Following is a summary of certain legal actions involving the Company:

Note 8: Comprehensive Income The Company presents comprehensive income (loss) in accordance with Financial Accounting Standard No. 130 "Reporting Comprehensive Income" ("SFAS 130"). The provisions of SFAS 130 require the Company to classify items of other comprehensive income (loss) in the financial statements and display the accumulated balance of other comprehensive income (loss) separately from retained earnings and additional paid in capital in the equity section of the balance sheet.

Other comprehensive income (loss) for the six-month and three-month periods ended June 30, 2001 and 2000 is detailed below.

As consideration to terminate the prior above-market priced take-or-pay purchase commitment which provided, among other things, for a market price based on natural gas and required minimum monthly purchase volumes, the Chemical Business agreed to pay the supplier a one-time settlement fee.  The remaining accrued liability as of June 30, 2001, associated with the above-market purchase commitment, net of the one-time settlement fee, was eliminated resulting in a gain on termination of the purchase commitment of $2.3 million that was recognized in the six and three-month periods ended June 30, 2001.

For the six and three-month periods ended June 30, 2001, the Company realized, through cost of goods sold, approximately $2.1 million and $1.1 million of the accrued liability previously established for loss on the former firm purchase commitment.

LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 2001 and 2000

In 1997, the Company entered into an interest rate forward agreement to effectively fix the interest rate of a long-term lease commitment (not for trading purposes). In 1999, the Company executed the long-term lease agreement and terminated the forward at a net cost of $2.8 million. The Company historically accounted for this hedge under the deferral method (as an adjustment of the initial term lease rentals). At December 31, 2000, the remaining deferred loss included in other assets approximated $2.4 million. The deferred cost recognized in operations amounted to $144,000 and $72,000 for the six months and three months ended June 30, 2000, respectively. Upon adoption of SFAS 133 on January 1, 2001, the deferred loss was reclassified into accumulated other comprehensive loss and will be amortized to operations over the term of the lease arrangement. The amount amortized to operations for the six months and three months ended June 30, 2001 was $144,000 and $72,000, respectively. The Company also periodically enters into exchange-traded futures contracts for copper and aluminum (as such products are used in the Company's Climate Control Business), which contracts are currently accounted for on a mark to market basis.

In July 2001, the FASB issued Statements No. 141 ("SFAS 141"), "Business Combinations," and No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets". SFAS 141 is effective for all business combinations initiated after June 30, 2001 and SFAS 142, that will require that goodwill and intangible assets with indefinate lives no longer be amortized but be tested for impairment at least annually, will become effective for the Company on January 1, 2002.  In August 2001, the FASB issued Statement No. 143, "Accounting for Asset Retirement Obligations" which will require liability recognition for retirement obligation associated with tangible long lived assets.  The Company will adopt SFAS No. 143 effective January 1, 2003. The Company is currently analyzing the effect, if any, the adoption of these standards will have on its financial statements.

The Company's wholly-owned subsidiary, ClimaChem, Inc. ("ClimaChem"), through its subsidiaries, owns substantially all of the Company's Chemical and Climate Control Businesses. ClimaChem and its subsidiaries are dependent on credit agreements with lenders and internally generated cash flow in order to fund their operations and pay their debts and obligations.

In April, 2001, the Company replaced its existing revolving credit facility for ClimaChem and its subsidiaries with a new lender. ClimaChem and its subsidiaries, entered into a new $50 million credit facility ("Working Capital Revolver Loan") with a new lender. An LSB subsidiary which is not a subsidiary of ClimaChem, Summit Machine Tool Manufacturing Corp., also executed the third amended and restated revolving credit agreement with the prior lender (the "Agreement") in April 2001. The Agreement provides a revolving line of credit of up to $2.5 million through April 2002.

ClimaChem is restricted as to the funds that it may transfer to the Company under the terms contained in an Indenture ("Indenture") covering the Senior Unsecured Notes issued by ClimaChem and the Working Capital Revolver Loan. Under the Management Agreement, it is possible that ClimaChem could pay up to $1.8 million of management fees to the Company (if ClimaChem has earnings before interest, income taxes, depreciation and amortization ("EBITDA") in excess of $26 million for the year). For the six months ended June 30, 2001 and 2000, ClimaChem owed the Company $900,000 inasmuch as EBITDA exceeded $13 million, respectively.

The Company has planned capital expenditures for the remainder of 2001 of approximately $1.4 million, primarily in the Chemical and Climate Control Businesses, but such capital expenditures are dependent upon obtaining acceptable financing. The Company will make these expenditures if there is sufficient working capital or available financing.

The Company's plan for the remainder of 2001 identifies specific non-core assets (real estate, oil and gas properties, spare parts, etc.) which the Company is considering selling to provide additional working capital to the Company. The Company also continues to evaluate alternatives for realizing its net investment in the Industrial Products Business.

In 2000, the Chemical Business entered into a letter of intent with a third party to sell its explosives distribution outlets and enter into a long-term supply agreement. Management currently expects to close the transaction during the third quarter of 2001. Under the terms of the letter of intent, the Chemical Business would sell its wholesale and retail explosive distribution business (excluding accounts receivable) and enter into an ammonium nitrate tolling agreement with the third party. The buyer has prepaid to the Chemical Business $2 million. If the transaction does not close, the $2 million prepayment may be applied towards the purchase of ammonium nitrate products by the third party from the Chemical Business or the third party may require the Company to return the prepayment. If these transactions are completed, they are expected to have the effect of providing additional working capital from the proceeds of the sale of assets, reduce outstanding accounts receivable and inve ntory balances and provide a more constant and predictable operating margin on explosives sales in the Chemical Business.

LSB INDUSTRIES, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Six Months Ended June 30, 2001 and 2000

In July 2001, the Company concluded the sale to a third party of the Crystal City Plant for $4 million, including a $.2 million hold back amount, $.1 million of which will be paid upon completion of certain decommissioning work and $.1 million of which will be paid upon the completion of removal of the nitric acid plant. Approximately $1.8 million of the proceeds is available to the Company and its subsidiaries which are not subsidiaries of ClimaChem to retire obligations that were guaranteed in connection with the Company's former automotive business, with the remainder being applied against the outstanding balance on the Working Capital Revolver Loan.

In May 2001, a subsidiary of the Company, Climate Master, Inc., ("Climate Master") sold to another subsidiary of the Company, Prime Financial Corporation ("Prime"), an option ("Option") to purchase the building in which Climate Master builds its products ("Building") for $1.6 million. Prime thereafter exercised the Option and sold the Building to a third party for a net amount of approximately $1.6 million cash, plus the exercise price under the Option (which was used to pay the mortgage on the Building) and related costs, together with a non-recourse, unsecured promissory note ("Note"), in the principal amount of $1.6 million, from the purchaser of the Building. The parties do not anticipate payment of the principal amount of the Note, but the third party buyer agreed that, although Climate Master is not the holder of the Note, Climate Master may reduce the option price as discussed below by the amount of the Note.

As a result of the transaction, the Climate Master lease and option to buy the Building was extended from 2003 to 2016. The option price for Climate Master to purchase the Building, if exercised, is to be based on the amount of the mortgage on the Building outstanding at the time the option is exercised plus up to $200,000 less the amount of the Note.

In July 2001, the Company repurchased approximately $3 million of the Senior Unsecured Notes and will recognize a gain of approximately $1.7 million before income taxes in the third quarter of 2001 relating to this transaction.

Assuming all of the events discussed above are completed and the lack of unforeseen adverse events, management of the Company believes the Company will have adequate resources to meet its obligations as they come due. This expectation could change in the near term.

The Company's plan for the remainder of 2001 involves a number of initiatives and assumptions which management believes to be reasonable and achievable; however, should the Company not be able to execute this plan described above, it may not have resources available to meet its obligations as they come due.

     The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") should be read in conjunction with the Company's June 30, 2001 Condensed Consolidated Financial Statements.

     Certain statements contained in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" may be deemed forward-looking statements. See "Special Note Regarding Forward-Looking Statements".

     The Company continues to focus on its core businesses relating to its Chemical and Climate Control Businesses. In addition, the Company is seeking to reduce its outstanding indebtedness and improve its liquidity and operating results through liquidation of selected assets.

     The Company's Chemical Business manufactures three principal product lines that are derived from anhydrous ammonia: (1) fertilizer grade ammonium nitrate and urea ammonia nitrate ("UAN") for the agricultural industry, (2) explosive grade ammonium nitrate for the mining industry and (3) concentrated, blended and mixed nitric acid for industrial applications. In addition the company also produces sulfuric acid for industrial applications.

On October 31, 2000 subsidiaries of the Company, which are not subsidiaries of ClimaChem acquired two chemical plants. One plant is in Cherokee, Alabama ("Cherokee Plant"). This plant is being leased to and operated by a subsidiary of ClimaChem. The other plant is in Crystal City, Missouri ("Crystal City Plant"). This plant was shut down concurrent with the purchase thereof. In July 2001, the Crystal City Plant was sold for approximately $4 million. The acquirer was interested in the land only and required that the nitric acid plant be removed by October 31, 2002. The Company estimates that the cost of removal will be minimal. Approximately $1.8 million of the proceeds is available to the Company and its subsidiaries which are not subsidiaries of ClimaChem to retire obligations assumed in connection with the Company's former automotive business with the remainder being applied against the outstanding balance on the Working Capital Revolver Loan See discussion in Note 11 of Notes to Condensed Consolidated Financial Statements.

Net sales in the Chemical Business were $109.9 million for the six months ended June 30, 2001 and $76.3 million for the six months ended June 30, 2000. The gross profit increased to $13.4 million (or 12.2% of net sales) in 2001 from $12 million (or 15.8% of net sales) in 2000. The net sales include approximately $20.9 million and gross profit includes approximately $2.3 million associated with the Cherokee Plant as discussed above.

Effective June 30, 2001, the Company renegotiated its contract to purchase anhydrous ammonia. Under the new contract, the Chemical Business is committed to purchase 100% of its anhydrous ammonia requirements through December 31, 2002 from the supplier at prices which approximate market. In connection with the termination of the above-market take-or-pay provisions of the firm purchase commitment, the Chemical Business recognized a gain of $2.3 million in the second quarter of 2001. See Note 9 of Notes to Condensed Consolidated Financial Statements.

In 2000, the Chemical Business entered into a letter of intent with a third party to sell its explosives distribution outlets and enter into a long-term supply agreement. Management currently expects to close the transaction during the third quarter of 2001. Under the terms of the letter of intent, the Chemical Business would sell its wholesale and retail explosive distribution business (excluding accounts receivable) and enter into an ammonium nitrate tolling agreement with the third party. The buyer has prepaid to the Chemical Business $2 million. If the transaction does not close, the $2 million prepayment may be applied towards the purchase of ammonium nitrate products by the third party from the Chemical Business or the third party may require the Company to return the prepayment. If these transactions are completed, they are expected to have the effect of providing additional working capital from the proceeds of the sale of assets, reduce outstanding accounts receivable and i nventory balances and provide a more constant and predictable operating margin on explosives sales in the Chemical Business. See "Special Note Regarding Forward-Looking Statements".

     The Climate Control Business manufactures and sells a broad range of hydronic fan coil, air handling, air conditioning, heating, water source heat pumps, and dehumidification products targeted to both commercial and residential new building construction and renovation.

     The Climate Control Business focuses on product lines in the specific niche markets of hydronic fan coils and water source heat pumps and has established a significant market share in these specific markets.

     Sales of $70.8 million for the six months ended June 30, 2001, in the Climate Control Business were approximately 10.2% greater than sales of $64.3 million for the six months ended June 30, 2000. The gross profit was approximately $18.9 million in the 2001 period and $17.4 million in the 2000 period. The gross profit percentage decreased to 26.6% for 2001 from 27% for 2000.

     Net sales in the Industrial Products Business during the six months ended June 30, 2001 and 2000 were $3.9 million and $5.6 million, respectively, resulting in operating profit of $.2 million for both periods. The net investment in assets of this Business has continued to decrease and the Company expects to realize further reductions in future periods. The Company continues to eliminate certain categories of machines from the product line by not replacing those machines when sold.

     Total revenues for the six months ended June 30, 2001 and 2000 were $185.9 million and $148.4 million, respectively, an increase of $37.5 million. Sales increased $38.4 million and other income decreased $.9 million.

     Consolidated net sales included in total revenues for the six months ended June 30, 2001, were $184.6 million, compared to $146.2 million for the first six months of 2000, an increase of $38.4 million. This increase in sales resulted principally from: (i) increased sales relating to the Chemical Business of $33.6 million from increased sales volumes of agricultural, explosive and industrial acid products due in part to the acquisition of the Cherokee Plant in the fourth quarter of 2000 and increased customer demand and improved sales prices of certain agricultural and explosive products and (ii) increased sales of $6.5 million in the Climate Control Business due primarily from an increase in customer demand and improved sales prices relating to heat pump products and the increase in sales of new products and services introduced in the second and third quarters of 2000 and the second quarter of 2001. This increase in sales was partially offset by a dec rease in foreign and hydronic fan coil sales in the Climate Control Business and a decrease in sales of machine tools in the Industrial Products Business. During the first six months of 2001, the newly acquired Cherokee Plant contributed $20.9 million to the Company's net sales.

    Gross Profit

     Gross profit as a percent of sales was 18.2% for the first six months of 2001, compared to 21.2% for the first six months of 2000. The decrease in the gross profit percentage was primarily the result of lower profit margins in the Chemical Business due primarily to increased raw material costs resulting from the extremely high cost of natural gas in December 2000 and January 2001.

Selling, General and Administrative Expense

Selling, general and administrative ("SG&A") expenses as a percent of net sales were 13.2% in the six-month period ended June 30, 2001, compared to 16% for the first six months of 2000. This decrease is primarily the result of higher sales without a comparable increase in expense. This decrease was partially offset by an increase relating to new products and services introduced in the third quarter of 2000 and the second quarter of 2001 in the Climate Control Business.

     Interest expense was $7.5 million in the first six months of 2001, compared to $8.1 million for the first six months of 2000. The decrease of $.6 million primarily resulted from the reduced debt outstanding resulting from the repurchase of the Senior Unsecured Notes during 2000 and decreased lenders' prime rates offset in part by the increase in borrowings from the Working Capital Revolver Loan.

     The Company had a benefit from gain on firm purchase commitments of approximately $2.3 million for the six months ended June 30, 2001 compared to a provision for loss on firm purchase commitments of approximately $2.5 million for the same period in 2000. See discussion in Note 9 of Notes to Condensed Consolidated Financial Statements.

     Other expense for the six months ended June 30, 2001 included financing fees relating to extending the maturity of the former revolving credit facility.

     The Company had income before income taxes and extraordinary gain of $4.4 million in the first six months of 2001 compared to a loss of $2.4 million in the six months ended June 30, 2000. The increase in profitability of $6.8 million was due to the increased gross profit of the Chemical and Climate Control Businesses, decrease in interest expense and the benefit from gain on firm purchase commitments recognized in 2001 compared to a loss incurred in 2000 as discussed above. This increase was partially offset by the increase in SG&A expenses as discussed above.

     As a result of the Company's net operating loss carry-forward for income tax purposes as discussed elsewhere herein and in Note 2 of Notes to Condensed Consolidated Financial Statements, a provision for income taxes associated with operations was recognized for the six months ended June 30, 2001 relating only to current state income taxes and federal alternative minimum taxes (none in 2000).

     During the six months ended June 30, 2000, a subsidiary of the Company repurchased approximately $19.2 million (face value) of the Senior Unsecured Notes and recognized a gain of approximately $13.2 million, net of income taxes.

     Total revenues for the three months ended June 30, 2001 and 2000 were $98.8 million and $77.5 million, respectively, an increase of $21.3 million. Sales increased $21.5 million and other income decreased $.2 million.

     Consolidated net sales included in total revenues for the three months ended June 30, 2001, were $98.1 million, compared to $76.6 million for the same three months of 2000, an increase of $21.5 million. This increase in sales resulted principally from: (i) increased sales relating to the Chemical Business of $20.2 million from increased sales volumes of agricultural and explosive products due in part to the acquisition of the Cherokee Plant in the fourth quarter of 2000 and increased customer demand and improved sales prices of certain agricultural and explosive products and (ii) increased sales of $2.2 million in the Climate Control Business due primarily from an increase in customer demand and improved sales prices relating to heat pump products and the increase in sales of new products and services introduced in the second and third quarters of 2000 and the second quarter of 2001.

     Gross Profit

     Gross profit as a percent of sales was 19.5% for the three months ended June 30, 2001, compared to 19.6% for the same period in 2000. The decrease in the gross profit percentage was primarily the result of the increase in sales of new product and services with lower profit margins relating to the Climate Control Business. This decrease was partially offset by (i) raising prices in the second quarter of 2001 in the Chemical Business, (ii) improved margins of the heat pump and large air handler products in the Climate Control Business and (iii) improved margins of machine tools in the Industrial Products Business.

     Selling, general and administrative ("SG&A") expenses as a percent of net sales were 12.8% in the three-month period ended June 30, 2001, compared to 15.3% for the three months ended June 30, 2000. This decrease is primarily the result of higher sales without a comparable increase in expense.

     Interest expense was $3.8 million in the three months ended June 30, 2001, compared to $4 million for the same period in 2000. The decrease of $.2 million primarily resulted from the reduced debt outstanding resulting from the repurchase of the Senior Unsecured Notes during 2000 and decreased lenders' prime rates offset in part by the increase in borrowings from the Working Capital Revolver Loan.

     The Company had a benefit from gain on firm purchase commitments of approximately $2.3 million for the three months ended June 30, 2001 compared to a provision for loss on firm purchase commitments of approximately $1.5 million for the same period in 2000. See discussion in Note 9 of Notes to Condensed Consolidated Financial Statements.

     Other expense for the three months ended June 30, 2001 included financing fees relating to extending the maturity of the former revolving credit facility.

     The Company had income before income taxes and extraordinary gain of $5.5 million for the three months ended June 30, 2001 compared to a loss of $2.7 million for the three months ended June 30, 2000. The increase in profitability of $8.2 million was largely due to the increased gross profit of the Chemical and Climate Control Businesses and the benefit from gain on the firm purchase commitments recognized in 2001 compared to a loss incurred in 2000 as discussed above, expenses incurred in 2000 relating to the Company's attempt to renegotiate the terms and conditions of the Indenture and a litigation settlement.

     As a result of the Company's net operating loss carry-forward for income tax purposes as discussed elsewhere herein and in Note 2 of Notes to Condensed Consolidated Financial Statements, a provision for income taxes associated with operations was recognized for the three months ended June 30, 2001 relating only to current state income taxes and federal alternative minimum taxes (none in 2000).

     During the three months ended June 30, 2000, a subsidiary of the Company repurchased approximately $19.2 million (face value) of the Senior Unsecured Notes and recognized a gain of approximately $13.2 million, net of income taxes.

     Historically, the Company's primary cash needs have been for operating expenses, working capital and capital expenditures. The Company has financed its cash requirements primarily through internally generated cash flow, borrowings under its revolving credit facilities and secured equipment financing.

     Net cash used in operating activities for the six months ended June 30, 2001 was $9.6 million, after adjustments for the gain on sale of property and equipment of $.4 million, depreciation and amortization of $4.8 million, realization of losses on firm sales and purchase commitments of $7.8 million, and including an accounts receivable increase of $6.4 million; an increase in inventories of $1.2 million; an increase in supplies and prepaid items of $1.1 million; a decrease in accounts payable of $2.3 million; and an increase in accrued liabilities of $.7 million. The increase in receivables is primarily due to seasonal sales of agricultural products and improved sales of explosive products in the Chemical Business and improved sales in the Climate Control Business due in part to the new products introduced in 2000 and 2001. The increase in inventories relates primarily to the increase of agricultural products due to demands relating to the spring fertilizing season and an increase of explosive products due to stronger sales in the Chemical Business. This increase is partially offset by a planned reduction in certain inventory in the Climate Control and Industrial Products Businesses. The increase in supplies and prepaid items includes the increase in supply of precious metals used in the Chemical Business. The decrease in accounts payable is primarily due to the timing of payments and a decrease in production of industrial acid products in the Chemical Business. The increase in accrued liabilities includes an increase in deferred revenue relating to the exercise of an option and related sale of the building in which Climate Master, Inc., builds its products, an increase in a deferred lease payment due in December 2001 and the prepayment received on the possible sale of the Company's explosives distribution outlets. This increase was partially offset by a decrease in the amount of customer deposits outstanding in the Chemical Business.

Net cash used in investing activities for the six months ended June 30, 2001 included $3.6 million for capital expenditures and an increase in other assets of $.8 million. The capital expenditures were primarily for the benefit of the Chemical and Climate Control Businesses. The increase in other assets is primarily due to an increase in deferred loan costs relating to the new credit facility partially offset by the sale of certain non-current inventory in the Industrial Products Business.

Net cash provided by financing activities included proceeds from long-term debt and other debt issuances of $3.6 million and a net increase in revolving working capital debt of $14.4 million to fund the increase in accounts receivable and inventories and the decrease in accounts payable, offset in part, by payments on long-term debt of $4.3 million.

The Company is a diversified holding company and, as a result, it is dependent on credit agreements and its ability to obtain funds from its subsidiaries in order to pay its debts and obligations.

The Company's wholly-owned subsidiary, ClimaChem, Inc. ("ClimaChem"), through its subsidiaries, owns substantially all of the Company's Chemical and Climate Control Businesses. ClimaChem and its subsidiaries are dependent on credit agreements with lenders and internally generated cash flow in order to fund their operations and pay their debts and obligations.

In April, 2001, the Company replaced its existing Revolving Credit Facility ("Revolver") for ClimaChem and its subsidiaries. ClimaChem and its subsidiaries, ("the borrowers"), entered into a new $50 million credit facility with a new lender (the "Working Capital Revolver Loan"). The Working Capital Revolver Loan provides for advances based on specified percentages of eligible accounts receivable and inventory of ClimaChem and its subsidiaries and accrues interest at a base rate (generally equivalent to the prime rate) plus 2% or the LIBOR rate plus 4.5%. Interest is due monthly. The Working Capital Revolver Loan matures in April 2005 and is secured by receivables, inventory and intangibles of all the ClimaChem entities other than El Dorado Nitric Co., ("EDNC"). EDNC is neither a borrower or guarantor of the Working Capital Revolver Loan. The Working Capital Revolver Loan requires ClimaChem to meet certain financial covenants on a monthly, quarterly and/or annual basis. The Worki ng Capital Revolver Loan requires that ClimaChem's excess availability, as defined, equal an amount not less than $3.8 million, on each interest payment date, after giving effect to the interest payment due under ClimaChem's 10 3/4% Senior Notes. The Working Capital Revolver Loan requires the borrowers to have various minimum amounts of availability under the revolver which amounts generally increase prior to interest payment due dates of the Senior Notes discussed in Note 7 of Notes to Condensed Consolidated Financial Statements. A subsidiary of the Company which is not a subsidiary of ClimaChem, Summit Machine Tool Manufacturing Corp. ("Summit"), executed the third amended and restated revolving credit agreement with the prior lender (the "Agreement") in April 2001. The Agreement provides a revolving line of credit of up to $2.5 million through April 2002. The Agreement is guaranteed by the Company. The Agreement requires monthly payments of interest which accrue based on the lender's prime rate plus t he applicable margin (2.5% in April 2000). Effective July 1, 2001, the applicable margin increases .50% and increases .50% monthly thereafter until the Agreement is terminated. The Agreement may be terminated by Summit with proper notice without premium or penalty.

As of June 30, 2001, the Company had a borrowing availability under the Agreement of $.1 million and ClimaChem had borrowing availability under the Working Capital Revolver Loan of $7 million. The effective interest rates under the Agreement and the Working Capital Revolver Loan were 9.25% and 8.75%, respectively. Borrowings under the Working Capital Revolver Loan outstanding at June 30, 2001, were $46.6 million. The annual interest on the outstanding debt under the Working Capital Revolver Loan at June 30, 2001, at the rates then in effect would approximate $4.1 million annually.

ClimaChem is restricted as to the funds that it may transfer to the Company under the terms contained in an Indenture ("Indenture") covering the Senior Unsecured Notes issued by ClimaChem and the Working Capital Revolver Loan. Under the terms of an Indenture between ClimaChem, the guarantors and the trustee relating to the Senior Notes, ClimaChem is permitted to distribute or pay in the form of dividends and other distributions to the Company in connection with ClimaChem's outstanding equity securities or loans, (a) advances or investments to any person (including the Company), up to 50% of ClimaChem's consolidated net income for the period (taken as one accounting period), commencing on the first day of the first full fiscal quarter commencing after the Issue Date of the Senior Notes to and including the last day of the fiscal quarter ended immediately prior to the date of said calculation (or, in the event consolidated net income for such period is a deficit, then minus 100% of such deficit), plus (b) the aggregate net cash proceeds received by ClimaChem from the sale of its capital stock. This limitation will not prohibit (i) payment to the Company under a Services Agreement, Management Agreement and a Tax Sharing Agreement, or (ii) the payment of any dividend within 60 days after the date of its declaration if such dividend could have been made on the date of such declaration. ClimaChem did not declare and pay to the Company a dividend during the six months ended June 30, 2001.

Under the Management Agreement, it is possible that ClimaChem could pay up to $1.8 million of management fees to the Company (if ClimaChem has earnings before interest, income taxes, depreciation and amortization ("EBITDA") in excess of $26 million for the year). For the six months ended June 30, 2001, ClimaChem owed the Company $900,000 inasmuch as EBITDA exceeded $13 million for the period

The Company's plan for the remainder of 2001 identifies specific non-core assets (real estate, oil and gas properties, spare parts, etc.) which the Company is considering selling to provide additional working capital to the Company. The Company also continues to evaluate alternatives for realizing its net investment in the Industrial Products Business.

The Chemical Business has entered into a letter of intent with an unrelated third party to sell its explosive business distribution outlets and enter into a long-term supply agreement. If the transaction is consummated, it is expected to have the effect of providing working capital from the proceeds of the sale of the assets, reduce outstanding accounts receivable and inventory, as well as provide a more constant and predictable operating margin in the Company's explosives business.

In July 2001, the Company concluded the sale to a third party of the Crystal City Plant for $4 million, including a $.2 million hold back amount, $.1 million of which will be paid upon completion of certain decommissioning work and $.1 million of which will be paid upon the completion of removal of the nitric acid plant. Approximately $1.8 million of the proceeds is available to the Company and its subsidiaries which are not subsidiaries of ClimaChem to retire obligations that were guaranteed in connection with the Company's former automotive business, with the remainder being applied against the outstanding balance on the Working Capital Revolver Loan.

In May 2001, a subsidiary of the Company, Climate Master, Inc., ("Climate Master") sold to another subsidiary of the Company, Prime Financial Corporation "Prime"), an option ("Option") to purchase the building in which Climate Master builds its products ("Building") for $1.6 million. Prime thereafter exercised the Option and sold the Building to a third party for a net amount of approximately $1.6 million cash, plus the exercise price under the Option (which was used to pay the mortgage on the Building) and related costs, together with a non-recourse, unsecured promissory note ("Note"), in the principal amount of $1.6 million, from the purchaser of the Building. The parties do not anticipate payment of the principal amount of the Note, but the third party buyer agreed that, although Climate Master is not the holder of the Note, Climate Master may reduce the option price as discussed below by the amount of the Note.

As a result of the transaction, the Climate Master lease and option to buy the Building was extended from 2003 to 2016. The option price for Climate Master to purchase the Building, if exercised, is to be based on the amount of the mortgage on the Building outstanding at the time the option is exercised plus up to $200,000 less the amount of the Note.

In July 2001, the Company repurchased approximately $3 million of the Senior Unsecured Notes and will recognize a gain of approximately $1.7 million before income taxes in the third quarter of 2001 relating to this transaction.

Assuming all of the events discussed above are completed and the lack of unforeseen adverse events, management of the Company believes the Company will have adequate resources to meet its obligations as they come due; however, this expectation could change in the near term. See "Special Note Regarding Forward-Looking Statements".

The Company's plan for the remainder of 2001 involves a number of initiatives and assumptions which management believes to be reasonable and achievable; however, should the Company not be able to execute this plan described above, it may not have resources available to meet its obligations as they come due.

As of June 30, 2001, Prime Financial Corporation ("Prime"), a subsidiary of the Company, has an outstanding principal balance of $1,750,000 ("the Note") owed to SBL Corporation ("SBL"), a corporation wholly owned by the spouse and children of Jack E. Golsen Chairman of the Board and President of the Company.

As of the date of this report, a proposal from SBL is expected to be presented to the Company's Board of Directors that SBL convert $1 million to $1.5 million in principal of the Note to $1 million to $1.5 million in a new LSB Preferred D ("Preferred D") shares at $1.00 per value, with each share carrying one vote. The terms of the Preferred D shares would be negotiated by a special committee comprised of three independent members appointed by the Board of Directors. See discussion in Item 5 of Part II "Other Information".

     The Company has several contingencies that could impact its liquidity in the event that the Company is unsuccessful in defending against the claimants. Although management does not anticipate that these claims will result in substantial adverse impacts on its liquidity, it is not possible to determine the outcome.  See Note 6A and C of the Notes to Condensed Consolidated Financial Statements for a discussion as to certain possible contingencies involving the sale of the Automotive Business.  The preceding sentence is a forward looking statement that involves a number of risks and uncertainties that could cause actual results to differ materially. See Note 6 of Notes to Condensed Consolidated Financial Statements.

     The Company's results of operations and operating cash flows are impacted by changes in market interest rates.

     The Company's interest rate risk exposure results from its debt portfolio which is impacted by short-term rates, primarily prime rate-based borrowings from commercial banks, and long-term rates, primarily fixed-rate notes, some of which prohibit prepayment or require substantial prepayment penalties.

     Reference is made to the Company's Annual Report on Form 10-K for the year ended December 31, 2000, for an expanded analysis of expected maturities of long term debt and its weighted average interest rates and discussion related to raw material price risk.

     As of June 30, 2001, the Company's variable rate and fixed rate debt, which aggregated $152.3 million, exceeded the debt's fair market value by approximately $48.9 million ($49.4 million at December 31, 2000). The fair value of the Senior Unsecured Notes of a subsidiary of the Company was determined based on a market quotation for such securities.

     Certain statements contained within this report may be deemed "Forward-Looking Statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All statements in this report other than statements of historical fact are Forward-Looking Statements that are subject to known and unknown risks, uncertainties and other factors which could cause actual results and performance of the Company to differ materially from such statements. The words "believe", "expect", "anticipate", "intend", "will", and similar expressions identify Forward-Looking Statements. Forward-Looking Statements contained herein relate to, among other things,

•  ability to improve operations and become profitable from operations on an annualized basis,
   

•  establishing a position as a market leader,
   

• the market for certain of the Climate Control Business products will continue to grow,
   

• availability of net operating loss carryovers,
   

• amount to be spent relating to compliance with federal, state and local environmental laws at the El Dorado Facility,
   

• liquidity and availability of funds,
   

• anticipated financial performance,
   

• adequate cash flows to meet its presently anticipated working capital requirements,
   

• expectation that the sale of the Company's explosive business distribution outlets and related long-term supply agreement will close,
   

• the Company's EBITDA and pre-tax income will be sufficient for the remainder of 2001 for the management fee and income taxes to be paid by ClimaChem,
   

• management believes that the Company has adequate resources to meet its obligations as they come due, and
   

• ability to make planned capital improvements,
   

• potential repayment of $2 million to the potential buyer of the explosive distribution outlets,
   

• ability to obtain financing for wastewater disposal project.

Independent Accountants' Review Report

Board of Directors
LSB Industries, Inc.

We have reviewed the accompanying condensed consolidated balance sheet of LSB Industries, Inc. and subsidiaries as of June 30, 2001, and the related condensed consolidated statements of operations for the six-month and three-month periods ended June 30, 2001 and 2000 and the condensed consolidated statements of cash flows for the six-month periods ended June 30, 2001 and 2000. These financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data, and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, which will be performed for the full year with the objective of expressing an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews, we are not aware of any material modifications that should be made to the accompanying condensed consolidated financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

We have previously audited, in accordance with auditing standards generally accepted in the United States, the consolidated balance sheet of LSB Industries, Inc. and subsidiaries as of December 31, 2000, and the related consolidated statements of operations, stockholders' deficit and cash flows for the year then ended (not presented herein); and in our report dated April 16, 2001, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2000, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

ERNST & YOUNG LLP

Oklahoma City, Oklahoma

August 20, 2001

                                                                              Number of 
                                                                               Shares            Number of
                                                            Number of       "Against" and       Abstentions
                                                            Shares           to "Withhold        and Broker
                            Name                             "For"            Authority"          Non-Votes

                            Robert C. Brown, M.D.          11,403,838         71,122                 0

(A)   Exhibits. The Company has included the following exhibits in this report:

(B)   Reports of Form 8-K. The Company did not file any reports on Form 8-K during the quarter ended June 30, 2001.

Exhibit 15.1

The Board of Directors
LSB Industries, Inc.

We are aware of the incorporation by reference in the Registration Statement (Form S-8 No. 33-8302) pertaining to the 1981 and 1986 Stock Option Plans, the Registration Statement (Form S-8 No. 333-58225) pertaining to the 1993 Stock Option and Incentive Plan, the Registration Statements (Forms S-8 No. 333-62831, No. 333-62835, No. 333-62839, No. 333-62843, and No. 333-62841) pertaining to the registration of an aggregate of 225,000 shares of common stock pursuant to the certain Non-Qualified Stock Option Agreements for various employees and the Registration Statement (Form S-3 No. 33-69800) of LSB Industries, Inc. and in the related Prospectuses of our report dated August 3, 2001, relating to the unaudited condensed consolidated interim financial statements of LSB Industries, Inc. which is included in its Form 10-Q for the quarter ended June 30, 2001.

Pursuant to Rule 436(c) of the Securities Act of 1933 our report is not a part of the registration statement prepared or certified by accountants within the meaning of Section 7 or 11 of the Securities Act of 1933.

ERNST & YOUNG LLP

Oklahoma City, Oklahoma

August 20, 2001