Performance Period.

                         (xi) “Return on Capital” shall mean the return produced by funds invested in the Company and shall be determined as Earnings from Continuing Operations, as defined in Section 2.a.(vi), divided by the Average Capital Employed. Average Capital Employed shall be derived by adding the Company's capital debt plus equity at the close of the last day of the year preceding the Performance Year, to the Company's capital debt plus equity at the close of the last day of the present Performance Year, with the resulting sum being divided by two. Capital debt is defined as the sum of borrowing by the Company due within one year and long-term borrowing, as designated on the Company's balance sheet. The resulting ratio shall be multiplied by One Hundred (100) in order to convert such to a percentage. Such percentage shall be calculated to the third place after the decimal point (i.e., xx.xxx%), and then rounded to the second place after the decimal point (i.e., xx.xx%).

        (xii) "Target Award Range" means, with respect to any eligible Employee, the number of performance shares within the range specified on Exhibit A hereto for the Salary Grade applicable to such Employee.

       (xiii) “TSR” means total stockholder return, as reflected by the sum of (A) change in stock price (measured as the difference between (I) the average of the closing prices of a company’s common stock on the New York Stock Exchange, or of the last sale prices or closing prices of such stock on another national trading exchange, as applicable, in the period beginning on the tenth trading day preceding the beginning of the Performance Period and ending on the tenth trading day of the Performance Period and (II) the average of such closing or last sale prices for such stock in the period beginning on the tenth trading day preceding the end of the Performance Period and ending on the tenth trading day following the end of the Performance Period) plus (B) dividends declared, assuming reinvestment of dividends, and expressed as a percentage return on a stockholder’s hypothetical investment.

(b) Any capitalized terms used but not otherwise defined in this Subplan shall have the respective meanings set forth in the Plan.

Section 3. Administration. This Subplan shall be administered by the Committee. The Committee shall have authority to interpret this Subplan, to prescribe rules and regulations relating to this Subplan, and to take any other actions it deems necessary or advisable for the administration of this Subplan, and shall retain all general authority granted to it under Section 3 of the Plan. At the end of the Performance Period, the Committee shall approve Actual Grant Amounts awarded to participants under this Subplan.

Section 4. Eligibility. The Employees who are eligible to participate in this Subplan are those Employees who, as of the Participation Date, are at Salary Grade 120 and above. These Salary Grades generally include Employees who, as of the Participation Date, have been designated as "officers" of the Company for purposes of Section 16 of the Exchange Act, and held positions with the Company considered carrying responsibilities and functions generally associated with a vice-president-level position. Employees who are promoted during the Performance Period to a position that would meet the above criteria, but who do not hold such position as of the Participation Date, are not eligible to participate in this Subplan.

Section 5. Form of Awards. Subject to the terms and conditions of the Plan and this Subplan, Awards under this Subplan shall be paid in the form of unrestricted shares of Common Stock, except for conversions to cash and deferrals under Section 9 of this Subplan, and except that if a participant is entitled to any fraction of a share of Common Stock, as a result of Section 10 of this Subplan or otherwise, then in lieu of receiving such fraction of a share, the participant shall be paid a cash amount representing the market value, as determined by the Committee, of such fraction of a share at the time of payment.

Section 6. Size of Awards.

(a) Target Award Range. Exhibit A hereto shows by Salary Grade the Target Award Range. The Salary Grade to be used in determining the size of any Award Amount to a participant under this Subplan shall be the Salary Grade applicable to the position held by the participant on the Participation Date. The actual size of the Award Amount to the participant shall be determined based on an assessment by his or her senior management of the participant’s past performance and potential for contributions to the Company’s future long term success. Based on this assessment, the participant may receive no award, the target award amount, or any amount within the Target Award Range to the nearest 10 performance shares. Each member of senior management will have a performance share budget, based on the cumulative award targets for their reports, which must be balanced for their organizations.

(b)           Stock Option Grants for Employees Named After the Participation Date. Employees who are hired into, or promoted to a Salary Grade 120 or above position after the Participation Date but prior to the Performance Period, will be eligible to receive an additional number of options to purchase Company stock as of the next scheduled meeting of the Compensation Committee following their hire or promotion. The additional grant of options will be determined based on several factors, including timing of the promotion or hire, number of options received in the previous assignment, stock option target ranges for the employee’s new salary grade, and considerations of performance assessment. The amount of the award will be recommended by the Company’s Chief Executive Officer for approval by the Compensation Committee for officers of the Company for purposes of Section 16 of the Exchange Act. For non-Section 16 employees, the amount of the award will be approved by the Chief Executive Officer. The option grant price will be the closing price of Company Common Stock on the New York Stock Exchange on the meeting date of the Compensation Committee.

(c)           Actual Grant Amount. Subject to the Committee’s authority to adjust the Actual Grant Amount described in Section 12, the Actual Grant Amount awarded to the participant at the end of the Performance Period is determined by applying a multiplier to the participant’s Award Amount. The multiplier shall be determined by comparing Company performance relative to two measures:

(i)   The Company's TSR during the Performance Period relative to the TSRs of the companies in the Comparison Group during the Performance Period. The Company and each company in the Comparison Group shall be ranked by TSR, in descending order, with the company having the highest TSR during the Performance Period being ranked number one. The Comparison Group shall further be separated into quintiles (first 20%, second 20%, etc.) and the Company's position, in relation to the Comparison Group, shall be expressed as a position in the applicable quintile ranking; and

      (ii) The arithmetic average, for each of the Performance Years during the Performance Period, of the Company’s average Return on Capital minus a Return on Capital target. The Return on Capital target will be determined by the Committee.

An award multiplier table is shown in Exhibit B. The award multiplier is based on the Company’s performance relative to its quintile ranking relative to the Comparison Group, and its average Return on Capital relative to a target during the Performance Period. The award multipliers range from 3.0 (i.e. 300%), if the Company's TSR is in the top performing quintile (top 20%) of companies in the Comparison Group, and the average Return on Capital minus the target Return on Capital is greater than 10 percentage points, to 0.0 (with no shares of Common Stock being delivered to participants under this Subplan), if the Company does not meet certain levels of performance relative to the two measures.

Section 7. Composition of Comparison Group. The Comparison Group is composed of companies relevant for purposes of TSR comparisons under this Subplan. However, during the Performance Period, a company in the Comparison Group may be dropped from the Comparison Group if a company's common stock ceases to be publicly traded on a national stock exchange or market; or a company is a party to a significant merger, acquisition, or other reorganization. Under these, or similar circumstances, the company or companies may be removed from the Comparison Group, and may be replaced with another company or companies by Standard & Poor’s, consistent with their established criteria for selection of companies for the Comparison Group. In any case where the Comparison Group ceases to exist, or is otherwise determined to no longer be appropriate as the basis for a measure under this Subplan, the Committee may designate a replacement Comparison Group. In any such case, the Committee shall have authority to determine the appropriate method of calculating the TSR of such former and/or replacement Comparison Group, whether by complete substitution of the replacement Comparison Group (and disregard of the former Comparison Group) over the entire Performance Period or by pro rata calculations for each Comparison Group or otherwise.

Section 8. Preconditions to Receipt of an Award.

(a) Continuous Employment. Except as specified in paragraphs (b) and (c) below, to remain eligible for an Award under this Subplan, an eligible Employee must remain continuously employed with the Company or a Subsidiary at all times from the Effective Date through the Award Payment Date.

(b) Death, Disability, Retirement, or Termination for an Approved Reason Before the Award Payment Date. If a participant's employment with the Company or a Subsidiary is terminated due to death, disability, retirement, or any approved reason as determined by the Committee prior to the Award Payment Date, the participant shall receive, subject to the terms and conditions of the Plan and this Subplan, an Award representing a prorated portion of the Actual Grant Amount to which such participant otherwise would be entitled, with the precise amount of such Award to be determined by multiplying the Actual Grant Amount by a fraction, the numerator of which is the number of full calendar months employed in the Performance Period from the Effective Date through and including the effective date of such termination, and the denominator of which is 36 (the total number of months in the Performance Period).

(c) Termination Without Cause or for Good Reason Before the Award Payment Date. If a participant's employment with the Company or a Subsidiary is terminated without "Cause" or for "Good Reason" (as such terms are defined in the participants' Employment Agreement dated May 4, 2006) prior to the Award Payment Date, the participant shall receive, subject to the terms and conditions of the Plan and this Subplan, within 30 days of termination (or such other date as may be required under Internal Revenue Code Section 409A), shares of Common Stock underlying outstanding performance shares (as if all performance objectives with respect thereto had been met at a level of 100%) on a pro rata basis based upon the number of full calendar months employed in the Performance Period from the Effective Date through and including the effective date of such termination.

Section 9. Manner and Timing of Award Payments.

(a) Timing of Award Payment. Except for deferrals under Sections 9(c) and 9(d), if any Awards are payable under this Subplan, the payment of such Awards to eligible Employees shall be made as soon as is administratively practicable after the end of the Performance Period and final approval by the Committee.

(b) Tax Withholding. The Company may withhold or require the grantee to remit a cash amount sufficient to satisfy federal, state, and local taxes (including the participant’s FICA obligation) required by law to be withheld. Further, either the Company or the grantee may elect to satisfy the withholding requirement by having the Company withhold shares of common stock having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the transaction.

(c) Deferral of Award in Excess of the Maximum Deductible Amount. If payment of the Award would, or could in the reasonable estimation of the Committee, result in the participant's receiving compensation in excess of the Maximum Deductible Amount in a given year, then such portion (or all, as applicable) of the Award as would, or could in the reasonable estimation of the Committee, cause such participant to receive compensation from the Company in excess of the Maximum Deductible Amount may, at the sole discretion of the Committee, be converted into the right to receive a cash payment, which shall be deferred until after the participant retires or otherwise terminates employment with the Company and its Subsidiaries, provided that such deferral is compliant with the requirements of Internal Revenue Code Section 409A and Treasury Regulations and guidance thereunder.

(d) Election to Defer the Award. Any participant in this Subplan may elect to defer the Award until after the participant retires or otherwise terminates employment with the Company and its Subsidiaries under the terms and subject to the conditions of the Eastman Executive Deferred Compensation Plan, as the same now exists or may be amended hereafter (the "EDCP"). If the participant chooses to defer the Award, the Award shall be converted into the right to receive a cash payment.

(e) Award Deferral to the EDCP. In the event that all or any portion of an Award is converted into a right to receive a cash payment pursuant to Sections 9(c) or 9(d), except as otherwise provided in this Section with respect to Section 16 insiders, an amount representing the Fair Market Value, as of the date the Common Stock covered by the Award otherwise would be delivered to the participant, of the Actual Grant Amount (or the deferred portion thereof) will be credited to the Stock Account of the EDCP, and hypothetically invested in units of Common Stock. Notwithstanding the foregoing, for each Section 16 insider electing to defer the Award, the deferrable amount, when initially credited to the participant's EDCP Account, shall be held in a participant's Interest Account until the next date that dividends are paid on Common Stock, and on such date the deferrable amount that would have been initially credited to the participant's Stock Account but for this sentence shall be transferred, together with allocable interest thereon, to the participant's Stock Account, subject to provisions set forth in the EDCP. Thereafter, such amount shall be treated in the same manner as other investments in the EDCP and shall be subject to the terms and conditions thereof.

Section 10. No Rights as Stockholder. No certificates for shares of Common Stock shall be issued under this Subplan nor shall any participant have any rights as a stockholder as a result of participation in this Subplan, until the Actual Grant Amount has been determined and such participant has otherwise become entitled to an Award under the terms of the Plan and this Subplan. In particular, no participant shall have any right to vote or to receive dividends on any shares of Common Stock under this Subplan, until certificates for such shares have been issued as described above; provided, however, that if payment of all or any portion of an Award under this Subplan has been deferred pursuant to Section 9 of this Subplan or otherwise, but such Award otherwise has become payable hereunder, then during the period during which payment is deferred, the deferred Award shall be credited with additional units of Common Stock, and (if applicable) fractions thereof, based on any dividends declared on the Common Stock, in accordance with the terms of the EDCP.

Section 11. Application of Plan. The provisions of the Plan shall apply to this Subplan, except to the extent that any such provisions are inconsistent with specific provisions of this Subplan. In particular, and without limitation, Section 11 (relating to performance shares), Section 12 (relating to qualification of Awards as "performance-based" under Code Section 162(m)), Section 17 (relating to nonassignability), Section 18 (relating to adjustment of shares available), Section 19 (relating to withholding taxes), Section 20 (relating to noncompetition and confidentiality), Section 21 (relating to regulatory approvals and listings), Section 24 (relating to the governing law), Section 25 (relating to changes in ownership), Section 26 (relating to changes in control), Section 27 (relating to no rights to employment or participation), Section 28 (relating to no rights, title, or interest in Company assets), and Section 29 (relating to securities laws) shall apply to this Subplan.

Section 12. Adjustment of Actual Grant Amount. The Committee may, in its sole discretion, adjust the Actual Grant Amount to reflect overall Company performance and business and financial conditions.

Section 13. Amendments. The Committee may, from time to time, amend this Subplan in any manner.

EXHIBIT A

Eastman Chemical Company

Performance Share Award Grant Table

2007-2009 Cycle

ON FILE IN GLOBAL COMPENSATIION

EXHIBIT B

Award Multiplier Table

Eastman TSR Relative to Comparison Companies	Differential from Target Return on Capital
	<-7%	-5% to -7%	-3 to -4.99%	-1 to -2.99%	-0.99 to +1%	+1.01 to +3%	+3.01 to +5%	+5.01 to +7%	+7.01 to +10%	>10%
0-19%( 5th quintile)	0.0	0.0	0.0	0.0	0.6	0.8	1.0	1.3	1.6	1.9
20-39%(4th quintile)	0.0	0.0	0.0	0.4	0.8	1.0	1.3	1.6	1.9	2.2
40-59%(3rd quintile)	0.0	0.0	0.4	0.6	1.0	1.3	1.6	1.9	2.2	2.5
60-79%(2nd quintile)	0.0	0.4	0.6	1.0	1.3	1.6	1.9	2.2	2.5	2.8
80-99%(1st quintile)	0.0	0.6	0.8	1.3	1.6	1.9	2.2	2.5	2.8	3.0

EX-12.01

EXHIBIT 12.01

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Computation of Ratios of Earnings to Fixed Charges

	Third Quarter				First Nine Months
(Dollars in millions)		2006		2005		2006		2005
Earnings before income taxes and cumulative effect of
changes in accounting principles	$	136	$	177	$	472	$	698
Add:
Interest expense		26		25		79		88
Appropriate portion of rental expense (1)		5		5		16		16
Amortization of capitalized interest		3		3		8		9
Earnings as adjusted	$	170	$	210	$	575	$	811
Fixed charges:
Interest expense	$	26	$	25	$	79	$	88
Appropriate portion of rental expense (1)		5		5		16		16
Capitalized interest		--		1		6		5
Total fixed charges	$	31	$	31	$	101	$	109
Ratio of earnings to fixed charges		5.5x		6.8x		5.7x		7.4x

⁽¹⁾   For all periods presented, the interest component of rental expense is estimated to equal one-third of such expense.

53

EX-31.01

Exhibit 31.01

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Rule 13a - 14(a)/15d - 14(a) Certifications

I, J. Brian Ferguson, Chairman of the Board and Chief Executive Officer of Eastman Chemical Company, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Eastman Chemical Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 31, 2006

/s/  J. Brian Ferguson
J. Brian Ferguson

Chairman of the Board and Chief Executive Officer

EX-31.02

Exhibit 31.02

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Rule 13a - 14(a)/15d - 14(a) Certifications

I, Richard A. Lorraine, Senior Vice President and Chief Financial Officer of Eastman Chemical Company, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Eastman Chemical Company;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: October 31, 2006

/s/ Richard A. Lorraine

Richard A. Lorraine

Senior Vice President and Chief Financial Officer

EX-32.01

Exhibit 32.01

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Section 1350 Certifications

In connection with the Quarterly Report of Eastman Chemical Company (the "Company") on Form 10-Q for the period ending September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:

1.   The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.   The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

A signed original of this written statement required by Section 906 has been provided to Eastman Chemical Company and will be retained by Eastman Chemical Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: October 31, 2006

/s/ J. Brian Ferguson

J. Brian Ferguson

Chairman of the Board and Chief Executive Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-32.02

Exhibit 32.02

EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES

Section 1350 Certifications

In connection with the Quarterly Report of Eastman Chemical Company (the "Company") on Form 10-Q for the period ending September 30, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), each of the undersigned officers of the Company certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to such officer's knowledge:

1.The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

2.The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.

A signed original of this written statement required by Section 906 has been provided to Eastman Chemical Company and will be retained by Eastman Chemical Company and furnished to the Securities and Exchange Commission or its staff upon request.

Date: October 31, 2006

/s/ Richard A. Lorraine

Richard A. Lorraine

Senior Vice President and Chief Financial Officer

The foregoing certification is being furnished solely pursuant to 18 U.S.C. §1350 and is not being filed as part of the Report or as a separate disclosure document.

EX-99.01

Exhibit 99.01

EASTMAN CHEMICAL COMPANY DETAIL OF SALES REVENUE

		First Quarter		Second Quarter		Third Quarter		First Nine Months
(Dollars in millions)		2006		2006		2006		2006
Sales Revenue	$	1,803	$	1,929	$	1,966	$	5,698
Less: product lines held for sale
Coatings, Adhesives, Special Polymers and Inks (1)		18		17		18		53
Performance Chemicals and Intermediates (2)		30		29		38		97
Performance Polymers (1)		180		168		169		517
Sales revenue - continuing product lines	$	1,575	$	1,715	$	1,741	$	63,65

		First Quarter		Second Quarter		Third Quarter		Fourth Quarter		Twelve Months
(Dollars in millions)		2005		2005		2005		2005		2005
Sales Revenue	$	1,762	$	1,752	$	1,816	$	1,729	$	7,059
Less: product lines held for sale
Coatings, Adhesives, Special Polymers and Inks (1)		16		17		15		16		64
Performance Chemicals and Intermediates (2)		26		27		22		29		104
Performance Polymers (1)		141		137		164		176		618
Sales revenue - continuing product lines	$	1,579	$	1,571	$	1,615	$	1,508	$	6,273

⁽¹⁾ Definitive agreement entered into in October 2006 for the sale of the polyethylene and Epolene polymer businesses and related assets of the Performance Polymers and Coatings, Adhesives, Specialty Polymers, and Inks ("CASPI") segments located at the Longview, Texas site and the Company's ethylene pipeline.

⁽²⁾ Definitive agreement entered into in July 2006 for the sale of the Company's Batesville, Arkansas manufacturing facility and related assets and the specialty organic chemicals product lines in the Performance Chemicals and Intermediates ("PCI") segment