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**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

 

**QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

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

 

Commission filenumber: **1-1463**

** **

**UNIONCARBIDE CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

**400 WestSam Houston Parkway South,  Houston,Texas  77042**

(Address ofprincipal executive offices)              (ZipCode)

 

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.     xYes   o No

 

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,a non-accelerated filer or a smaller reporting company. See definitions of“large accelerated filer,” “accelerated filer” and “smaller reporting company”in Rule 12b-2 of the Exchange Act.

 
| Large accelerated filer  o                   | Accelerated filer o         |   |
|----------------------------------------------|-----------------------------|--------|
| Non-accelerated filer x                      | Smaller reporting company o |   |
| (Do not check if  smaller reporting company) |                        |   |

 

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act).

oYes    x No

 

AtSeptember 30, 2008, 1,000 shares of common stock were outstanding, all ofwhich were held by the registrant’s parent, The Dow Chemical Company.

 

The registrant meets the conditions set forth inGeneral Instructions H(1)(a) and (b) for Form 10-Q and istherefore filing this form with a reduced disclosure format. 

 

 

 

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**Union Carbide Corporation**

** **

**TABLE OFCONTENTS**

 
| ** **                                                                                            | **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**                                                                 | 20         |
| ** **                                                                                            |       |
| 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** | ** ** | **Nine Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **Sept. 30,**               | ** ** | **Sept. 30,**              | ** ** | **Sept. 30,** | ** ** | **Sept. 30,** | ** ** |
| In millions (Unaudited)                   | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net trade sales                                     |       | $                                | 48         |                            | $          | 51 |   | $ | 144 |   | $ | 153 |   |
| Net sales to related companies                      |       | 1,929                            |       | 1,812                           |       | 5,823 |   | 5,335 |   |
| Total Net Sales                                     |       | 1,977                            |       | 1,863                           |       | 5,967 |   | 5,488 |   |
| Cost of sales                                       |       | 1,942                            |       | 1,703                           |       | 5,785 |   | 5,031 |   |
| Research and development expenses                   |       | 16                               |       | 15                              |       | 54 |   | 56 |   |
| Selling, general and administrative  expenses       |       | 3                                |       | 3                               |       | 9 |   | 14 |   |
| Equity in earnings of nonconsolidated  affiliates   |       | 55                               |       | 130                             |       | 172 |   | 369 |   |
| Sundry income (expense) - net                       |       | (18                              | )          | (6                              | )          | 38 |   | (33 | ) |
| Interest income                                     |       | 24                               |       | 49                              |       | 82 |   | 129 |   |
| Interest expense and amortization of debt  discount |       | 12                               |       | 12                              |       | 37 |   | 38 |   |
| Income before Income Taxes                          |       | $                                | 65         |                            | $          | 303 |   | $ | 374 |   | $ | 814 |   |
| Provision (credit) for income taxes                 |       | (16                              | )          | 167                             |       | 93 |   | 297 |   |
| Net Income Available for Common Stockholder         |       | $                                | 81         |                            | $          | 136 |   | $ | 281 |   | $ | 517 |   |
| Depreciation                                        |       | $                                | 66         |                            | $          | 64 |   | $ | 197 |   | $ | 202 |   |
| Capital Expenditures                                |       | $                                | 74         |                            | $          | 85 |   | $ | 173 |   | $ | 185 |   |

*See Notes to the Consolidated FinancialStatements.*

 

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**Union Carbide Corporation and Subsidiaries**

**ConsolidatedBalance Sheets**

** **
| ** **                                                                          | ** ** | **Sept. 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: $1; 2007: $2)             |       | 27                 |       | 26                |       |
| Related companies                                                                   |       | 373                |       | 487               |       |
| Other                                                                               |       | 121                |       | 129               |       |
| Notes receivable from related companies                                             |       | 3,604              |       | 3,227             |       |
| Inventories                                                                         |       | 221                |       | 178               |       |
| Deferred income taxes and other current  assets                                     |       | 34                 |       | 60                |       |
| Total current assets                                                                |       | 4,405              |       | 4,129             |       |
| Investments                                                                         |       |               |       |              |       |
| Investments in related companies                                                    |       | 972                |       | 972               |       |
| Investments in nonconsolidated affiliates                                           |       | 521                |       | 385               |       |
| Other investments                                                                   |       | 20                 |       | 22                |       |
| Noncurrent receivables                                                              |       | 46                 |       | 46                |       |
| Noncurrent receivables from related  companies                                      |       | 278                |       | 306               |       |
| Total investments                                                                   |       | 1,837              |       | 1,731             |       |
| Property                                                                            |       |               |       |              |       |
| Property                                                                            |       | 7,661              |       | 7,509             |       |
| Less accumulated depreciation                                                       |       | 5,725              |       | 5,547             |       |
| Net property                                                                        |       | 1,936              |       | 1,962             |       |
| Other Assets                                                                        |       |               |       |              |       |
| Goodwill                                                                            |       | 26                 |       | 26                |       |
| Other intangible assets (net of accumulated  amortization - 2008: $133; 2007: $128) |       | 18                 |       | 22                |       |
| Deferred income tax assets - noncurrent                                             |       | 73                 |       | 112               |       |
| Asbestos-related insurance receivables -  noncurrent                                |       | 662                |       | 696               |       |
| Pension assets                                                                      |       | 751                |       | 699               |       |
| Deferred charges and other assets                                                   |       | 75                 |       | 88                |       |
| Total other assets                                                                  |       | 1,605              |       | 1,643             |       |
| Total Assets                                                                        |       | $                  | 9,783      |              | $          | 9,465 |   |

*See Notes to the Consolidated Financial Statements.*

 

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**Union Carbide Corporation and Subsidiaries**

**Consolidated Balance Sheets**

** **
| ** **                                                                  | ** ** | **Sept. 30,** | ** ** | **Dec. 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|
| In millions (Unaudited)                                           | ** ** | **2008**           | ** ** | **2007**          | ** ** |
| **Liabilities and Stockholder’s Equity**                               | ** ** |
| Current Liabilities                                                         |       |               |       |              |       |
| Notes payable - related companies                                           |       | $                  | 13         |              | $          | 5 |   |
| Long-term debt due within one year                                          |       | 249                |       | —            |       |
| Accounts payable:                                                           |       |               |       |              |       |
| Trade                                                                       |       | 240                |       | 239               |       |
| Related companies                                                           |       | 381                |       | 391               |       |
| Other                                                                       |       | 45                 |       | 29                |       |
| Income taxes payable                                                        |       | 140                |       | 185               |       |
| Asbestos-related liabilities - current                                      |       | 120                |       | 141               |       |
| Accrued and other current liabilities                                       |       | 202                |       | 180               |       |
| Total current liabilities                                                   |       | 1,390              |       | 1,170             |       |
| Long-Term Debt                                                              |       | 571                |       | 820               |       |
| Other Noncurrent Liabilities                                                |       |               |       |              |       |
| Pension and other postretirement benefits -  noncurrent                     |       | 455                |       | 461               |       |
| Asbestos-related liabilities - noncurrent                                   |       | 904                |       | 1,001             |       |
| Other noncurrent obligations                                                |       | 329                |       | 356               |       |
| Total other noncurrent liabilities                                          |       | 1,688              |       | 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                                                           |       | 6,049              |       | 5,767             |       |
| Accumulated other comprehensive loss                                        |       | (229               | )          | (233              | )          |
| Net stockholder’s equity                                               |       | 6,132              |       | 5,655             |       |
| Total Liabilities and Stockholder’s Equity                             |       | $                  | 9,783      |              | $          | 9,465 |   |

*See Notes to the Consolidated FinancialStatements.*

 

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**Union Carbide Corporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows**

** **
| ** **                                                                         | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------------------------------------|------------|---------------------------------|------------|
| ** **                                                                         | ** ** | **Sept. 30,**              | ** ** | **Sept. 30,** | ** ** |
| In millions (Unaudited)                                                  | ** ** | **2008**                        | ** ** | **2007** | ** ** |
| Operating Activities                                                               | * *   | * *                        | * *   | * * | * * |
| Net Income Available for Common Stockholder                                        |       | $                               | 281        |   | $ | 517 |   |
| Adjustments to reconcile net income to net  cash provided by operating activities: |       |                            |       |   |   |
| Depreciation and amortization                                                      |       | 204                             |       | 232 |   |
| Provision for deferred income tax                                                  |       | 113                             |       | 54 |   |
| Earnings of nonconsolidated affiliates in  excess of dividends received            |       | (136                            | )          | (113 | ) |
| Net gain on sales of property                                                      |       | (7                              | )          | (11 | ) |
| Pension contribution                                                               |       | (2                              | )          | (2 | ) |
| Changes in assets and liabilities:                                                 |       |                            |       |   |   |
| Accounts and notes receivable                                                      |       | (6                              | )          | 8 |   |
| Related company receivables                                                        |       | (263                            | )          | (460 | ) |
| Inventories                                                                        |       | (44                             | )          | 20 |   |
| Accounts payable                                                                   |       | 27                              |       | (53 | ) |
| Related company payables                                                           |       | (1                              | )          | 5 |   |
| Other assets and liabilities                                                       |       | (24                             | )          | (7 | ) |
| Cash provided by operating activities                                              |       | 142                             |       | 190 |   |
| Investing Activities                                                               |       |                            |       |   |   |
| Capital expenditures                                                               |       | (173                            | )          | (185 | ) |
| Changes in noncurrent receivable from  related company                             |       | 29                              |       | (13 | ) |
| Proceeds from sales of property                                                    |       | 6                               |       | 17 |   |
| Purchases of investments                                                           |       | (12                             | )          | (7 | ) |
| Proceeds from sales of investments                                                 |       | 11                              |       | 6 |   |
| Cash used in investing activities                                                  |       | (139                            | )          | (182 | ) |
| Financing Activities                                                               |       |                            |       |   |   |
| Changes in short-term notes payable                                                |       | —                          |       | (1 | ) |
| Cash used in financing activities                                                  |       | —                          |       | (1 | ) |
| Summary                                                                            |       |                            |       |   |   |
| Increase in cash and cash equivalents                                              |       | 3                               |       | 7 |   |
| Cash and cash equivalents at beginning of  year                                    |       | 22                              |       | 71 |   |
| Cash and cash equivalents at end of period                                         |       | $                               | 25         |   | $ | 78 |   |

*See Notes to the Consolidated FinancialStatements.*

 

**Union Carbide Corporation and Subsidiaries**

**ConsolidatedStatements of Comprehensive Income**

** **
| ** **                                                     | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| ** **                                                     | ** ** | **Sept. 30,**               | ** ** | **Sept. 30,**              | ** ** | **Sept. 30,** | ** ** | **Sept. 30,** | ** ** |
| In millions (Unaudited)                              | ** ** | **2008**                         | ** ** | **2007**                        | ** ** | **2008** | ** ** | **2007** | ** ** |
| Net Income Available for Common Stockholder                    |       | $                                | 81         |                            | $          | 136 |   | $ | 281 |   | $ | 517 |   |
| Other Comprehensive Income (Loss), Net of  Tax                 |       |                             |       |                            |       |   |   |   |   |
| Translation adjustments                                        |       | (1                               | )          | 3                               |       | 1 |   | 1 |   |
| Adjustments to pension and other  postretirement benefit plans |       | 1                                |       | 5                               |       | 4 |   | 13 |   |
| Net loss on cash flow hedging derivative  instruments          |       | —                           |       | —                          |       | (1 | ) | — |   |
| Total other comprehensive income                               |       | —                           |       | 8                               |       | 4 |   | 14 |   |
| Comprehensive Income                                           |       | $                                | 81         |                            | $          | 144 |   | $ | 285 |   | $ | 531 |   |

*See Notes to the Consolidated FinancialStatements.*

 

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**UnionCarbide Corporation and Subsidiaries**

**Notes tothe Consolidated Financial Statements**

 

(Unaudited)

 

**NOTE A     CONSOLIDATED FINANCIALSTATEMENTS**

 

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     RECENTACCOUNTING 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 and expands disclosures about fair valuemeasurements. The Statement applies under other accounting pronouncements thatrequire or permit fair value measurements and was effective for fiscal yearsbeginning after November 15, 2007. In February 2008, the FASB issuedFASB Staff Position (“FSP”) FAS No. 157-2, which delayed the effectivedate of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities,except for items that are recognized or disclosed at fair value in thefinancial statement on a recurring basis, to fiscal years beginning after November 15,2008. On January 1, 2008, the Corporation adopted the portion of SFAS No. 157that was not delayed, and since the Corporation’s existing fair valuemeasurements are consistent with the guidance of the Statement, the partialadoption of the Statement did not have a material impact on the Corporation’sconsolidated financial statements. The Corporation uses a December 31measurement date for its pension and other postretirement plans; therefore, theCorporation is still evaluating the impact of adopting the Statement for itsplan assets. The adoption of the deferred portion of the Statement on January 1,2009 is not expected to have a material impact on the Corporation’sconsolidated financial statements. See Note F for expanded disclosures aboutfair value measurements.

 

In October 2008, theFASB issued FSP FAS No. 157-3, “Determining the Fair Value of a FinancialAsset When the Market for That Asset Is Not Active.” The FSP clarifies theapplication of SFAS No. 157, “Fair Value Measurements,” when the marketfor a financial asset is not active. The FSP was effective upon issuance,including reporting for prior periods for which financial statements have notbeen issued. The adoption of the FSP for reporting as of September 30,2008 did not have a material impact on the Corporation’s consolidated financialstatements. See Note F for further information on fair value measurements.

 

**SAB No. 74 Disclosures for AccountingStandards 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.

 

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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 whichis January 1, 2009 for the Corporation. The Corporation will provide therequired disclosures in its Quarterly Report on Form 10-Q for the quarterended March 31, 2009.

 

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 mustbe applied prospectively to intangible assets acquired after the effectivedate. The Corporation will apply the guidance of the FSP to intangible assetsacquired after January 1, 2009.

 

In September 2008, the FASB issued FSP FASNo.133-1 and FIN 45-4, “Disclosures About Credit Derivatives and CertainGuarantees: An Amendment of FASB Statement No. 133 and FASB InterpretationNo. 45; and Clarification of the Effective Date of FASB Statement No. 161.”The FSP amends and enhances the disclosure requirements for sellers of creditderivatives (including hybrid instruments that have embedded creditderivatives) and financial guarantees. This FSP is effective for reportingperiods ending after November 15, 2008, which is December 31, 2008for the Corporation. The Corporation currently does not hold any of thesederivatives, thus this FSP is not anticipated to have an impact on thedisclosures in the Corporation’s consolidated financial statements.

 

In September 2008, the FASB ratified theconsensus reached by the EITF with respect to EITF Issue No. 08-5, “Issuer’sAccounting for Liabilities Measured at Fair Value With a Third-Party CreditEnhancement.” The Issue which is effective in the first reporting periodbeginning on or after December 15, 2008, instructs issuers of a liabilitywith a third-party credit enhancement that is inseparable from the liability totreat the liability and the credit enhancement as two units of accounting, andprovide related disclosures. The Corporation does not carry any liabilitieswith inseparable third-party credit enhancements, thus the Issue is notanticipated to have an impact on the Corporation’s consolidated financialstatements.

 

**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 of 231 people;curtailment costs of $12 million associated with the Corporation’s definedbenefit plans; and a $26 million write-off of the net book value andassociated exit costs of the polypropylene manufacturing facility at St.Charles Operations in Hahnville, Louisiana, which was shut down at the end of2007. As of September 30, 2008,severance of $2 million had been paid to 40 employees, and a liability of $15 million remained for 191 employees.

 

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

 

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

 

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**NOTE D     INVENTORIES**

 

The following tableprovides a breakdown of inventories:

 

**Inventories**
| In millions   | ** ** | **Sept. 30,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|--------------------|------------|--------------------------|------------|-------------------------|------------|
| Finished goods     |       | $                        | 54         |                    | $          | 17 |   |
| Work in process    |       | 6                        |       | 40                      |       |
| Raw materials      |       | 83                       |       | 47                      |       |
| Supplies           |       | 78                       |       | 74                      |       |
| Total  inventories |       | $                        | 221        |                    | $          | 178 |   |

 

Thereserves reducing inventories from the first-in, first-out (“FIFO”) basis tothe last-in, first-out (“LIFO”) basis amounted to $223 million at September 30, 2008 and$183 million at December 31, 2007.

 

**NOTE E     OTHERINTANGIBLE ASSETS**

 

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

 

**Other Intangible Assets**
| ** **                            | ** ** | **At September 30, 2008** | ** ** | **At December 31, 2007** | ** ** |
|---------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                            | ** ** | **Gross  Carrying**                      | ** ** | **Accumulated**                         | ** ** | ** ** | ** ** | **Gross  Carrying** | ** ** | **Accumulated** | ** ** | ** ** | ** ** |
| In millions                      | ** ** | **Amount**                               | ** ** | **Amortization**                        | ** ** | **Net** | ** ** | **Amount** | ** ** | **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                                      |       | (99                                     | )          | 17 |   | 114 |   | (94 | ) | 20 |   |
| Total other  intangible assets        |       | $                                        | 151        |                                    | $          | (133 | ) | $ | 18 |   | $ | 150 |   | $ | (128 | ) | $ | 22 |   |

 

Amortizationexpense for software, which is included in “Cost of sales,” was $2 millionin the third quarter of 2008 and $1 million in the third quarter of 2007.Amortization expense for software was $5 million for the nine months endedSeptember 30, 2008 and $4 million for the nine months ended September 30,2007. Amortization expense for other intangible assets (not including software)was immaterial in the third quarters of 2008 and 2007, as well as year to datefor 2008 and 2007. Total estimated amortization expense for 2008 and the fivesucceeding fiscal years is as follows:

 

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

 

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**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**
| ** **             | ** ** | **At Sept. 30,** | ** ** | **Significant Other   Observable Inputs** | ** ** |
|------------------------|------------|------------------|------------|----------------------------------------------------------|------------|
| In millions            | ** ** | **2008**         | ** ** | **(Level 2)**                                       | ** ** |
| Assets at fair  value: |       |             |       |                                                     |       |
| Debt securities (1)    |       | $                | 16         |                                                     | $          | 16 |   |
|                        |            |                  |            |                                                          |            |  |  |

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

 

Assets that are measured using significant other observableinputs are primarily valued by reference to quoted prices of similar assets inactive markets, adjusted for any terms specific to that asset. For all otherassets for which observable inputs are used, fair value is derived through theuse of fair value models, such as a discounted cash flow model or otherstandard 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 September 30, 2008, theCorporation had accrued obligations of $71 million for environmentalremediation and restoration costs, including $18 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 with respectto these particular matters could range up to twice that amount. Inherentuncertainties exist in these estimates primarily due to unknown conditions,changing governmental regulations and legal standards regarding liability, andevolving technologies for handling site remediation and restoration. At December 31,2007, the Corporation had accrued obligations of $75 million forenvironmental remediation and restoration costs, including $23 million forthe remediation 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 a resultof such exposure, or that injuries incurred in fact resulted from exposure tothe Corporation’s products. Influenced by the bankruptcy filings of numerousdefendants in asbestos-related litigation and the prospects of various forms ofstate and national legislative reform, the rate at which plaintiffs filedasbestos-related suits against various companies, including the Corporation andAmchem, increased in 2001, 2002 and the first half of 2003. Since then, therate of filing has significantly abated. The Corporation expects moreasbestos-related suits to be filed against it and Amchem in the future, andwill aggressively defend or reasonably resolve, as appropriate, both pendingand 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 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 the 

 

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Corporation’s historical asbestos claim and resolution activity each November since2004 to determine the appropriateness of updating 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 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 ofthe recorded liability related to pending claims and approximately69 percent related to future claims.

 

Basedon the Corporation’s review of 2008 activity, the Corporation determined thatno adjustment to the accrual was required at September 30, 2008. TheCorporation’s asbestos-related liability for pending and future claims was$1.0 billion at September 30, 2008. Approximately 27 percent ofthe recorded liability related to pending claims and approximately73 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 theasbestos liability 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 third quarter of 2008, theCorporation has reached settlements with several of the carriers involved inthis litigation.

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was$415 million at September 30, 2008 and $467 million at December 31,2007. At September 30, 2008 and December 31, 2007, all of thereceivable for insurance recoveries was related to insurers that are notsignatories to the Wellington Agreement and/or do not otherwise have agreementsin place regarding 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                  | ** ** | **Sept. 30,  2008** | ** ** | **Dec. 31,  2007** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-------------------------|------------|
| Receivables for  defense costs    |       | $                        | 35         |                    | $          | 18 |   |
| Receivables for  resolution costs |       | 245                      |       | 253                     |       |
| Total                             |       | $                        | 280        |                    | $          | 271 |   |

 

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The Corporation expensesdefense costs as incurred. The pretax impact for defense and resolution costs,net of insurance, was $14 million in the third quarter of 2008($16 million in the third quarter of 2007) and $30 million in thefirst nine months of 2008 ($58 million in the first nine 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.

 

**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 is presentedin the following table:

** **

**Fixed andDeterminable 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 has undertakenobligations to guarantee the performance of certain nonconsolidated affiliates.Non-performance under a contract for commercial and/or financial obligations bythe guaranteed party would trigger the obligation of the Corporation to makepayments to the beneficiary of the guarantees. Financial obligations includedebt 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  September 30, 2008 |       | 2014                  |       | $                                 | 69         |                    | $          | 1 |   |
| Guarantees at  December 31, 2007  |       | 2014                  |       | $                                 | 77         |                    | $          | 1 |   |

 

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**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 September 30, 2008 and December 31, 2007. Thediscount rate used to calculate the Corporation’s asset retirement obligationswas 5.08 percent, unchanged from December 31, 2007. These obligationsare included 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.

 

**NOTE H     PENSIONAND OTHER POSTRETIREMENT BENEFITS**

 

**NetPeriodic Benefit Cost (Credit) for All Significant Plans**
| ** **                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|---------------------------------------|------------|----------------------------------|------------|---------------------------------|------------|
| In millions                      | ** ** | **Sept. 30,  2008**         | ** ** | **Sept. 30,  2007**        | ** ** | **Sept. 30,  2008** | ** ** | **Sept. 30,  2007** | ** ** |
| *Defined  Benefit Pension Plans:*     |       |                             |       |                            |       |   |   |   |   |
| Service cost                          |       | $                                | 5          |                            | $          | 6 |   | $ | 15 |   | $ | 16 |   |
| Interest cost                         |       | 56                               |       | 53                              |       | 168 |   | 159 |   |
| Expected return  on plan assets       |       | (78                              | )          | (79                             | )          | (234 | ) | (237 | ) |
| Amortization of  prior service cost   |       | 2                                |       | —                          |       | 6 |   | 1 |   |
| Amortization of  net loss             |       | 1                                |       | 7                               |       | 2 |   | 21 |   |
| Net periodic  benefit credit          |       | $                                | (14        | )                               | $          | (13 | ) | $ | (43 | ) | $ | (40 | ) |
|                                  |       |                             |       |                            |       |   |   |   |   |
| *Other  Postretirement Benefits:*     |       |                             |       |                            |       |   |   |   |   |
| Service cost                          |       | $                                | 1          |                            | $          | 1 |   | $ | 3 |   | $ | 3 |   |
| Interest cost                         |       | 7                                |       | 7                               |       | 21 |   | 21 |   |
| Amortization of  prior service credit |       | (1                               | )          | —                          |       | (2 | ) | (2 | ) |
| Amortization of  net loss             |       | —                           |       | —                          |       | — |   | 1 |   |
| Net periodic  benefit cost            |       | $                                | 7          |                            | $          | 8 |   | $ | 22 |   | $ | 23 |   |

 

**NOTE I     RELATEDPARTY 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 $1.1 billionin the third quarter of 2008 ($803 million in the third quarter of 2007)and $3.2 billion in the first nine months of 2008 ($2.3 billion inthe first nine months 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.

 

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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 September 30, 2008,the Corporation had a note receivable of $3.6 billion ($3.2 billionat December 31, 2007) from Dow under a revolving loan agreement. TheCorporation may draw from this note receivable in support of its daily workingcapital requirements and, as such, the net effect of cash inflows and outflowsunder this revolving loan agreement is presented in the consolidated statementsof cash flows as an operating 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; thecredit agreement expires December 30, 2009, pursuant to an amendmenteffective as of September 30, 2008. Dow may demand repayment with a 30-daywritten notice to the Corporation, subject to certain restrictions. A relatedcollateral agreement provides for the replacement of certain existing pledgedassets, primarily equity interests in various subsidiaries and joint ventures,with cash collateral. At September 30, 2008, $821 million($813 million at December 31, 2007) was available under the revolvingcredit agreement. The cash collateral is reported as “Noncurrent receivablesfrom related companies” in the consolidated balance sheets.

 

The Corporation has aninsurance receivable for losses incurred related to Hurricane Katrina in 2005and Hurricanes Gustav and Ike in the third quarter of 2008 totaling$92 million at September 30, 2008 from its insurer (an affiliateof 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 September 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 $82 million in thefirst nine months of 2008, including $75 million from DIHC. Thesedividends were included in “Sundry income (expense) – net.”

 

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**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 nine-month periodsended September 30, 2008, the most recent period, compared with the three-and nine-month periods ended September 30, 2007, the corresponding periodsin the preceding 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.

 

##### **DISCLOSURE REGARDINGFORWARD-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 thethird quarter of 2008 were $1,977 million compared with$1,863 million for the third quarter of 2007, an increase of 6 percent.Total net sales were $5,967 million for the first nine months of 2008compared with $5,488 million for the first nine months of 2007, anincrease of 9 percent. Selling prices to Dow are based on market prices for therelated products. Average selling prices for most products were higher in thethird quarter of 2008 and on a year-to-date basis compared with the sameperiods of last year, driven by escalating feedstock and energy costs. Priceincreases were led by solvents and intermediates, polyglycols, surfactants,polyethylene and polypropylene. Overall volume was down in the third quarter of2008 and on a year-to-date basis compared with the same periods last year.Volume was impacted by disruptions in production and distribution caused byHurricanes Gustav and Ike, which hit the U.S. Gulf Coast in the third quarterof 2008.

 

Cost of sales increased14 percent to $1,942 million in the third quarter of 2008 from$1,703 million in the third quarter of 2007 due to higher feedstock andenergy costs. On a year-to-date basis, cost of sales increased 15 percentfrom $5,031 million to $5,785 million, again reflecting higherfeedstock and energy costs.

 

Equity in earnings ofnonconsolidated affiliates decreased $75 million in the third 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 tothe Consolidated Financial Statements). This decline was partially offset byhigher reported earnings from the OPTIMAL Group of Companies. Year-to-dateequity in earnings of nonconsolidated affiliates was $172 million comparedwith $369 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 third quarter of 2008 was expense of $18 millioncompared with expense of $6 million for the third quarter of last year.Year to date, sundry income (expense) - net was income of$38 million compared with expense of $33 million for the first ninemonths of last year. Sundry income (expense) - net for the first ninemonths of 2008 was favorably impacted by a dividend of $75 million fromDIHC in the first quarter of 2008 (see Note I to the Consolidated FinancialStatements).

 

Interest income was$24 million in the third quarter of 2008 compared with $49 million inthe third quarter of 2007. Year to date, interest income was $82 million,down from $129 million in the first nine months of 2007. Despite anincrease

 

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in the Corporation’s note receivable from Dow, interest income waslower for the third quarter of 2008 and on a year-to-date basis compared withthe same period last year due to lower interest rates. See Note I for furtherdiscussion.

 

Interest expense andamortization of debt discount in the third quarter of 2008 was flat comparedwith the third quarter of 2007. Year to date, interest expense and amortizationof debt discount was $37 million, a decline of $1 million from thefirst nine months of 2007.The effective tax rate fluctuates based on, amongother factors, where income is earned, the level of after-tax income from jointventures, and the level of income relative to tax credits available.

 

The effective tax ratefor the third quarter of 2008 was a credit of 24.6 percent compared with aprovision of 55.1 percent for the same quarter last year. During the thirdquarter of 2008, state income tax matters were favorably resolved and changesin the audit reserve impacted the effective tax rate for the quarter. Year todate, the effective tax rate was 24.9 percent versus 36.5 percentlast year.

 

The Corporation reportednet income of $81 million for the third quarter of 2008 compared with$136 million for the third quarter of 2007, and net income for the firstnine months of 2008 of $281 million compared with $517 million forthe first nine months of last year. While results for the first nine months of2008 were favorably impacted by higher dividends from investments, thisimprovement was more than offset by lower equity earnings and lower margins dueto increased feedstock and energy costs, as well as Hurricanes Gustav and Ikewhich hit the U.S. Gulf Coast in the third quarter resulting in temporaryoutages for several of the Corporation’s Gulf Coast production facilities and$33 million of additional manufacturing expenses including the repair ofproperty damage, clean-up costs, unabsorbed fixed costs and inventorywrite-offs.

 

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 proposed joint venture, K-Dow Petrochemicals (“K-Dow”) willmanufacture and market polyethylene, ethyleneamines, ethanolamines,polypropylene, and polycarbonate. K-Dow will be headquartered in southeastMichigan in the United States. The joint venture is expected to have revenuesof more than $11 billion and employ more than 5,000 people worldwide. Itis anticipated that a significant part (but not substantially all) of UCC’sU.S.-based manufacturing assets will be included in the new joint venture.While the transaction is subject to the completion of definitive agreements,customary conditions and regulatory approvals, it is anticipated that the jointventure between Dow and PIC will close in late 2008. Management is currentlyevaluating the accounting treatment and the impact on the Corporation’sfinancial statements.

 

**OTHERMATTERS**

 

**RecentAccounting Pronouncements**

 

See Note B to theConsolidated 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.

 

**Critical Accounting 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 is andhas been involved in a large number of asbestos-related suits filed primarilyin state courts during the past three decades. These suits principally allegepersonal injury resulting from exposure to asbestos-containing products andfrequently seek both actual and punitive damages. The alleged claims primarilyrelate to products that UCC sold in the past, alleged exposure toasbestos-containing products located on UCC’s premises, and UCC’sresponsibility for asbestos suits filed against a former subsidiary, AmchemProducts, Inc. (“Amchem”). In many cases, plaintiffs are unable todemonstrate 

 

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that they have sufferedany compensable loss as a result of such exposure, or that injuries incurred infact resulted from exposure 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.

 

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                                       |       | 8,357    |       | 7,696    |       |
| Claims settled,  dismissed or otherwise resolved   |       | (15,856  | )          | (15,681  | )          |
| Claims  unresolved at September 30            |       | 82,823   |       | 103,902  |       |
| Claimants with  claims against both UCC and Amchem |       | 26,184   |       | 35,114   |       |
| Individual  claimants at September 30         |       | 56,639   |       | 68,788   |       |

 

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 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.

 

Based on ARPC’s December 2006study and the Corporation’s own review of the asbestos claim and resolutionactivity, the Corporation decreased its asbestos-related liability for pendingand future claims to $1.2 billion at December 31, 2006 which coveredthe 15-year period ending in 2021 (excluding future defense and processingcosts). 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, 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.

 

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Based on the Corporation’sreview of 2008 activity, the Corporation determined that no adjustment to theaccrual was required at September 30, 2008. The Corporation’sasbestos-related liability for pending and future claims was $1.0 billionat September 30, 2008. Approximately 27 percent of the recordedliability related to pending claims and approximately 73 percent relatedto future claims.

 

*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**
| ** **       | ** ** | **Nine Months Ended** | ** ** | **Aggregate Costs**       | ** ** |
|------------------|------------|---------------------------------|------------|--------------------------------|------------|
| In millions | ** ** | **Sept. 30,   2008**  | ** ** | **Sept. 30,   2007** | ** ** | **to Date as of   Sept. 30, 2008** | ** ** |
| Defense costs    |       | $                               | 37         |                           | $          | 58 |   | $ | 602 |   |
| Resolution costs |       | $                               | 90         |                           | $          | 48 |   | $ | 1,360 |   |

 

The average resolutionpayment per asbestos claimant and the rate of new claim filings has fluctuatedboth up and down since the beginning of 2001. The Corporation’s managementexpects such fluctuations to continue in the future based upon a number offactors, including the number and type of claims settled in a particularperiod, the jurisdictions in which such claims arose, and the extent to whichany proposed legislative reform related to asbestos litigation is beingconsidered.

 

The Corporation expensesdefense costs as incurred. The pretax impact for defense and resolution costs,net of insurance, was $14 million in the third quarter of 2008($16 million in the third quarter of 2007) and $30 million in thefirst nine months of 2008 ($58 million in the first nine 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 third quarter of 2008, theCorporation had reached settlements with several of the carriers involved inthis litigation.

 

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was$415 million at September 30, 2008 and $467 million at December 31,2007. At September 30, 2008 and December 31, 2007, all of thereceivable for insurance recoveries was related to insurers that are notsignatories to the Wellington Agreement and/or do not otherwise have agreementsin place regarding 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                  | ** ** | **Sept. 30,   2008** | ** ** | **Dec. 31,   2007** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|-------------------------------|------------|
| Receivables for  defense costs    |       | $                              | 35         |                          | $          | 18 |   |
| Receivables for  resolution costs |       | 245                            |       | 253                           |       |
| Total                             |       | $                              | 280        |                          | $          | 271 |   |

 

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 

 

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insurancesettlements; and the advice of outside counsel with respect to the applicableinsurance coverage law relating to the terms and conditions of its insurancepolicies, the Corporation continues to believe that its recorded receivable forinsurance recoveries from all insurance carriers is probable of collection.

 

*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.

 

**Changesin Internal Control Over Financial Reporting**

 

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 third 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.**

 

The following new riskfactor should be considered in addition to those discussed in the Corporation’sAnnual Report of Form 10-K for the year ended December 31, 2007.

 

**Thevalue of investments are influenced by economic and market conditions.**

 

The current economicenvironment could negatively impact the fair value of pension assets, whichcould increase future funding requirements of the pension trusts.

 

**ITEM 6.  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:  October 28, 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 |
|------------------|------------|-------------|
|             |       |        |   |
|             | 10.5.6     |        | Sixth Amendment to the  Amended and Restated Revolving Credit Agreement, effective as of  September 30, 2008, among the Corporation, The Dow Chemical Company  and certain Subsidiary Guarantors. |
|             |       |        |   |
|             | 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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