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**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)OF THESECURITIES EXCHANGE ACT OF 1934**

 

For the quarterly period ended** JUNE 30, 2008**

 

Commission file number: **1-1463**

 

**UNION CARBIDE CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **New York**                    | ** ** | **13-1421730**                       |
|---------------------------------|------------|--------------------------------------|
| (State or other jurisdiction of |       | (I.R.S. Employer Identification No.) |
| incorporation or organization)  |       |                                 |

 

**400 West Sam Houston Parkway South,  Houston, Texas  77042**

(Address of principal executive offices)              (ZipCode)

 

Registrant’s telephone number, including area code:  **713-978-2016**

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.     x Yes   oNo

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule12b-2 of the Exchange Act.

 
| Large accelerated filer  o |   | Accelerated filer o         |
|----------------------------|--------|-----------------------------|
| Non-accelerated filer x    |   | Smaller reporting company o |

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).

oYes    x No

 

At June 30, 2008, 1,000shares of common stock were outstanding, all of which were held by theregistrant’s parent, The Dow Chemical Company.

 

The registrant meets theconditions set forth in General Instructions H(1)(a) and (b) for Form 10-Q andis therefore filing this form with a reduced disclosure format.

 

 

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**Union Carbide Corporation**

 

**TABLE OF CONTENTS**

 
| ** **                                                                                           | **PAGE**   |
|------------------------------------------------------------------------------------------------------|------------|
| **PART I - FINANCIAL INFORMATION**                                                                   | ** ** |
| ** **                                                                                           | ** ** |
| Item 1. Financial  Statements.                                                                       | 3          |
|                                                                                                 |       |
| Consolidated  Statements of Income                                                                   | 3          |
|                                                                                                 |       |
| Consolidated  Balance Sheets                                                                         | 4          |
|                                                                                                 |       |
| Consolidated  Statements of Cash Flows                                                               | 6          |
|                                                                                                 |       |
| Consolidated  Statements of Comprehensive Income                                                     | 6          |
|                                                                                                 |       |
| Notes to  the Consolidated Financial Statements                                                      | 7          |
|                                                                                                 |       |
| Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations. | 15         |
|                                                                                                 |       |
| Disclosure  Regarding Forward-Looking Information                                                    | 15         |
|                                                                                                 |       |
| Results of Operations                                                                                | 15         |
|                                                                                                 |       |
| Other Matters                                                                                        | 16         |
|                                                                                                 |       |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                                 | 20         |
|                                                                                                 |       |
| Item 4T.  Controls and Procedures.                                                                   | 20         |
|                                                                                                 |       |
| **PART II - OTHER  INFORMATION**                                                                     | ** ** |
|                                                                                                 | ** ** |
| Item 1. Legal  Proceedings.                                                                          | 20         |
|                                                                                                 |       |
| Item 1A. Risk Factors.                                                                               | 20         |
|                                                                                                 |       |
| Item 6. Exhibits.                                                                                    | 20         |
|                                                                                                 |       |
| **SIGNATURES**                                                                                       | 21         |
|                                                                                                 |       |
| **EXHIBIT INDEX**                                                                                    | 22         |

 

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**PART I - FINANCIAL INFORMATION**

 

**ITEM 1. FINANCIAL STATEMENTS.**

 

**Union Carbide Corporation and Subsidiaries**

**Consolidated Statements of Income**

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| In millions (Unaudited)                   | ** ** | **2008**                         | ** ** | **2007**                       | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net trade sales                                     |       | $                                | 50         |                           | $          | 49 |   | $ | 96 |   | $ | 102 |   |
| Net sales to related companies                      |       | 1,905                            |       | 1,850                          |       | 3,894 |   | 3,523 |   |
| Total Net Sales                                     |       | 1,955                            |       | 1,899                          |       | 3,990 |   | 3,625 |   |
| Cost of sales                                       |       | 1,882                            |       | 1,730                          |       | 3,843 |   | 3,328 |   |
| Research and development expenses                   |       | 19                               |       | 21                             |       | 38 |   | 41 |   |
| Selling, general and administrative  expenses       |       | 3                                |       | 4                              |       | 6 |   | 11 |   |
| Equity in earnings of nonconsolidated  affiliates   |       | 63                               |       | 115                            |       | 117 |   | 239 |   |
| Sundry income (expense) - net                       |       | (14                              | )          | (17                            | )          | 56 |   | (27 | ) |
| Interest income                                     |       | 26                               |       | 43                             |       | 58 |   | 80 |   |
| Interest expense and amortization of debt  discount |       | 13                               |       | 11                             |       | 25 |   | 26 |   |
| Income before Income Taxes                          |       | 113                              |       | 274                            |       | 309 |   | 511 |   |
| Provision for income taxes                          |       | 68                               |       | 79                             |       | 109 |   | 130 |   |
| Net Income Available for Common Stockholder         |       | $                                | 45         |                           | $          | 195 |   | $ | 200 |   | $ | 381 |   |
| Depreciation                                        |       | $                                | 66         |                           | $          | 70 |   | $ | 131 |   | $ | 138 |   |
| Capital Expenditures                                |       | $                                | 59         |                           | $          | 54 |   | $ | 99 |   | $ | 100 |   |

*See Notes to the Consolidated Financial Statements.*

 

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**UnionCarbide Corporation and Subsidiaries**

**Consolidated Balance Sheets**

 
| ** **                                                                          | ** ** | **June 30,** | ** ** | **Dec. 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| In millions (Unaudited)                                                   | ** ** | **2008**          | ** ** | **2007**          | ** ** |
| **Assets**                                                                          | ** ** |
| Current Assets                                                                      |       |              |       |              |       |
| Cash and cash equivalents                                                           |       | $                 | 25         |              | $          | 22 |   |
| Accounts receivable:                                                                |       |              |       |              |       |
| Trade (net of allowance for doubtful  receivables - 2008: $2; 2007: $2)             |       | 27                |       | 26                |       |
| Related companies                                                                   |       | 398               |       | 487               |       |
| Other                                                                               |       | 104               |       | 129               |       |
| Notes receivable from related companies                                             |       | 3,788             |       | 3,227             |       |
| Inventories                                                                         |       | 226               |       | 178               |       |
| Deferred income taxes and other current  assets                                     |       | 60                |       | 60                |       |
| Total current assets                                                                |       | 4,628             |       | 4,129             |       |
| Investments                                                                         |       |              |       |              |       |
| Investments in related companies                                                    |       | 972               |       | 972               |       |
| Investments in nonconsolidated affiliates                                           |       | 472               |       | 385               |       |
| Other investments                                                                   |       | 21                |       | 22                |       |
| Noncurrent receivables                                                              |       | 46                |       | 46                |       |
| Noncurrent receivables from related  companies                                      |       | 283               |       | 306               |       |
| Total investments                                                                   |       | 1,794             |       | 1,731             |       |
| Property                                                                            |       |              |       |              |       |
| Property                                                                            |       | 7,590             |       | 7,509             |       |
| Less accumulated depreciation                                                       |       | 5,661             |       | 5,547             |       |
| Net property                                                                        |       | 1,929             |       | 1,962             |       |
| Other Assets                                                                        |       |              |       |              |       |
| Goodwill                                                                            |       | 26                |       | 26                |       |
| Other intangible assets (net of accumulated  amortization - 2008: $131; 2007: $128) |       | 20                |       | 22                |       |
| Deferred income tax assets - noncurrent                                             |       | 70                |       | 112               |       |
| Asbestos-related insurance receivables -  noncurrent                                |       | 681               |       | 696               |       |
| Pension assets                                                                      |       | 734               |       | 699               |       |
| Deferred charges and other assets                                                   |       | 67                |       | 88                |       |
| Total other assets                                                                  |       | 1,598             |       | 1,643             |       |
| Total Assets                                                                        |       | $                 | 9,949      |              | $          | 9,465 |   |

*See Notes to the Consolidated Financial Statements.*

 

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| ** **                                                                  | ** ** | **June 30,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| In millions (Unaudited)                                           | ** ** | **2008**          | ** ** | **2007**          | ** ** |
| **Liabilities and Stockholder’s Equity**                               | ** ** |
| Current Liabilities                                                         |       |              |       |              |       |
| Notes payable - related companies                                           |       | $                 | 8          |              | $          | 5 |   |
| Long-term debt due within one year                                          |       | 249               |       | —            |       |
| Accounts payable:                                                           |       |              |       |              |       |
| Trade                                                                       |       | 294               |       | 239               |       |
| Related companies                                                           |       | 529               |       | 391               |       |
| Other                                                                       |       | 33                |       | 29                |       |
| Income taxes payable                                                        |       | 176               |       | 185               |       |
| Asbestos-related liabilities - current                                      |       | 123               |       | 141               |       |
| Accrued and other current liabilities                                       |       | 175               |       | 180               |       |
| Total current liabilities                                                   |       | 1,587             |       | 1,170             |       |
| Long-Term Debt                                                              |       | 571               |       | 820               |       |
| Other Noncurrent Liabilities                                                |       |              |       |              |       |
| Pension and other postretirement benefits -  noncurrent                     |       | 453               |       | 461               |       |
| Asbestos-related liabilities - noncurrent                                   |       | 925               |       | 1,001             |       |
| Other noncurrent obligations                                                |       | 361               |       | 356               |       |
| Total other noncurrent liabilities                                          |       | 1,739             |       | 1,818             |       |
| Minority Interest in Subsidiaries                                           |       | 2                 |       | 2                 |       |
| Stockholder’s Equity                                                   |       |              |       |              |       |
| Common stock (authorized and issued: 1,000  shares of $0.01 par value each) |       | —            |       | —            |       |
| Additional paid-in capital                                                  |       | 312               |       | 121               |       |
| Retained earnings                                                           |       | 5,967             |       | 5,767             |       |
| Accumulated other comprehensive loss                                        |       | (229              | )          | (233              | )          |
| Net stockholder’s equity                                               |       | 6,050             |       | 5,655             |       |
| Total Liabilities and Stockholder’s Equity                             |       | $                 | 9,949      |              | $          | 9,465 |   |

*See Notes to the Consolidated Financial Statements.*

 

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**UnionCarbide Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

 
| ** **                                                                                           | ** ** | **Six Months Ended**   | ** ** |
|------------------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                           | ** ** | **June 30,**                | ** ** | **June 30,** | ** ** |
| In millions (Unaudited)                                                                    | ** ** | **2008**                         | ** ** | **2007** | ** ** |
| Operating Activities                                                                                 | * *   | * *                         | * *   | * * | * * |
| Net Income Available for Common Stockholder                                                          |       | $                                | 200        |   | $ | 381 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities:                   |       |                             |       |   |   |
| Depreciation and amortization                                                                        |       | 157                              |       | 164 |   |
| Charge (credit) for deferred income tax                                                              |       | 100                              |       | (21 | ) |
| Earnings of nonconsolidated affiliates in  excess of dividends received                              |       | (86                              | )          | (4 | ) |
| Net gain on sales of property                                                                        |       | (7                               | )          | (1 | ) |
| Pension contributions                                                                                |       | (1                               | )          | — |   |
| Changes in assets and liabilities:                                                                   |       |                             |       |   |   |
| Accounts and notes receivable                                                                        |       | 7                                |       | 13 |   |
| Related company receivables                                                                          |       | (473                             | )          | (452 | ) |
| Inventories                                                                                          |       | (48                              | )          | (5 | ) |
| Accounts payable                                                                                     |       | 69                               |       | (25 | ) |
| Related company payables                                                                             |       | 142                              |       | 28 |   |
| Other assets and liabilities                                                                         |       | 10                               |       | 43 |   |
| Cash provided by operating activities                                                                |       | 70                               |       | 121 |   |
| Investing Activities                                                                                 |       |                             |       |   |   |
| Capital expenditures                                                                                 |       | (99                              | )          | (100 | ) |
| Changes in noncurrent receivable from  related company                                               |       | 23                               |       | (14 | ) |
| Proceeds from sales of property                                                                      |       | 6                                |       | 3 |   |
| Purchases of investments                                                                             |       | (4                               | )          | (3 | ) |
| Proceeds from sales of investments                                                                   |       | 7                                |       | 2 |   |
| Cash used in investing activities                                                                    |       | (67                              | )          | (112 | ) |
| Financing Activities                                                                                 |       |                             |       |   |   |
| Changes in short-term notes payable                                                                  |       | —                           |       | (1 | ) |
| Cash used in financing activities                                                                    |       | —                           |       | (1 | ) |
| Summary                                                                                              |       |                             |       |   |   |
| Increase in cash and cash equivalents                                                                |       | 3                                |       | 8 |   |
| Cash and cash equivalents at beginning of  year                                                      |       | 22                               |       | 71 |   |
| Cash and cash equivalents at end of period                                                           |       | $                                | 25         |   | $ | 79 |   |
| *See Notes to the  Consolidated Financial Statements.*                                               |       |                             |       |   |   |   |   |
|                                                                                                 |       |                             |       |   |   |   |   |
| **Union Carbide Corporation and Subsidiaries**

**Consolidated Statements of Comprehensive  Income** |       |
|                                                                                                 |       |
| ** **                                                                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| ** **                                                                                           | ** ** | **June 30,**                | ** ** | **June 30,** | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| In millions (Unaudited)                                                                    | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Income Available for Common Stockholder                                                          |       | $                                | 45         |   | $ | 195 |   | $ | 200 |   | $ | 381 |   |
| Other Comprehensive Income (Loss), Net of  Tax                                                       |       |                             |       |   |   |   |   |   |   |
| Translation adjustments                                                                              |       | (4                               | )          | (2 | ) | 2 |   | (2 | ) |
| Adjustments to pension and other  postretirement benefit plans                                       |       | 2                                |       | 4 |   | 3 |   | 8 |   |
| Net loss on cash flow hedging derivative  instruments                                                |       | —                           |       | — |   | (1 | ) | — |   |
| Total other comprehensive income (loss)                                                              |       | (2                               | )          | 2 |   | 4 |   | 6 |   |
| Comprehensive Income                                                                                 |       | $                                | 43         |   | $ | 197 |   | $ | 204 |   | $ | 387 |   |
|                                                                                                      |            |                                  |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

*See Notes to the Consolidated Financial Statements.*

 

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**UnionCarbide Corporation and Subsidiaries**

**Notes tothe Consolidated Financial Statements**

 

(Unaudited)

 

**NOTE A    CONSOLIDATED FINANCIAL STATEMENTS**

 

The unauditedinterim consolidated financial statements of Union Carbide Corporation and itssubsidiaries (the “Corporation” or “UCC”) were prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)and reflect all adjustments (including normal recurring accruals) which, in theopinion of management, are considered necessary for the fair presentation ofthe results for the periods presented.

 

The Corporation is awholly owned subsidiary of The Dow Chemical Company (“Dow”). In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 128, “EarningsPer Share,” the presentation of earnings per share is not required in financialstatements of wholly owned subsidiaries.

 

The Corporation’sbusiness activities comprise components of Dow’s global operations rather thanstand-alone operations. Dow conducts its worldwide operations through globalbusinesses. Because there are no separable reportable business segments for UCCunder SFAS No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” and no detailed business information is provided to achief operating decision maker regarding the Corporation’s stand-aloneoperations, the Corporation’s results are reported as a single operatingsegment.

 

Intercompany transactionsand balances are eliminated in consolidation. Transactions with the Corporation’sparent company, Dow, or other Dow subsidiaries have been reflected as relatedcompany transactions in the consolidated financial statements. See Note I forfurther discussion.

 

These statements shouldbe read in conjunction with the audited consolidated financial statements andnotes thereto included in the Corporation’s Annual Report on Form 10-K forthe year ended December 31, 2007.

 

**NOTE B     RECENT ACCOUNTING PRONOUNCEMENTS**

 

In September 2006, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 157, “Fair Value Measurements,” which defines fair value, establishesa framework for measuring fair value in U.S. GAAP, and expands disclosuresabout fair value measurements. The Statement applies under other accountingpronouncements that require or permit fair value measurements and was effectivefor fiscal years beginning after November 15, 2007. In February 2008,the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2, which delayedthe effective date of SFAS No. 157 for nonfinancial assets andnonfinancial liabilities, except for items that are recognized or disclosed atfair value in the financial statement on a recurring basis, to fiscal yearsbeginning after November 15, 2008. On January 1, 2008, theCorporation adopted the portion of SFAS No. 157 that was not delayed, andsince the Corporation’s existing fair value measurements are consistent withthe guidance of the Statement, the partial adoption of the Statement did nothave a material impact on the Corporation’s consolidated financial statements.The Corporation uses a December 31 measurement date for its pension andother postretirement plans; therefore, the Corporation is still evaluating theimpact of adopting the Statement for its plan assets. The adoption of thedeferred portion of the Statement on January 1, 2009 is not expected tohave a material impact on the Corporation’s consolidated financial statements.See Note F for expanded disclosures about fair value measurements.

 

**SAB No. 74 Disclosures forAccounting Standards Issued But Not Yet Adopted**

 

In December 2007, the FASB revised SFAS No. 141,“Business Combinations,” to establish revised principles and requirements forhow entities will recognize and measure assets and liabilities acquired in abusiness combination. The Statement is effective for business combinationscompleted on or after the beginning of the first annual reporting periodbeginning on or after December 15, 2008. The Corporation will apply theguidance of the Statement to business combinations completed on or after January 1,2009.

 

In December 2007, the FASB issued SFAS No. 160,“Noncontrolling Interests in Consolidated Financial Statements, an amendment ofARB No. 51.” The Statement establishes accounting and reporting standardsfor the noncontrolling interest in a subsidiary and for the deconsolidation ofa subsidiary. The Statement is effective on or after the beginning of the firstannual reporting period beginning on or after December 15, 2008. TheCorporation is currently evaluating the impact of adopting the Statement on January 1,2009.

 

In March 2008, the FASB issued SFAS No. 161,“Disclosures about Derivative Instruments and Hedging Activities, an amendmentof SFAS No. 133.” The Statement requires enhanced disclosures about anentity’s derivative and hedging activities. The Statement is effective forfiscal years and interim periods beginning after November 15, 2008. TheCorporation is currently evaluating the additional disclosures required by theStatement.

 

In April 2008, the FASB issued FSP FAS No. 142-3,“Determination of the Useful Life of Intangible Assets.” The FSP amends thefactors an entity should consider in developing renewal or extensionassumptions used in determining the useful life of recognized intangible assetsunder SFAS No. 142, “Goodwill and Other Intangible Assets.”  The FSP must be applied 

 

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prospectively to intangible assets acquired after theeffective date. The Corporation will apply the guidance of the FSP tointangible assets acquired after January 1, 2009.

 

**NOTE C    RESTRUCTURING**

 

In the fourth quarter of2007, the Corporation recorded restructuring charges totaling $55 million  resulting from decisions made bymanagement to make organizational changes within targeted support functions inWest Virginia and to shut down certain assets in Louisiana to enhance theefficiency and cost effectiveness of the Corporation’s operations. The chargesincluded severance of $17 million for a workforce reduction ofapproximately 225 people; curtailment costs of $12 million associated withthe Corporation’s defined benefit plans; and a $26 million write-off ofthe net book value and associated exit costs of the polypropylene manufacturingfacility at St. Charles Operations in Hahnville, Louisiana, which was shut downat the end of 2007. As of June 30,2008, severance of $2 million had been paid to 34 employees, and a liability of$15 million remained for approximately 190 employees.

 

The following table summarizes 2008 activities related to the Corporation’srestructuring reserve:

 

**2008 Activities Related to 2007 Restructuring**
| In millions                          | ** ** | **Costs associated  with Exit or  Disposal Activities** | ** ** | **Severance  Costs** | ** ** | **Total** | ** ** |
|-------------------------------------------|------------|-----------------------------------------------------------------------------|------------|----------------------|------------|-----------|------------|
| Reserve balance at December 31, 2007 |       | $                                                                           | 12         |                 | $          | 17        |       | $ | 29 |   |
| Cash payments                             |       | —                                                                      |       | (2                   | )          | (2        | )          |
| Reserve balance at June 30, 2008     |       | $                                                                           | 12         |                 | $          | 15        |       | $ | 27 |   |

 

**NOTE D     INVENTORIES**

 

The following tableprovides a breakdown of inventories:

 

**Inventories**
| In millions   | ** ** | **June 30,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|--------------------|------------|-------------------------|------------|-------------------------|------------|
| Finished goods     |       | $                       | 97         |                    | $          | 17 |   |
| Work in process    |       | 2                       |       | 40                      |       |
| Raw materials      |       | 51                      |       | 47                      |       |
| Supplies           |       | 76                      |       | 74                      |       |
| Total  inventories |       | $                       | 226        |                    | $          | 178 |   |

 

Thereserves reducing inventories from the first-in, first-out (“FIFO”) basis tothe last-in, first-out (“LIFO”) basis amounted to $231 million at June 30,2008 and $183 million at December 31, 2007.

 

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**NOTE E     OTHER INTANGIBLE ASSETS**

 

The following table provides information regarding the Corporation’sother intangible assets:

 

**Other Intangible Assets**
| ** **                            | ** ** | **At June 30, 2008** | ** ** | **At December 31, 2007** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| In millions                      | ** ** | **Gross  Carrying  Amount**         | ** ** | **Accumulated  Amortization**           | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Intangible assets  with finite lives: |       |                                |       |                                    |       |   |   |   |   |   |   |   |   |
| Licenses and  intellectual property   |       | $                                   | 33         |                                    | $          | (33 | ) | $ | — |   | $ | 33 |   | $ | (32 | ) | $ | 1 |   |
| Patents                               |       | 2                                   |       | (1                                      | )          | 1 |   | 3 |   | (2 | ) | 1 |   |
| Software                              |       | 116                                 |       | (97                                     | )          | 19 |   | 114 |   | (94 | ) | 20 |   |
| Total other  intangible assets        |       | $                                   | 151        |                                    | $          | (131 | ) | $ | 20 |   | $ | 150 |   | $ | (128 | ) | $ | 22 |   |

 

Amortizationexpense for software, which is included in “Cost of sales,” was $1 millionin the second quarter of 2008 and $2 million in the second quarter of2007. Amortization expense for software was $3 million for the six monthsended June 30, 2008 and 2007. Amortization expense for other intangibleassets (not including software) was immaterial in the second quarter of 2008and the second quarter of 2007, as well as year to date for 2008 and 2007.Total estimated amortization expense for 2008 and the five succeeding fiscalyears is as follows:

 
| **Estimated Amortization Expense**In millions | ** ** | ** ** | ** ** |
|----------------------------------------------------|------------|------------|------------|
| 2008                                               |       | $          | 7          |   |
| 2009                                               |       | $          | 7          |   |
| 2010                                               |       | $          | 5          |   |
| 2011                                               |       | $          | 1          |   |
| 2012                                               |       | —     |       |
| 2013                                               |       | —     |       |

 

**NOTEF****     FAIR VALUE MEASUREMENTS**

 

The following table summarizes the bases used tomeasure certain assets and liabilities at fair value on a recurring basis inthe consolidated balance sheets:

 

**Basis of Fair Value Measurements**
| In millions       | ** ** | **At June 30,  2008** | ** ** | **Significant Other  Observable Inputs  (Level 2)** | ** ** |
|------------------------|------------|---------------------------------|------------|--------------------------------------------------------------------|------------|
| Assets at fair  value: |       |                            |       |                                                               |       |
| Debt securities (1)    |       | $                               | 17         |                                                               | $          | 17 |   |
|                        |            |                                 |            |                                                                    |            |  |  |

(1)          Included in “Other investments” in the consolidated balance sheets.

 

Assets that are measured using significant otherobservable inputs are primarily valued by reference to quoted prices of similarassets in active markets, adjusted for any terms specific to that asset. Forall other assets for which observable inputs are used, fair value is derivedthrough the use of fair value models, such as a discounted cash flow model orother standard pricing models.

 

**NOTE G     COMMITMENTS AND CONTINGENT LIABILITIES**

 

**Environmental Matters**

 

Accruals forenvironmental matters are recorded when it is probable that a liability hasbeen incurred and the amount of the liability can be reasonably estimated,based on current law and existing technologies. At June 30, 2008, theCorporation had accrued obligations of $71 million for environmentalremediation and restoration costs, including $20 million for theremediation of Superfund sites. This is management’s best estimate of the costsfor remediation and restoration with respect to environmental matters for whichthe Corporation has accrued liabilities, although the ultimate cost withrespect to these 

 

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particular matterscould range up to twice that amount. Inherent uncertainties exist in theseestimates primarily due to unknown conditions, changing governmentalregulations and legal standards regarding liability, and evolving technologiesfor handling site remediation and restoration. At December 31, 2007, theCorporation had accrued obligations of $75 million for environmentalremediation and restoration costs, including $23 million for theremediation of Superfund sites. It is the opinion of the Corporation’smanagement that the possibility is remote that costs in excess of thosedisclosed will have a material adverse impact on the Corporation’s consolidatedfinancial statements.

 

**Litigation**

 

The Corporation and itssubsidiaries are involved in a number of legal proceedings and claims with bothprivate and governmental parties. These cover a wide range of matters,including, but not limited to: product liability; trade regulation;governmental regulatory proceedings; health, safety and environmental matters;employment; patents; contracts; taxes; and commercial disputes.

 

Separately, theCorporation is and has been involved in a large number of asbestos-relatedsuits filed primarily in state courts during the past three decades. Thesesuits principally allege personal injury resulting from exposure toasbestos-containing products and frequently seek both actual and punitivedamages. The alleged claims primarily relate to products that UCC sold in thepast, alleged exposure to asbestos-containing products located on UCC’spremises, and UCC’s responsibility for asbestos suits filed against a formersubsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffsare unable to demonstrate that they have suffered any compensable loss as aresult of such exposure, or that injuries incurred in fact resulted fromexposure to the Corporation’s products. Influenced by the bankruptcy filings ofnumerous defendants in asbestos-related litigation and the prospects of variousforms of state and national legislative reform, the rate at which plaintiffsfiled asbestos-related suits against various companies, including theCorporation and Amchem, increased in 2001, 2002 and the first half of 2003.Since then, the rate of filing has significantly abated. The Corporationexpects more asbestos-related suits to be filed against it and Amchem in thefuture, and will aggressively defend or reasonably resolve, as appropriate,both pending and future claims.

 

Based on a studycompleted by Analysis, Research & Planning Corporation (“ARPC”) in January 2003,the Corporation increased its December 31, 2002 asbestos-related liabilityfor pending and future claims for the 15-year period ending in 2017 to $2.2 billion,excluding future defense and processing costs. Since then, the Corporation hascompared current asbestos claim and resolution activity to the results of themost recent ARPC study at each balance sheet date to determine whether theaccrual continues to be appropriate. In addition, the Corporation has requestedARPC to review the Corporation’s historical asbestos claim and resolutionactivity each November since 2004 to determine the appropriateness ofupdating the most recent ARPC study.

 

In November 2006,the Corporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsmost recent study from January 2005. In response to that request, ARPCreviewed and analyzed data through October 31, 2006 and concluded that theexperience from 2004 through 2006 was sufficient for the purpose of forecastingfuture filings and values of asbestos claims filed against UCC and Amchem, andcould be used in place of previous assumptions to update its January 2005study. The resulting study, completed by ARPC in December 2006, statedthat the undiscounted cost of resolving pending and future asbestos-relatedclaims against UCC and Amchem, excluding future defense and processing costs,through 2021 was estimated to be between approximately $1.2 billion and$1.5 billion. As in its January 2003 and January 2005 studies,ARPC provided estimates for a longer period of time in its December 2006study, but also reaffirmed its prior advice that forecasts for shorter periodsof time are more accurate than those for longer periods of time.

 

Basedon ARPC’s December 2006 study and the Corporation’s own review of theasbestos claim and resolution activity, the Corporation decreased its asbestos-relatedliability for pending and future claims to $1.2 billion at December 31,2006 which covered the 15-year period ending in 2021 (excluding future defenseand processing costs). The reduction was $177 million and was shown as “Asbestos-relatedcredit” in the consolidated statements of income.

 

In November 2007,the Corporation requested ARPC to review the Corporation’s 2007 asbestos claimand resolution activity and determine the appropriateness of updating its December 2006study. In response to that request, ARPC reviewed and analyzed data through October 31,2007. In December 2007, ARPC stated that an update of its study would notprovide a more likely estimate of future events than the estimate reflected inits study of the previous year and, therefore, the estimate in that studyremained applicable. Based on the Corporation’s own review of the asbestosclaim and resolution activity and ARPC’s response, the Corporation determinedthat no change to the accrual was required. At December 31, 2007, the Corporation’sasbestos-related liability for pending and future claims was $1.1 billion.At December 31, 2007, approximately 31 percent of the recordedliability related to pending claims and approximately 69 percent relatedto future claims.

 

Basedon the Corporation’s review of 2008 activity, the Corporation determined thatno adjustment to the accrual was required at June 30, 2008. TheCorporation’s asbestos-related liability for pending and future claims was$1.0 billion at 

 

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June 30, 2008.Approximately 31 percent of the recorded liability related to pendingclaims and approximately 69 percent related to future claims.

 

At December 31,2002, the Corporation increased the receivable for insurance recoveries relatedto its asbestos liability to $1.35 billion, substantially exhausting itsasbestos product liability coverage. The insurance receivable related to the asbestosliability was determined by the Corporation after a thorough review ofapplicable insurance policies and the 1985 Wellington Agreement, to which theCorporation and many of its liability insurers are signatory parties, as wellas other insurance settlements, with due consideration given to applicabledeductibles, retentions and policy limits, and taking into account the solvencyand historical payment experience of various insurance carriers. The WellingtonAgreement and other agreements with insurers are designed to facilitate anorderly resolution and collection of Union Carbide’s insurance policies and toresolve issues that the insurance carriers may raise.

 

In September 2003,the Corporation filed a comprehensive insurance coverage case, now proceedingin the Supreme Court of the State of New York, County of New York, seeking toconfirm its rights to insurance for various asbestos claims and to facilitatean orderly and timely collection of insurance proceeds. This lawsuit was filedagainst insurers that are not signatories to the Wellington Agreement and/or donot otherwise have agreements in place with the Corporation regarding theirasbestos-related insurance coverage, in order to facilitate an orderlyresolution and collection of such insurance policies and to resolve issues thatthe insurance carriers may raise. Although the lawsuit is continuing, through the end of the second quarter of 2008,the Corporation has reached settlements with several of the carriers involvedin this litigation.

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was$465 million at June 30, 2008 and $467 million at December 31,2007. At June 30, 2008 and December 31, 2007, all of the receivablefor insurance recoveries was related to insurers that are not signatories tothe Wellington Agreement and/or do not otherwise have agreements in placeregarding their asbestos-related insurance coverage.

 

In addition to thereceivable for insurance recoveries related to its asbestos liability, theCorporation had receivables for defense and resolution costs submitted toinsurance carriers for reimbursement as follows:

 

**Receivablesfor Costs Submitted to Insurance Carriers**
| In millions                  | ** ** | **June 30,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Receivables for  defense costs    |       | $                       | 16         |                    | $          | 18 |   |
| Receivables for  resolution costs |       | 222                     |       | 253                     |       |
| Total                             |       | $                       | 238        |                    | $          | 271 |   |

 

The Corporation expensesdefense costs as incurred. The pretax impact for defense and resolution costs,net of insurance, was $2 million in the second quarter of 2008($25 million in the second quarter of 2007) and $16 million in thefirst six months of 2008 ($42 million in the first six months of 2007),and was reflected in “Cost of sales.”

 

Aftera review of its insurance policies, with due consideration given to applicabledeductibles, retentions and policy limits, after taking into account thesolvency and historical payment experience of various insurance carriers;existing insurance settlements; and the advice of outside counsel with respectto the applicable insurance coverage law relating to the terms and conditionsof its insurance policies, the Corporation continues to believe that itsrecorded receivable for insurance recoveries from all insurance carriers isprobable of collection.

 

The amounts recorded forthe asbestos-related liability and related insurance receivable described abovewere based upon current, known facts. However, future events, such as thenumber of new claims to be filed and/or received each year, the average cost ofdisposing of each such claim, coverage issues among insurers, and thecontinuing solvency of various insurance companies, as well as the numerousuncertainties surrounding asbestos litigation in the United States, could causethe actual costs and insurance recoveries to be higher or lower than thoseprojected or those recorded.

 

Because of theuncertainties described above, management cannot estimate the full range of thecost of resolving pending and future asbestos-related claims facing theCorporation and Amchem. Management believes that it is reasonably possible thatthe cost of disposing of the Corporation’s asbestos-related claims, includingfuture defense costs, could have a material adverse impact on the results ofoperations and cash flows for a particular period and on the consolidatedfinancial position of the Corporation.

 

While it is not possibleat this time to determine with certainty the ultimate outcome of any of thelegal proceedings and claims referred to in this filing, management believesthat adequate provisions have been made for probable losses with respect topending claims and proceedings, and that, except for the asbestos-relatedmatters described above, the ultimate outcome of all known and future claims,after provisions for insurance, will not have a material adverse impact on theresults of operations, cash flows and consolidated financial position of theCorporation. Should any losses be sustained in connection with any of suchlegal proceedings and claims in excess of provisions provided and availableinsurance, they will be charged to income when determinable.

 

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**Purchase Commitments**

 

At December 31,2007, the Corporation had various outstanding commitments for take-or-payagreements, with terms extending from one to fifteen years. Such commitmentswere not in excess of current market prices. The fixed and determinable portionof obligations under purchase commitments at December 31, 2007 ispresented in the following table:

 
| **Fixed and Determinable Portion of Take-or-Pay  Obligations   at December 31, 2007** | ** ** |
|--------------------------------------------------------------------------------------------|------------|
| In millions                                                                           | ** ** | ** ** | ** ** |
| 2008                                                                                       |       | $ | 7 |   |
| 2009                                                                                       |       | 7 |   |
| 2010                                                                                       |       | 8 |   |
| 2011                                                                                       |       | 2 |   |
| 2012                                                                                       |       | 2 |   |
| 2013 and beyond                                                                            |       | 11 |   |
| Total                                                                                      |       | $ | 37 |   |

 

**Guarantees**

 

The Corporation hasundertaken obligations to guarantee the performance of certain nonconsolidatedaffiliates. Non-performance under a contract for commercial and/or financialobligations by the guaranteed party would trigger the obligation of theCorporation to make payments to the beneficiary of the guarantees. Financialobligations include debt and lease arrangements.

 

The followingtable provides a summary of the final expiration, maximum future payments, andrecorded liability reflected in the consolidated balance sheets for theseguarantees.

 
| **Guarantees**In millions        | ** ** | **Final  Expiration** | ** ** | **Maximum Future  Payments** | ** ** | **Recorded  Liability** | ** ** |
|---------------------------------------|------------|-----------------------|------------|-----------------------------------|------------|-------------------------|------------|
| Guarantees at  June 30, 2008     |       | 2014                  |       | $                                 | 78         |                    | $          | 1 |   |
| Guarantees at  December 31, 2007 |       | 2014                  |       | $                                 | 77         |                    | $          | 1 |   |

 

**Conditional Asset RetirementObligations**

 

In accordance with FIN No. 47,the Corporation has recognized conditional asset retirement obligations relatedto asbestos encapsulation as a result of planned demolition and remediationactivities at manufacturing and administrative sites in the United States. Theaggregate carrying amount of conditional asset retirement obligations was$9 million at June 30, 2008 and December 31, 2007. The discountrate used to calculate the Corporation’s asset retirement obligations was5.08 percent, unchanged from December 31, 2007. These obligations areincluded in the consolidated balance sheets as “Accrued and other currentliabilities.”

 

The Corporation has notrecognized conditional asset retirement obligations for which a fair valuecannot be reasonably estimated in its consolidated financial statements. It isthe opinion of management that the possibility is remote that such conditionalasset retirement obligations, when estimable, will have a material adverseimpact on the Corporation’s consolidated financial statements based on currentcosts.

 

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**NOTE H     PENSION AND OTHER POSTRETIREMENT BENEFITS**

 

**Net Periodic Benefit Cost (Credit)for All Significant Plans**
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| In millions                      | ** ** | **June 30,  2008**          | ** ** | **June 30,  2007**        | ** ** | **June 30,  2008** | ** ** | **June 30,  2007** | ** ** |
| *Defined  Benefit Pension Plans:*     |       |                             |       |                           |       |   |   |   |   |
| Service cost                          |       | $                                | 5          |                           | $          | 5 |   | $ | 10 |   | $ | 10 |   |
| Interest cost                         |       | 56                               |       | 53                             |       | 112 |   | 106 |   |
| Expected return  on plan assets       |       | (78                              | )          | (79                            | )          | (156 | ) | (158 | ) |
| Amortization of  prior service cost   |       | 2                                |       | —                         |       | 4 |   | 1 |   |
| Amortization of  net loss             |       | —                           |       | 7                              |       | 1 |   | 14 |   |
| Net periodic  benefit credit          |       | $                                | (15        | )                              | $          | (14 | ) | $ | (29 | ) | $ | (27 | ) |
|                                  |       |                             |       |                           |       |   |   |   |   |
| *Other  Postretirement Benefits:*     |       |                             |       |                           |       |   |   |   |   |
| Service cost                          |       | $                                | 1          |                           | $          | 1 |   | $ | 2 |   | $ | 2 |   |
| Interest cost                         |       | 7                                |       | 7                              |       | 14 |   | 14 |   |
| Amortization of  prior service credit |       | —                           |       | (1                             | )          | (1 | ) | (2 | ) |
| Amortization of  net loss             |       | —                           |       | —                         |       | — |   | 1 |   |
| Net periodic  benefit cost            |       | $                                | 8          |                           | $          | 7 |   | $ | 15 |   | $ | 15 |   |

 

**NOTE I     RELATED PARTY TRANSACTIONS**

 

The Corporation sells products to Dow to simplify the customerinterface process. Products are sold to and purchased from Dow at market-basedprices in accordance with the terms of Dow’s long-standing intercompany pricingpolicies. The Corporation also procures certain commodities and raw materialsthrough a Dow subsidiary and pays a commission to that Dow subsidiary based onthe volume and type of commodities and raw materials purchased. The commissionexpense is included in “Sundry income (expense) – net” in the consolidatedstatements of income. Purchases from that Dow subsidiary were approximately$1.1 billion in the second quarter of 2008 ($825 million in the secondquarter of 2007) and $2.1 billion in the first half of 2008($1.5 billion in the first half of 2007).

 

The Corporationhas a master services agreement with Dow whereby Dow provides servicesincluding but not limited to, accounting, legal, treasury (investments, cashmanagement, risk management, insurance), procurement, human resources,environmental, health and safety, and business management for UCC. Under themaster services agreement with Dow, for general administrative and overheadtype services that Dow routinely allocates to various businesses, UCC ischarged the cost of those services based on the Corporation’s and Dow’srelative manufacturing conversion costs. This arrangement results in aquarterly charge of approximately $6 million (included in “Sundry income(expense) – net”).

 

For services thatDow routinely charges based on effort, UCC is charged the cost of such serviceson a fully absorbed basis, which includes direct and indirect costs.Additionally, certain Dow employees are contracted to UCC and Dow is reimbursedfor all direct employment costs of such employees. Management believes themethod used for determining expenses charged by Dow is reasonable. Dow providesthese services by leveraging its centralized functional service centers toprovide services at a cost that management believes provides an advantage tothe Corporation.

 

The monitoring andexecution of risk management policies related to interest rate and foreigncurrency risks, which are based on Dow’s risk management philosophy, areprovided as a service to UCC.

 

As part of Dow’scash management process, UCC is a party to revolving loans with Dow that haveLIBOR-based interest rates with varying maturities. At June 30, 2008, theCorporation had a note receivable of $3.7 billion ($3.2 billion at December 31,2007) from Dow under a revolving loan agreement. The Corporation may draw fromthis note receivable in support of its daily working capital requirements and,as such, the net effect of cash inflows and outflows under this revolving loanagreement is presented in the consolidated statements of cash flows as anoperating activity.

 

The Corporation also hasa separate revolving credit agreement with Dow that allows the Corporation toborrow or obtain credit enhancements up to an aggregate of $1 billion thatmatures December 30, 2008, pursuant to an amendment effective as of September 30,2007. Dow may demand repayment with a 30-day written notice to the Corporation,subject to certain restrictions. A related collateral agreement provides forthe replacement of certain existing pledged assets, primarily equity interestsin various subsidiaries and joint ventures, with cash collateral. At June 30,2008, $810 million ($813 million at December 31, 2007) wasavailable under the revolving credit agreement. The cash collateral is reportedas “Noncurrent receivables from related companies” in the consolidated balancesheets.

 

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The losses and additionalcosts incurred by the Corporation in 2005 due to hurricane Katrina were coveredby the Corporation’s insurance program. The Corporation has an insurancereceivable for losses incurred of $85 million at June 30, 2008from its insurer (an affiliate of Dow).

 

In December 2007,under the terms of a contribution agreement among UCC, Dow and DowInternational Holdings LLC (“DIHC”), the Corporation contributed its42.5 percent ownership interest in EQUATE Petrochemical Company K.S.C. (“EQUATE”)to UC Investment B.V. (“UCIBV”), a newly formed Dutch limited liability companyin which the Corporation was the sole shareholder. The Corporation thencontributed its ownership interest in UCIBV to DIHC in exchange for anincreased ownership interest in DIHC. The Corporation has the right to sell itsshares in DIHC to Dow (anytime during the period January 1, 2009 through December 31,2011) for an amount calculated using a formula in the agreement, which intendsto approximate fair value. In accordance with the terms of the contributionagreement, Dow made a capital contribution to UCC in the amount of$191 million in the first quarter of 2008. At June 30, 2008, theCorporation had a 19.13 percent ownership interest in DIHC which theCorporation accounts for using the cost method.

 

The Corporation receivedcash dividends from its related company investments of $5 million in thesecond quarter of 2008, and $82 million in the first half of 2008,including $75 million from DIHC. These dividends were included in “Sundryincome (expense) – net.”

 

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**UnionCarbide Corporation and Subsidiaries**

 

**ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS.**

** **

Pursuant toGeneral Instruction H of Form 10-Q “Omission of Information by CertainWholly-Owned Subsidiaries,” this section includes only management’s narrativeanalysis of the results of operations for the three and six-month periods endedJune 30, 2008, the most recent period, compared with the three andsix-month periods ended June 30, 2007, the corresponding periods in thepreceding fiscal year.

 

References below to “Dow”refer to The Dow Chemical Company and its consolidated subsidiaries, except asthe context otherwise indicates.

 

Union Carbide Corporation’s(the “Corporation” or “UCC”) business activities comprise components of Dow’sglobal operations rather than stand-alone operations. Dow conducts itsworldwide operations through global businesses. Because there are no separablereportable business segments for UCC under Statement of Financial AccountingStandards No. 131, “Disclosures about Segments of an Enterprise andRelated Information,” and no detailed business information is provided to achief operating decision maker regarding the Corporation’s stand-aloneoperations, the Corporation’s results are reported as a single operatingsegment.

 

##### **DISCLOSUREREGARDING FORWARD-LOOKING INFORMATION**

 

The PrivateSecurities Litigation Reform Act of 1995 provides a “safe harbor” forforward-looking statements made by or on behalf of the Corporation. Thissection covers the current performance and outlook of the Corporation. Theforward-looking statements contained in this section and in other parts of thisdocument involve risks and uncertainties that may affect the Corporation’soperations, markets, products, services, prices and other factors as more fullydiscussed elsewhere and in filings with the U.S. Securities and ExchangeCommission. These risks and uncertainties include, but are not limited to,economic, competitive, legal, governmental and technological factors.Accordingly, there is no assurance that the Corporation’s expectations will berealized. The Corporation assumes no obligation to provide revisions to anyforward-looking statements should circumstances change, except as otherwiserequired by securities and other applicable laws.

 

**RESULTSOF OPERATIONS**

 

Total net sales for thesecond quarter of 2008 were $1,955 million compared with$1,899 million for the second quarter of 2007, an increase of3 percent. Total net sales were $3,990 million for the first half of2008 compared with $3,625 million for the first half of 2007, an increaseof 10 percent. Selling prices to Dow are based on market prices for therelated products. Average selling prices for most products were higher in thesecond quarter of 2008 and on a year-to-date basis compared with the sameperiods of last year, led by ethylene glycol (“EG”), polyglycols, surfactants,polyethylene and polypropylene. Sales volume was mixed with overall volume downin the second quarter of 2008 and on a year-to-date basis compared with thesame periods last year. Volume was impacted by a decline in ethyleneaminesvolume due to unplanned outages at St. Charles Operations in Hahnville,Louisiana in the second quarter of 2008 and a decline in polypropylene volumerelated to the shutdown of the polypropylene plant at St. CharlesOperations in the fourth quarter of 2007. This decline more than offset growthin a few of the Corporation’s other products, principally polyethylene.

 

Cost of salesincreased 9 percent to $1,882 million in the second quarter of 2008from $1,730 million in the second quarter of 2007 due to higher feedstockand energy costs. On a year-to-date basis, cost of sales increased15 percent from $3,328 million to $3,843 million, againreflecting higher feedstock and energy costs.

 

Equity earnings ofnonconsolidated affiliates decreased $52 million in the second quarter of2008 compared with the same quarter last year, principally due to the absenceof equity earnings from EQUATE Petrochemical Company K.S.C. (see Note I to theConsolidated Financial Statements). This decline was partially offset by higherreported earnings from the OPTIMAL Group of Companies. Year-to-date equityearnings of nonconsolidated affiliates were $117 million compared with$239 million last year.

 

Sundry income(expense) - net includes a variety of income and expense items suchas the gain or loss on foreign currency exchange, dividends from investments,commissions, charges for management services provided by Dow, and gains andlosses on sales of investments and assets. Sundry income(expense) - net for the second quarter of 2008 was expense of$14 million compared with expense of $17 million for the secondquarter of last year. Year to date, sundry income (expense) - net wasincome of $56 million compared with expense of $27 million for thefirst six months of last year. Sundry income (expense) - net for thefirst six months of 2008 was favorably impacted by a dividend of$75 million from DIHC in the first quarter of 2008 (see Note I to theConsolidated Financial Statements).

 

Interest incomewas $26 million in the second quarter of 2008 compared with$43 million in the second quarter of 2007. Year to date, interest incomewas $58 million, down from $80 million in the first six months of2007. Interest income was 

 

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lower for the secondquarter of 2008 and on a year to date basis compared with the same periods oflast year due to lower interest rates partially offset by a higher level ofinterest-bearing assets.

 

Interest expense andamortization of debt discount increased $2 million in the second quarterof 2008 compared with the second quarter of 2007. Year to date, interestexpense and amortization of debt discount was $25 million, a decline of$1 million from the first six months of 2007.

 

The effective tax ratefluctuates based on, among other factors, where income is earned, the level ofafter-tax income from joint ventures, and the level of income relative to taxcredits available. The effective tax rate for the second quarter of 2008 was60.2 percent compared with 28.8 percent for the same quarter lastyear. During the second quarter of 2008, the Corporation recorded adjustmentsto the tax accounts which impacted the effective tax rate for the quarter. Yearto date, the effective tax rate was 35.3 percent versus 25.4 percentlast year.

 

The Corporation reportednet income of $45 million for the second quarter of 2008 compared with$195 million for the second quarter of 2007, and net income for the firsthalf of 2008 of $200 million compared with $381 million for the firsthalf of last year. While results for the first half of 2008 were favorablyimpacted by higher dividends from investments, this improvement was more thanoffset by lower equity earnings and lower margins due to increased feedstockand energy costs.

 

On December 13,2007, Dow and Petrochemical Industries Company (“PIC”) of the State of Kuwait,a wholly owned subsidiary of Kuwait Petroleum Corporation, announced plans toform a 50:50 joint venture that will be a market-leading, global petrochemicalscompany. The joint venture, K-Dow Petrochemicals (“KDP”) will manufacture andmarket polyethylene, ethyleneamines, ethanolamines, polypropylene, andpolycarbonate. KDP will be headquartered in southeast Michigan in the UnitedStates. The joint venture is expected to have revenues of more than$11 billion and employ more than 5,000 people worldwide. It is anticipatedthat a significant part (but not substantially all) of UCC’s U.S.-basedmanufacturing assets will be included in the new joint venture. While thetransaction is subject to the completion of definitive agreements, customaryconditions and regulatory approvals, it is anticipated that the joint venturebetween Dow and PIC will close in late 2008. Management is currently evaluatingthe accounting treatment and the impact on the Corporation’s financialstatements.

 

**OTHERMATTERS**

 

**RecentAccounting Pronouncements**

 

See NoteB to the Consolidated Financial Statements for a summary of recent accountingpronouncements. In addition, see Note F to the Consolidated FinancialStatements for the Corporation’s disclosures about fair value measurements. Thesensitivity of fair value estimates is immaterial relative to the assets andliabilities measured at fair value, as well as to the total equity of theCorporation.

 

**CriticalAccounting Policies**

 

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States of America requiresmanagement to make judgments, assumptions and estimates that affect the amountsreported in the Consolidated Financial Statements and accompanying notes. NoteA to the Consolidated Financial Statements in the Corporation’s Annual Reporton Form 10-K for the year ended December 31, 2007 (“2007 10-K”)describes the significant accounting policies and methods used in thepreparation of the Consolidated Financial Statements. The Corporation’scritical accounting policies that are impacted by judgments, assumptions andestimates are described in Management’s Discussion and Analysis of FinancialCondition and Results of Operations in the Corporation’s 2007 10-K. Since December 31,2007, there have been no material changes in the Corporation’s criticalaccounting policies.

 

**Asbestos-Related Matters**

 

*Introduction*

 

The Corporation isand has been involved in a large number of asbestos-related suits filedprimarily in state courts during the past three decades. These suitsprincipally allege personal injury resulting from exposure toasbestos-containing products and frequently seek both actual and punitivedamages. The alleged claims primarily relate to products that UCC sold in thepast, alleged exposure to asbestos-containing products located on UCC’spremises, and UCC’s responsibility for asbestos suits filed against a formersubsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffsare unable to demonstrate that they have suffered any compensable loss as aresult of such exposure, or that injuries incurred in fact resulted fromexposure to the Corporation’s products.

 

Influenced by thebankruptcy filings of numerous defendants in asbestos-related litigation andthe prospects of various forms of state and national legislative reform, therate at which plaintiffs filed asbestos-related suits against variouscompanies, including the Corporation and Amchem, increased in 2001, 2002 andthe first half of 2003. Since then, the rate of filing has significantlyabated. The Corporation expects more asbestos-related suits to be filed againstit and Amchem in the future, and will aggressively defend or reasonablyresolve, as appropriate, both pending and future claims.

 

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The table below providesinformation regarding asbestos-related claims filed against the Corporation andAmchem:

 
| ** **                                         | ** ** | **2008** | ** ** | **2007** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Claims  unresolved at January 1               |       | 90,322   |       | 111,887  |       |
| Claims  filed                                      |       | 6,035    |       | 5,839    |       |
| Claims  settled, dismissed or otherwise resolved   |       | (7,663   | )          | (13,486  | )          |
| Claims  unresolved at June 30                 |       | 88,694   |       | 104,240  |       |
| Claimants  with claims against both UCC and Amchem |       | 28,154   |       | 35,025   |       |
| Individual  claimants at June 30              |       | 60,540   |       | 69,215   |       |

 

Plaintiffs’lawyers often sue dozens or even hundreds of defendants in individual lawsuitson behalf of hundreds or even thousands of claimants. As a result, the damagesalleged are not expressly identified as to UCC, Amchem or any other particulardefendant, even when specific damages are alleged with respect to a specificdisease or injury. In fact, there are no personal injury cases in which onlythe Corporation and/or Amchem are the sole named defendants. For thesereasons and based upon the Corporation’s litigation and settlement experience,the Corporation does not consider the damages alleged against it and Amchem tobe a meaningful factor in its determination of any potential asbestosliability.

 

*Estimatingthe Liability*

 

Based on a studycompleted by Analysis, Research & Planning Corporation (“ARPC”) in January 2003,the Corporation increased its December 31, 2002 asbestos-related liabilityfor pending and future claims for the 15-year period ending in 2017 to$2.2 billion, excluding future defense and processing costs. Since then,the Corporation has compared current asbestos claim and resolution activity tothe results of the most recent ARPC study at each balance sheet date todetermine whether the accrual continues to be appropriate. In addition, theCorporation has requested ARPC to review Union Carbide’s historical asbestosclaim and resolution activity each November since 2004 to determine theappropriateness of updating the most recent ARPC study.

 

In November 2006,the Corporation requested ARPC to review the Corporation’s historical asbestos claimand resolution activity and determine the appropriateness of updating its mostrecent study from January 2005. In response to that request, ARPC reviewedand analyzed data through October 31, 2006 and concluded that theexperience from 2004 through 2006 was sufficient for the purpose of forecastingfuture filings and values of asbestos claims filed against UCC and Amchem, andcould be used in place of previous assumptions to update its January 2005study. The resulting study, completed by ARPC in December 2006, statedthat the undiscounted cost of resolving pending and future asbestos-relatedclaims against UCC and Amchem, excluding future defense and processing costs,through 2021 was estimated to be between approximately $1.2 billion and$1.5 billion. As in its January 2003 and January 2005 studies,ARPC provided estimates for a longer period of time in its December 2006study, but also reaffirmed its prior advice that forecasts for shorter periodsof time are more accurate than those for longer periods of time.

 

Based onARPC’s December 2006 study and the Corporation’s own review of theasbestos claim and resolution activity, the Corporation decreased itsasbestos-related liability for pending and future claims to $1.2 billionat December 31, 2006 which covered the 15-year period ending in 2021(excluding future defense and processing costs). The reduction was$177 million and was shown as “Asbestos-related credit” in theconsolidated statements of income.

 

In November 2007,the Corporation requested ARPC to review the Corporation’s 2007 asbestos claimand resolution activity and determine the appropriateness of updating its December 2006study. In response to that request, ARPC reviewed and analyzed data through October 31,2007. In December 2007, ARPC stated that an update of its study would notprovide a more likely estimate of future events than the estimate reflected inits study of the previous year and, therefore, the estimate in that studyremained applicable. Based on the Corporation’s own review of the asbestosclaim and resolution activity and ARPC’s response, the Corporation determinedthat no change to the accrual was required. At December 31, 2007, theCorporation’s asbestos-related liability for pending and future claims was$1.1 billion. At December 31, 2007, approximately 31 percent of therecorded liability related to pending claims and approximately 69 percentrelated to future claims.

 

Basedon the Corporation’s review of 2008 activity, the Corporation determined thatno adjustment to the accrual was required at June 30, 2008. TheCorporation’s asbestos-related liability for pending and future claims was$1.0 billion at June 30, 2008. Approximately 31 percent of therecorded liability related to pending claims and approximately 69 percentrelated to future claims.

 

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*Defenseand Resolution Costs*

 

The following tableprovides information regarding defense and resolution costs related toasbestos-related claims filed against the Corporation and Amchem:

 

**Defense and Resolution Costs**
| ** **        | ** ** | **Six Months Ended** | ** ** | **Aggregate Costs** | ** ** |
|-------------------|------------|--------------------------------|------------|--------------------------|------------|
| In millions  | ** ** | **June 30,   2008**  | ** ** | **June 30,  2007**  | ** ** | **to Date as of  June 30, 2008** | ** ** |
| Defense  costs    |       | $                              | 23         |                     | $          | 42 |   | $ | 588 |   |
| Resolution  costs |       | $                              | 68         |                     | $          | 28 |   | $ | 1,338 |   |

 

Theaverage resolution payment per asbestos claimant and the rate of new claimfilings has fluctuated both up and down since the beginning of 2001. TheCorporation’s management expects such fluctuations to continue in the futurebased upon a number of factors, including the number and type of claims settledin a particular period, the jurisdictions in which such claims arose, and theextent to which any proposed legislative reform related to asbestos litigationis being considered.

 

The Corporation expensesdefense costs as incurred. The pretax impact for defense and resolution costs,net of insurance, was $2 million in the second quarter of 2008($25 million in the second quarter of 2007) and $16 million in thefirst six months of 2008 ($42 million in the first six months of 2007),and was reflected in “Cost of sales.”

 

*Insurance Receivables*

 

At December 31,2002, the Corporation increased the receivable for insurance recoveries relatedto its asbestos liability to $1.35 billion, substantially exhausting itsasbestos product liability coverage. The insurance receivable related to theasbestos liability was determined after a thorough review of applicableinsurance policies and the 1985 Wellington Agreement, to which the Corporationand many of its liability insurers are signatory parties, as well as otherinsurance settlements, with due consideration given to applicable deductibles,retentions and policy limits, and taking into account the solvency andhistorical payment experience of various insurance carriers. The WellingtonAgreement and other agreements with insurers are designed to facilitate anorderly resolution and collection of the Corporation’s insurance policies andto resolve issues that the insurance carriers may raise.

 

In September 2003,the Corporation filed a comprehensive insurance coverage case, now proceedingin the Supreme Court of the State of New York, County of New York, seeking toconfirm its rights to insurance for various asbestos claims and to facilitatean orderly and timely collection of insurance proceeds. This lawsuit was filedagainst insurers that are not signatories to the Wellington Agreement and/or donot otherwise have agreements in place with the Corporation regarding theirasbestos-related insurance coverage, in order to facilitate an orderlyresolution and collection of such insurance policies and to resolve issues thatthe insurance carriers may raise. Although the lawsuit is continuing, through the end of the second quarter of 2008,the Corporation had reached settlements with several of the carriers involvedin this litigation.

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was$465 million at June 30, 2008 and $467 million at December 31,2007. At June 30, 2008 and December 31, 2007, all of the receivablefor insurance recoveries was related to insurers that are not signatories tothe Wellington Agreement and/or do not otherwise have agreements in place regardingtheir asbestos-related insurance coverage.

 

In addition to thereceivable for insurance recoveries related to its asbestos liability, theCorporation had receivables for defense and resolution costs submitted toinsurance carriers for reimbursement as follows:

 

**Receivablesfor Costs Submitted to Insurance Carriers**
|                              | ** ** | **June 30,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------|------------|-------------------|------------|-------------------|------------|
| In millions                  | ** ** | **2008**          | ** ** | **2007**          | ** ** |
| Receivables  for defense costs    |       | $                 | 16         |              | $          | 18 |   |
| Receivables  for resolution costs |       | 222               |       | 253               |       |
| Total                             |       | $                 | 238        |              | $          | 271 |   |

 

After a review of its insurance policies, with due consideration given toapplicable deductibles, retentions and policy limits, after taking into accountthe solvency and historical payment experience of various insurance carriers;existing insurance settlements; and the advice of outside counsel with respectto the applicable insurance coverage law relating to the terms and conditionsof its insurance policies, the Corporation continues to believe that itsrecorded receivable for insurance recoveries from all insurance carriers isprobable of collection.

 

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* *

*Summary*

 

The amounts recorded forthe asbestos-related liability and related insurance receivable described abovewere based upon current, known facts. However, future events, such as thenumber of new claims to be filed and/or received each year, the average cost ofdisposing of each such claim, coverage issues among insurers, and the continuingsolvency of various insurance companies, as well as the numerous uncertaintiessurrounding asbestos litigation in the United States, could cause the actualcosts and insurance recoveries to be higher or lower than those projected orthose recorded.

 

Because of theuncertainties described above, management cannot estimate the full range of thecost of resolving pending and future asbestos-related claims facing theCorporation and Amchem. Management believes that it is reasonably possible thatthe cost of disposing of the Corporation’s asbestos-related claims, includingfuture defense costs, could have a material adverse impact on the results ofoperations and cash flows for a particular period and on the consolidatedfinancial position of the Corporation.

 

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**ITEM3.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISK.**

 

Omitted pursuant toGeneral Instruction H of Form 10-Q.

 

**ITEM4T.  CONTROLS AND PROCEDURES.**

 

**Evaluationof Disclosure Controls and Procedures**

 

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, the Corporationcarried out an evaluation, under the supervision and with the participation ofthe Corporation’s Disclosure Committee and the Corporation’s management,including the Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the design and operation of the Corporation’s disclosurecontrols and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15or 15d-15. Based upon that evaluation, the Chief Executive Officer and theChief Financial Officer concluded that the Corporation’s disclosure controlsand procedures were effective.

 

**Changes in Internal Control Over FinancialReporting**

 

There were no changes inthe Corporation’s internal control over financial reporting identified inconnection with the evaluation required by paragraph (d) of Exchange Act Rules 13a-15or 15d-15 that was conducted during the last fiscal quarter that havematerially affected, or are reasonably likely to materially affect, theCorporation’s internal control over financial reporting.

 

**PART II– OTHER INFORMATION**

 

**ITEM1.  LEGAL PROCEEDINGS.**

 

No material developmentsin asbestos-related matters occurred during the second quarter of 2008. For asummary of the history and current status of asbestos-related matters, seeManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, Asbestos-Related Matters; and Note G to the Consolidated FinancialStatements.

 

**ITEM1A.  RISK FACTORS.**

 

There were no materialchanges in the Corporation’s risk factors in the second quarter of 2008.

 

**ITEM6.  EXHIBITS.**

 

See the Exhibit Indexon page 22 of this Quarterly Report on Form 10-Q for exhibits filedwith this report.

 

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**UnionCarbide Corporation and Subsidiaries**

**Signatures**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
|                           |   | UNION CARBIDE  CORPORATION     |
|--------------------------------|--------|--------------------------------|
|                           |   | Registrant                     |
|                           |   |                           |
|                           |   |                           |
| Date:  July 29, 2008 |   |                           |
|                           |   |                           |
|                           |   |                           |
|                           | By:    | /s/  WILLIAM H. WEIDEMAN       |
|                           |   | William  H. Weideman           |
|                           |   | Vice  President and Controller |
|                           |   | The  Dow Chemical Company      |
|                           |   | Authorized  Representative of  |
|                           |   | Union  Carbide Corporation     |
|                           |   |                           |
|                           |   |                           |
|                           | By:    | /s/ EUDIO GIL                  |
|                           |   | Eudio Gil                      |
|                           |   | Vice President, Treasurer and  |
|                           |   | Chief Financial Officer        |

 

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**UnionCarbide Corporation and Subsidiaries**

**Exhibit Index**

 
| EXHIBIT NO. |   | DESCRIPTION                                                                                                                                                 |
|-------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------|
|        |   |                                                                                                                                                        |
| 3.1.4       |   | Restated Certificate of  Incorporation of Union Carbide Corporation under Section 807 of the  Business Corporation Law, as filed on May 13, 2008. |
|        |   |                                                                                                                                                        |
| 23          |   | Analysis,  Research & Planning Corporation’s Consent.                                                                                         |
|        |   |                                                                                                                                                        |
| 31.1        |   | Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              |
|        |   |                                                                                                                                                        |
| 31.2        |   | Certification Pursuant  to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                              |
|        |   |                                                                                                                                                        |
| 32.1        |   | Certification Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                              |
|        |   |                                                                                                                                                        |
| 32.2        |   | Certification Pursuant  to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                              |

 

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