**UNITED STATES**

**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

** **

**QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE**

**SECURITIES EXCHANGE ACT OF 1934**

 

**For thequarterly period ended****  JUNE 30, 2007**

 

**Commission file number:****1-1463**

** **

**UNION CARBIDE CORPORATION**

(Exact name of registrantas specified in its charter)

 

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

 

| **400 West Sam Houston Parkway South, Houston, Texas** |   | **77042**  |
|--------------------------------------------------------|--------|------------|
| (Address of  principal executive offices)              |   | (Zip Code) |
|                                                   |   |       |

 

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

 

Indicate by check markwhether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.                               x Yes    o No

 

Indicate by check markwhether the registrant is a large accelerated filer, an accelerated filer, or anon-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 
| Large accelerated filer o | Accelerated  filer o | Non-accelerated filer x |
|---------------------------|----------------------|-------------------------|

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theAct).    o Yes   x No

 

At June 30, 2007,1,000 shares of common stock were outstanding, all of which were held by theregistrant’s parent, The Dow Chemical Company.

 

Theregistrant meets the conditions set forth in General Instructions H(1)(a) and(b) for Form 10-Q and is therefore filing this form with a reduced disclosureformat. 

 

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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. |       | 14         |       |
|                                                                                                  |       |       |       |
| Disclosure  Regarding Forward-Looking Information                                                     |       | 14         |       |
|                                                                                                  |       |       |       |
| Results of Operations                                                                                 |       | 14         |       |
|                                                                                                  |       |       |       |
| Other Matters                                                                                         |       | 15         |       |
|                                                                                                  |       |       |       |
| Item 3.  Quantitative and Qualitative Disclosures About Market Risk.                                  |       | 18         |       |
|                                                                                                  |       |       |       |
| Item 4. Controls  and Procedures.                                                                     |       | 18         |       |
|                                                                                                  |       |       |       |
| **PART II - OTHER INFORMATION**                                                                       | ** ** | ** ** | ** ** |
| ** **                                                                                            | ** ** | ** ** | ** ** |
| Item 1. Legal  Proceedings.                                                                           |       | 18         |       |
|                                                                                                  |       |       |       |
| Item 1A. Risk Factors.                                                                                |       | 18         |       |
|                                                                                                  |       |       |       |
| Item 6. Exhibits.                                                                                     |       | 18         |       |
|                                                                                                  |       |       |       |
| **SIGNATURES**                                                                                        |       | 19         |       |
| ** **                                                                                            |       |       |       |
| **EXHIBIT INDEX**                                                                                     |       | 20         |       |

 

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**PARTI - FINANCIAL INFORMATION**

 

**ITEM1. FINANCIAL STATEMENTS.**

 

**Union Carbide Corporation and Subsidiaries**

**ConsolidatedStatements of Income**
| ** **                                          | ** **   | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------|--------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                          | ** **   | **June 30,**                | ** ** | **June 30,**              | ** ** | **June 30,** | ** ** | **June 30,** | ** ** |
| **In millions   (Unaudited)**        | *** *** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | *** *** |
| Net trade sales                                     |         | $                                | 49         |                           | $          | 56 |   | $ | 102 |   | $ | 374 |   |
| Net sales to  related companies                     |         | 1,850                            |       | 1,720                          |       | 3,523 |   | 3,455 |   |
| Total Net Sales                                     |         | 1,899                            |       | 1,776                          |       | 3,625 |   | 3,829 |   |
| Cost of sales                                       |         | 1,730                            |       | 1,603                          |       | 3,328 |   | 3,239 |   |
| Research and  development expenses                  |         | 21                               |       | 19                             |       | 41 |   | 40 |   |
| Selling, general  and administrative expenses       |         | 4                                |       | 1                              |       | 11 |   | 12 |   |
| Equity in  earnings of nonconsolidated affiliates   |         | 115                              |       | 83                             |       | 239 |   | 144 |   |
| Sundry expense -  net                               |         | (17                              | )          | (23                            | )          | (27 | ) | (44 | ) |
| Interest income                                     |         | 43                               |       | 35                             |       | 80 |   | 58 |   |
| Interest expense  and amortization of debt discount |         | 11                               |       | 13                             |       | 26 |   | 26 |   |
| Income before Income  Taxes                         |         | 274                              |       | 235                            |       | 511 |   | 670 |   |
| Provision for  income taxes                         |         | 79                               |       | 80                             |       | 130 |   | 232 |   |
| Net Income Available  for Common Stockholder        |         | $                                | 195        |                           | $          | 155 |   | $ | 381 |   | $ | 438 |   |
| Depreciation                                        |         | $                                | 70         |                           | $          | 71 |   | $ | 138 |   | $ | 139 |   |
| Capital Expenditures                                |         | $                                | 54         |                           | $          | 54 |   | $ | 100 |   | $ | 95 |   |

*See Notes to the ConsolidatedFinancial Statements.*

 

3

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**UnionCarbide Corporation and SubsidiariesConsolidated Balance Sheets**
| ** **                                                                          | ** ** | **June 30,** | ** ** | **Dec. 31,** | ** ** |
|-------------------------------------------------------------------------------------|------------|-------------------|------------|-------------------|------------|
| **In millions  (Unaudited)**                                         | ** ** | **2007**          | ** ** | **2006**          | ** ** |
| **Assets**                                                                          |       |
| Current Assets                                                                      |       |              |       |              |       |
| Cash and cash  equivalents                                                          |       | $                 | 79         |              | $          | 71 |   |
| Accounts  receivable:                                                               |       |              |       |              |       |
| Trade (net of  allowance for doubtful receivables - 2007: $2; 2006: $2)             |       | 23                |       | 33                |       |
| Related  companies                                                                  |       | 443               |       | 449               |       |
| Other                                                                               |       | 150               |       | 145               |       |
| Notes receivable  from related companies                                            |       | 3,004             |       | 2,547             |       |
| Inventories                                                                         |       | 204               |       | 199               |       |
| Deferred income  tax assets - current                                               |       | 84                |       | 41                |       |
| Total current  assets                                                               |       | 3,987             |       | 3,485             |       |
| Investments                                                                         |       |              |       |              |       |
| Investments in  related companies                                                   |       | 297               |       | 297               |       |
| Investments in  nonconsolidated affiliates                                          |       | 897               |       | 896               |       |
| Other  investments                                                                  |       | 19                |       | 23                |       |
| Noncurrent  receivables                                                             |       | 56                |       | 58                |       |
| Noncurrent  receivable from related company                                         |       | 201               |       | 187               |       |
| Total investments                                                                   |       | 1,470             |       | 1,461             |       |
| Property                                                                            |       |              |       |              |       |
| Property                                                                            |       | 7,379             |       | 7,459             |       |
| Less accumulated  depreciation                                                      |       | 5,448             |       | 5,489             |       |
| Net property                                                                        |       | 1,931             |       | 1,970             |       |
| Other Assets                                                                        |       |              |       |              |       |
| Goodwill                                                                            |       | 26                |       | 26                |       |
| Other intangible  assets (net of accumulated amortization - 2007: $124; 2006: $122) |       | 23                |       | 25                |       |
| Deferred income  tax assets - noncurrent                                            |       | 156               |       | 115               |       |
| Asbestos-related  insurance receivables - noncurrent                                |       | 693               |       | 725               |       |
| Deferred charges  and other assets                                                  |       | 408               |       | 383               |       |
| Total other  assets                                                                 |       | 1,306             |       | 1,274             |       |
| Total Assets                                                                        |       | $                 | 8,694      |              | $          | 8,190 |   |

*See Notes to the Consolidated Financial Statements.*

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**Union CarbideCorporation and SubsidiariesConsolidated Balance Sheets**
| ** **                                                                      | ** **   | **June 30,** | ** ** | **Dec. 31,** | ** **   |
|---------------------------------------------------------------------------------|--------------|-------------------|------------|-------------------|--------------|
| **In millions  (Unaudited)**                                     | *** *** | **2007**          | ** ** | **2006**          | *** *** |
| **Liabilities and Stockholder’s Equity**                                   |         |
| Current Liabilities                                                             |         |              |       |              |         |
| Notes payable:                                                                  |         |              |       |              |         |
| Related  companies                                                              |         | $                 | 4          |              | $            | 8 |   |
| Other                                                                           |         | —            |       | 1                 |         |
| Accounts  payable:                                                              |         |              |       |              |         |
| Trade                                                                           |         | 250               |       | 292               |         |
| Related  companies                                                              |         | 284               |       | 252               |         |
| Other                                                                           |         | 33                |       | 40                |         |
| Income taxes  payable                                                           |         | 192               |       | 49                |         |
| Asbestos-related  liabilities - current                                         |         | 115               |       | 129               |         |
| Pension and  other postretirement benefits - current                            |         | 56                |       | 56                |         |
| Accrued and  other current liabilities                                          |         | 136               |       | 116               |         |
| Total current  liabilities                                                      |         | 1,070             |       | 943               |         |
| Long-Term Debt                                                                  |         | 820               |       | 820               |         |
| Other Noncurrent  Liabilities                                                   |         |              |       |              |         |
| Pension and  other postretirement benefits - noncurrent                         |         | 505               |       | 518               |         |
| Asbestos-related  liabilities - noncurrent                                      |         | 1,071             |       | 1,079             |         |
| Other noncurrent  obligations                                                   |         | 486               |       | 407               |         |
| Total other  noncurrent liabilities                                             |         | 2,062             |       | 2,004             |         |
| Minority Interest in  Subsidiaries                                              |         | 2                 |       | 3                 |         |
| Stockholder’s Equity                                                       |         |              |       |              |         |
| Common stock  (1,000 shares authorized and issued)                              |         | —            |       | —            |         |
| Additional  paid-in capital                                                     |         | 121               |       | 121               |         |
| Retained  earnings (includes cumulative effect of adopting FIN No. 48 of $(67)) |         | 5,096             |       | 4,782             |         |
| Accumulated  other comprehensive loss                                           |         | (477              | )          | (483              | )            |
| Net  stockholder’s equity                                                  |         | 4,740             |       | 4,420             |         |
| Total Liabilities and Stockholder’s Equity                                 |         | $                 | 8,694      |              | $            | 8,190 |   |

*See Notes to the ConsolidatedFinancial Statements.*

5

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**UnionCarbide Corporation and SubsidiariesConsolidated Statements of Cash Flows**
| ** **                                                                          | ** **   | **Six Months Ended**   | ** ** |                           |
|-------------------------------------------------------------------------------------|--------------|----------------------------------|------------|--------------------------------|
| ** **                                                                          | ** **   | **June 30,**                | ** ** | **June 30,**              | ** ** |   |
| **In millions  (Unaudited)**                                         | ** **   | **2007**                         | ** ** | **2006**                       | ** ** |   |
| Operating Activities                                                                | * *     | * *                         | * *   | * *                       | * * |   |
| Net Income  Available for Common Stockholder                                        |         | $                                | 381        |                           | $ | 438 |   |   |
| Adjustments to  reconcile net income to net cash provided by operating activities:  |         |                             |       |                           |   |   |
| Depreciation and  amortization                                                      |         | 164                              |       | 153                            |   |   |
| Credit for  deferred income tax                                                     |         | (21                              | )          | (26                            | ) |   |
| Earnings of  nonconsolidated affiliates less than (in excess of) dividends received |         | (4                               | )          | 131                            |   |   |
| Net gain on  sales of property                                                      |         | (1                               | )          | —                         |   |   |
| Changes in  assets and liabilities:                                                 |         |                             |       |                           |   |   |
| Accounts and  notes receivable                                                      |         | 13                               |       | 12                             |   |   |
| Related company  receivables                                                        |         | (452                             | )          | (402                           | ) |   |
| Inventories                                                                         |         | (5                               | )          | (27                            | ) |   |
| Accounts payable                                                                    |         | (25                              | )          | (50                            | ) |   |
| Related company  payables                                                           |         | 28                               |       | (137                           | ) |   |
| Other assets and  liabilities                                                       |         | 43                               |       | —                         |   |   |
| Cash provided by  operating activities                                              |         | 121                              |       | 92                             |   |   |
| Investing Activities                                                                |         |                             |       |                           |   |   |
| Capital  expenditures                                                               |         | (100                             | )          | (95                            | ) |   |
| Distributions  from nonconsolidated affiliates                                      |         | —                           |       | 4                              |   |   |
| Changes in  noncurrent receivable from related company                              |         | (14                              | )          | (2                             | ) |   |
| Proceeds from  sales of property                                                    |         | 3                                |       | —                         |   |   |
| Purchases of  investments                                                           |         | (3                               | )          | (2                             | ) |   |
| Proceeds from  sales of investments                                                 |         | 2                                |       | 2                              |   |   |
| Cash used in  investing activities                                                  |         | (112                             | )          | (93                            | ) |   |
| Financing Activities                                                                |         |                             |       |                           |   |   |
| Changes in  short-term notes payable                                                |         | (1                               | )          | (1                             | ) |   |
| Payments on  long-term debt                                                         |         | —                           |       | (2                             | ) |   |
| Cash used in  financing activities                                                  |         | (1                               | )          | (3                             | ) |   |
| Summary                                                                             |         |                             |       |                           |   |   |
| Increase  (Decrease) in cash and cash equivalents                                   |         | 8                                |       | (4                             | ) |   |
| Cash and cash  equivalents at beginning of year                                     |         | 71                               |       | 73                             |   |   |
| Cash and cash equivalents  at end of period                                         |         | $                                | 79         |                           | $ | 69 |   |   |
| *See Notes to the Consolidated Financial  Statements.*                              |         |                             |       |                           |   |   |
|                                                                                |         |                             |       |                           |   |   |
|                                                                                |         |
| **Union  Carbide Corporation and Subsidiaries**                                     |         |
| **Consolidated Statements of Comprehensive Income**                                 |         |
| ** **                                                                          | ** **   | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
| **In millions  (Unaudited)**                                         | *** *** | **June 30,  2007**          | ** ** | **June 30,  2006**        | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | *** *** |
| Net Income Available  for Common Stockholder                                        |         | $                                | 195        |                           | $ | 155 |   | $ | 381 |   | $ | 438 |   |
| Other Comprehensive  Income (Loss), Net of Tax                                      |         |                             |       |                           |   |   |   |   |   |
| Unrealized gains  on investments                                                    |         | —                           |       | 1                              |   | — |   | — |   |
| Translation adjustments                                                             |         | (2                               | )          | 1                              |   | (2 | ) | 1 |   |
| Adjustments to  pension and other postretirement benefit plans                      |         | 4                                |       | —                         |   | 8 |   | — |   |
| Net gain on cash  flow hedging derivative instruments                               |         | —                           |       | —                         |   | — |   | 1 |   |
| Total other  comprehensive income                                                   |         | 2                                |       | 2                              |   | 6 |   | 2 |   |
| Comprehensive Income                                                                |         | $                                | 197        |                           | $ | 157 |   | $ | 387 |   | $ | 440 |   |
|                                                                                     |              |                                  |            |                                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

*See Notes to the ConsolidatedFinancial Statements.*

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**UnionCarbide Corporation and SubsidiariesNotes to the Consolidated Financial Statements**

(Unaudited)

**NOTE A    CONSOLIDATED FINANCIAL STATEMENTS**

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

The Corporation is awholly owned subsidiary of The Dow Chemical Company (“Dow”). In accordance withStatement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings PerShare,” 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 and RelatedInformation,” and no detailed business information is provided to a chiefoperating decision maker regarding the Corporation’s stand-alone operations,the Corporation’s results are reported as a single operating segment.

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 G forfurther discussion.

Certain reclassificationsof prior year’s amounts have been made to conform to the presentation adoptedfor 2007. These statements should be read in conjunction with the auditedconsolidated financial statements and notes thereto included in the Corporation’sAnnual Report on Form 10-K for the year ended December 31, 2006.

**NOTE B     RECENT ACCOUNTING PRONOUNCEMENTS**

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation (“FIN”)No. 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty inincome taxes recognized in an enterprise’s financial statements in accordancewith SFAS No. 109. Thisinterpretation prescribes a recognition threshold and measurement attribute for the financial statementrecognition and measurement of a tax position taken or expected to be taken ina tax return. This interpretation also provides guidance on derecognition,classification, interest and penalties, accounting in interim periods,disclosure, and transition. FIN No. 48 was effective for fiscal yearsbeginning after December 15, 2006.

On January 1,2007, the Corporation adopted the provisions of FIN No. 48. The cumulativeeffect of adoption was a $67 million reduction of retained earnings. AtJanuary 1, 2007, the total amount of unrecognized tax benefits was$251 million, of which $217 million would impact the effective tax rate,if recognized. Interest and penalties associated with uncertain tax positionsare recognized as components of the “Provision for income taxes.” TheCorporation’s accrual for interest and penalties was $36 million upon adoptionof FIN No. 48.

The Corporation is included in Dow’s consolidated federal income taxgroup and consolidated tax return. For Dow, the tax years 1998-2003 arecurrently under audit by the U.S. Internal Revenue Service and the review ofthese years is expected to be completed during 2007. It is reasonably possiblethat a reduction in the unrecognized tax benefits may occur (which may impactUCC’s unrecognized tax benefits); however, quantification of an estimated rangecannot be made at this time.

While theCorporation is subject to taxation in certain foreign jurisdictions, its majortax jurisdictions are in the United States. The tax years that remain subjectto examination in the United States are 1998 through 2006 for federal incometaxes and 2002 through 2006 for state and local income taxes.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined BenefitPension and Other Postretirement Plans - an amendment of FASB Statements No.87, 88, 106, and 132(R).” This Statement, which was effective December 31, 2006for the Corporation, required employers to recognize the funded status ofdefined benefit postretirement plans as an asset or liability on the balancesheet and to recognize changes in that funded status through comprehensiveincome. See Note F for the Corporation’s disclosures related to pension andother postretirement benefits.

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

In September 2006, the FASB issued SFAS No. 157, “FairValue Measurements,” which defines fair value, establishes a framework formeasuring fair value in GAAP, and expands disclosures about fair valuemeasurements. This Statement applies under other accounting pronouncements thatrequire or permit fair value measurements and is effective for fiscal yearsbeginning after November 15, 2007. The Corporation is currently evaluating theimpact of adopting this Statement.

In February 2007,the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets andFinancial Liabilities - Including an amendment of FASB Statement No. 115,”which permits entities to choose to measure many financial instruments andcertain other items at fair value. SFAS No. 159 is effective as of thebeginning of an entity’s first fiscal year 

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that begins afterNovember 15, 2007. The Corporation is currently evaluating if it will elect thefair value option for any of its eligible financial instruments and otheritems.

In April 2007, the FASB issued FASB Staff Position (“FSP”)No. FIN 39-1, “Amendment of FASB Interpretation No. 39.” This FSP replacescertain terms in FIN No. 39 with “derivative instruments” (as defined in SFASNo. 133) and permits the offsetting of fair value amounts recognized for theright to reclaim cash collateral or the obligation to return cash collateralagainst fair value amounts recognized for derivative instruments executed withthe same counterparty under the same master netting arrangement. The FSP iseffective for fiscal years beginning after November 15, 2007. The Corporationis currently evaluating the impact of applying the guidance in this FSP.

**NOTE C     INVENTORIES**

The following tableprovides a breakdown of inventories:
| InventoriesIn millions | ** ** | **June 30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-----------------------------|------------|-------------------------|------------|-------------------------|------------|
| Finished goods              |       | $                       | 37         |                    | $          | 35 |   |
| Work in process             |       | 42                      |       | 40                      |       |
| Raw materials               |       | 44                      |       | 37                      |       |
| Supplies                    |       | 81                      |       | 87                      |       |
| Total inventories           |       | $                       | 204        |                    | $          | 199 |   |

 

The reserves reducing inventories from the first-in, first-out (“FIFO”)basis to the last-in, first-out (“LIFO”) basis amounted to $156 million at June30, 2007 and $160 million at December 31, 2006.

**NOTE D     OTHER INTANGIBLE ASSETS**

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

**Other Intangible Assets**
|                                       | ** ** | **At June 30, 2007** | ** ** | **At December 31, 2006** | ** ** |
|---------------------------------------|------------|-------------------------------------|------------|-----------------------------------------|------------|
| **In millions**                  | ** ** | **Gross  Carrying  Amount**         | ** ** | **Accumulated  Amortization**           | ** ** | **Net** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net** | ** ** |
| Intangible  assets with finite lives: |       |                                |       |                                    |       |   |   |   |   |   |   |   |   |
| Licenses and intellectual property    |       | $                                   | 33         |                                    | $          | (32 | ) | $ | 1 |   | $ | 33 |   | $ | (32 | ) | $ | 1 |   |
| Patents                               |       | 2                                   |       | (1                                      | )          | 1 |   | 3 |   | (2 | ) | 1 |   |
| Software                              |       | 112                                 |       | (91                                     | )          | 21 |   | 111 |   | (88 | ) | 23 |   |
| Total                                 |       | $                                   | 147        |                                    | $          | (124 | ) | $ | 23 |   | $ | 147 |   | $ | (122 | ) | $ | 25 |   |

 

Total estimatedamortization expense for 2007 and the next five fiscal years is as follows:

**Estimated Amortization Expensefor Next Five Years**
| In millions | *** *** | *** *** | *** *** |
|------------------|--------------|--------------|--------------|
| 2007             |         | $            | 5            |   |
| 2008             |         | $            | 6            |   |
| 2009             |         | $            | 6            |   |
| 2010             |         | $            | 6            |   |
| 2011             |         | $            | 2            |   |
| 2012             |         | —       |         |

 

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**NOTEE     COMMITMENTS AND CONTINGENTLIABILITIES**

**EnvironmentalMatters**

Accruals forenvironmental matters are recorded when it is probable that a liability hasbeen incurred and the amount of the liability can be reasonably estimated,based on current law and existing technologies. At June 30, 2007, theCorporation had accrued obligations of $75 million for environmentalremediation and restoration costs, including $26 million for the remediation ofSuperfund sites. This is management’s best estimate of the costs forremediation and restoration with respect to environmental matters for which theCorporation has accrued liabilities, although the ultimate cost with respect tothese 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. AtDecember 31, 2006, the Corporation had accrued obligations of $77 million forenvironmental remediation and restoration costs, including $25 million for theremediation of Superfund sites. It is the opinion of the Corporation’smanagement that the possibility is remote that costs in excess of thosedisclosed will have a material adverse impact on the Corporation’s consolidatedfinancial statements.

**Litigation**

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

Separately, the Corporation is and has been involvedin a large number of asbestos-related suits filed primarily in state courtsduring the past three decades. These suits principally allege personal injuryresulting from exposure to asbestos-containing products and frequently seekboth actual and punitive damages. The alleged claims primarily relate toproducts that UCC sold in the past, alleged exposure to asbestos-containingproducts located on UCC’s premises, and UCC’s responsibility for asbestos suitsfiled against a former subsidiary, Amchem Products, Inc. (“Amchem”). In manycases, plaintiffs are unable to demonstrate that they have suffered anycompensable 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.

Based on a studycompleted by Analysis, Research & Planning Corporation (“ARPC”) in January2003, the Corporation increased its December 31, 2002 asbestos-relatedliability for pending and future claims for the 15-year period ending in 2017to $2.2 billion, excluding future defense and processing costs. Since then, theCorporation has compared current asbestos claim and resolution activity to theresults of the most recent ARPC study at each balance sheet date to determinewhether the accrual continues to be appropriate.

In November 2004,the Corporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsJanuary 2003 study. In January 2005, ARPC provided the Corporation with areport summarizing the results of its study. At December 31, 2004, the recordedasbestos-related liability for pending and future claims was $1.6 billion.Based on the low end of the range in the January 2005 study, the recordedasbestos-related liability for pending and future claims at December 31, 2004would be sufficient to resolve asbestos-related claims against UCC and Amcheminto 2019. As in its January 2003 study, ARPC did provide estimates for alonger period of time in its January 2005 study, but also reaffirmed its prioradvice that forecasts for shorter periods of time are more accurate than thosefor longer periods of time.

In November 2005,the Corporation requested ARPC to review the Corporation’s 2005 asbestos claimand resolution activity and determine the appropriateness of updating itsJanuary 2005 study. In response to that request, ARPC reviewed and analyzeddata through October 31, 2005. In January 2006, ARPC stated that an update ofits study would not provide a more likely estimate of future events than theestimate reflected in its study of the previous year and, therefore, theestimate in that study remained applicable. Based on the Corporation’s ownreview of the asbestos claim and resolution activity and ARPC’s response, theCorporation determined that no change to the accrual was required. At December31, 2005, the recorded asbestos-related liability for pending and future claimswas $1.5 billion.

InNovember 2006, the Corporation requested ARPC to review the Corporation’shistorical asbestos claim and resolution activity and determine theappropriateness of updating its January 2005 study. In response to thatrequest, ARPC reviewed and analyzed data through October 31, 2006 and concludedthat the experience from 2004 through 2006 was sufficient for the purpose offorecasting future filings and values of asbestos claims filed against UCC andAmchem, and could be used in 

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place of previousassumptions to update its January 2005 study. The resulting study, completed byARPC in December 2006, stated that the undiscounted cost of resolving pendingand future asbestos-related claims against UCC and Amchem, excluding future defenseand processing costs, through 2021 was estimated to be between approximately$1.2 billion and $1.5 billion. As in its January 2005 study, ARPC providedestimates for a longer period of time in its December 2006 study, but alsoreaffirmed its prior advice that forecasts for shorter periods of time are moreaccurate than those for longer periods of time.

Based onARPC’s December 2006 study and the Corporation’s own review of the asbestosclaim and resolution activity, the Corporation decreased its asbestos-relatedliability for pending and future claims to $1.2 billion at December 31, 2006which covers the 15-year period ending in 2021 (excluding future defense andprocessing costs). The reduction was $177 million and was shown as “Asbestos-relatedcredit” in the consolidated statements of income for 2006. At December 31,2006, approximately 25 percent of the recorded liability related to pendingclaims and approximately 75 percent related to future claims.

Based on theCorporation’s review of 2007 activity, the Corporation determined that noadjustment to the accrual was required at June 30, 2007. The asbestos-relatedliability for pending and future claims was $1.2 billion at June 30, 2007.Approximately 29 percent of the recorded liability related to pending claimsand approximately 71 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 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 Wellington Agreementand other agreements with insurers are designed to facilitate an orderlyresolution and collection of the Corporation’s insurance policies and toresolve issues that the insurance carriers may raise.

In September 2003, theCorporation filed a comprehensive insurance coverage case, now proceeding inthe 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 orderly resolutionand collection of such insurance policies and to resolve issues that theinsurance carriers may raise. Although the lawsuit is continuing, through the end of the second quarter of 2007,the Corporation had reached settlements with several of the carriers involvedin this litigation.

The Corporation’s receivable for insurance recoveriesrelated to its asbestos liability was $478 million at June 30, 2007 and $495million at December 31, 2006. At June 30, 2007 and December 31, 2006, all ofthe receivable 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:

**Receivables forCosts Submitted to Insurance Carriers**
| In millions                  | ** ** | **June 30,  2007** | ** ** | **Dec. 31,  2006** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Receivables for  defense costs    |       | $                       | 37         |                    | $          | 34 |   |
| Receivables for  resolution costs |       | 257                     |       | 266                     |       |
| Total                             |       | $                       | 294        |                    | $          | 300 |   |

 

The Corporation expenses defense costs as incurred.The pretax impact for defense and resolution costs, net of insurance, was $25million in the second quarter of 2007 ($14 million in the second quarter of2006) and $42 million in the first six months of 2007 ($28 million in the firstsix months of 2006), and was reflected in “Cost of sales.”

After a review of its insurancepolicies, with due consideration given to applicable deductibles, retentionsand policy limits, after taking into account the solvency and historicalpayment experience of various insurance carriers; existing 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.

The amountsrecorded for the asbestos-related liability and related insurance receivabledescribed above were based upon current, known facts. However, future events,such as the number of new claims to be filed and/or received each year, theaverage cost of disposing of each such claim, coverage issues among insurers,and the continuing solvency of various 

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insurance companies, aswell as the numerous uncertainties surrounding asbestos litigation in theUnited States, could cause the actual costs and insurance recoveries to behigher or lower than those projected 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 possible at this time to determinewith certainty the ultimate outcome of any of the legal proceedings and claimsreferred to in this filing, management believes that adequate provisions havebeen made for probable losses with respect to pending claims and proceedings,and that, except for the asbestos-related matters described above, the ultimateoutcome of all known and future claims, after provisions for insurance, willnot have a material adverse impact on the results of operations, cash flows andconsolidated financial position of the Corporation. Should any losses besustained in connection with any of such legal proceedings and claims in excessof provisions provided and available insurance, they will be charged to incomewhen determinable.

**Purchase Commitments**

At December 31, 2006, the Corporation had variousoutstanding commitments for take or pay agreements, with terms extending fromone to ten years. Such commitments were not in excess of current market prices.The fixed and determinable portion of obligations under purchase commitments atDecember 31, 2006 is presented in the following table:

**Fixed and Determinable Portion ofTake or Pay Obligations**

**at December 31, 2006**
| In millions | ** ** | ** ** | ** ** |
|------------------|------------|------------|------------|
| 2007             |       | $          | 14         |   |
| 2008             |       | 8          |       |
| 2009             |       | 8          |       |
| 2010             |       | 7          |       |
| 2011             |       | 1          |       |
| 2012 and beyond  |       | 6          |       |
| Total            |       | $          | 44         |   |

 

**Guarantees**

The Corporation hasundertaken obligations to guarantee the performance of certain nonconsolidatedaffiliates (including the OPTIMAL Group and Nippon Unicar Company Limited) anda former subsidiary of the Corporation (via delivery of cash or other assets)if specified triggering events occur. Non-performance under a contract forcommercial and/or financial obligations by the guaranteed party would triggerthe obligation of the Corporation to make payments to the beneficiary of theguarantees. Financial obligations include debt and lease arrangements. Theguarantee related to a former subsidiary of the Corporation expired in thesecond quarter of 2007.

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

**Guarantees**
| In millions                 | *** *** | **Final  Expiration** | ** ** | **Maximum Future  Payments** | ** ** | **Recorded  Liability** | *** *** |
|----------------------------------|--------------|-----------------------|------------|-----------------------------------|------------|-------------------------|--------------|
| Guarantees at  June 30, 2007     |         | 2014                  |       | $                                 | 76         |                    | $            | 1 |   |
| Guarantees at December  31, 2006 |         | 2014                  |       | $                                 | 84         |                    | $            | 1 |   |

 

**Conditional Asset RetirementObligations**

In accordance with FINNo. 47, the Corporation has recognized conditional asset retirement obligationsrelated to asbestos encapsulation as a result of planned demolition andremediation activities at manufacturing and administrative sites in the United States.The aggregate carrying amount of conditional asset retirement obligations was$13 million at June 30, 2007 and December 31, 2006. The discount rate usedto calculate the Corporation’s asset retirement obligations was 4.6 percent.These obligations are included in the consolidated balance sheets as “Accruedand other current liabilities.”

The Corporation has not recognized conditional assetretirement obligations for which a fair value cannot be reasonably estimated inits consolidated financial statements. It is the opinion of management that thepossibility is remote that such conditional asset retirement obligations, whenestimable, will have a material adverse impact on the Corporation’sconsolidated financial statements based on current costs.

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**NOTE F     PENSION AND OTHER POSTRETIREMENT BENEFITS**

**NetPeriodic Benefit Cost (Credit) for All Significant Plans**
|                                       | ** **   | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------|--------------|----------------------------------|------------|--------------------------------|------------|
| **In millions**                  | *** *** | **June 30,  2007**          | ** ** | **June 30,  2006**        | ** ** | **June 30,  2007** | ** ** | **June 30,  2006** | *** *** |
| *Defined Benefit Pension Plans:*      |         |                             |       |                           |       |   |   |   |   |
| Service cost                          |         | $                                | 5          |                           | $          | 6 |   | $ | 10 |   | $ | 12 |   |
| Interest cost                         |         | 53                               |       | 53                             |       | 106 |   | 106 |   |
| Expected return  on plan assets       |         | (79                              | )          | (83                            | )          | (158 | ) | (166 | ) |
| Amortization of  prior service cost   |         | —                           |       | —                         |       | 1 |   | — |   |
| Amortization of  net loss             |         | 7                                |       | 8                              |       | 14 |   | 16 |   |
| Net periodic  benefit credit          |         | $                                | (14        | )                              | $          | (16 | ) | $ | (27 | ) | $ | (32 | ) |
| * *                              |         |                             |       |                           |       |   |   |   |   |
| *Other Postretirement Benefits:*      |         |                             |       |                           |       |   |   |   |   |
| Service cost                          |         | $                                | 1          |                           | $          | 1 |   | $ | 2 |   | $ | 2 |   |
| Interest cost                         |         | 7                                |       | 8                              |       | 14 |   | 16 |   |
| Amortization of  prior service credit |         | (1                               | )          | (1                             | )          | (2 | ) | (2 | ) |
| Amortization of net  loss             |         | —                           |       | 1                              |       | 1 |   | 2 |   |
| Net periodic benefit  cost            |         | $                                | 7          |                           | $          | 9 |   | $ | 15 |   | $ | 18 |   |

 

**NOTE G     RELATED PARTY TRANSACTIONS**

The Corporation sells products to Dow to simplify the customerinterface process. Products are sold to and purchased from Dow at market-basedprices in accordance with the terms of Dow’s long-standing intercompany pricingpolicies. The Corporation also procures certain commodities and raw materialsthrough a Dow subsidiary and pays a commission to that Dow subsidiary based onthe volume and type of commodities and raw materials purchased. The commissionexpense is included in “Sundry income (expense) — net” in the consolidatedstatements of income. Purchases from that Dow subsidiary were approximately$825 million in the second quarter of 2007 ($725 million in the second quarterof 2006) and $1,518 million in the first half of 2007 ($1,530 million inthe first half of 2006).

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

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

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

As part of Dow’scash management process, UCC is a party to revolving loans with Dow that haveLIBOR-based interest rates with varying maturities. At June 30, 2007, theCorporation had a note receivable of $2.9 billion from Dow under a revolvingloan agreement. The Corporation may draw from this note receivable in supportof its daily working capital requirements and, as such, the net effect of cashinflows and outflows under this revolving loan agreement is presented in theconsolidated statements of cash flows as an operating activity.

The Corporationalso has a separate revolving credit agreement with Dow that allows theCorporation to borrow or obtain credit enhancements up to an aggregate of $1billion that matures December 30, 2007 pursuant to an amendment effective as ofSeptember 30, 2006; however, Dow may demand repayment with a 30-day writtennotice 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 June 30, 2007, $808 million was 

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available under the revolving credit agreement. The cash collateral wasreported as “Noncurrent receivable from related company” in the consolidatedbalance sheets.

The losses andadditional costs incurred by the Corporation in 2005 due to hurricane Katrinawere covered by the Corporation’s insurance program. The Corporation has aninsurance receivable for losses incurred of $105 million at June 30, 2007 fromits insurer (an affiliate of Dow). Additionally, the Corporation has insurancecoverage for lost sales and margins caused by hurricane Katrina. No amount ofrecovery for lost sales and margins had been recognized at June 30, 2007, andwill only be recognized when the amount of recovery is realized throughagreement among the insurers.

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**Union Carbide Corporation and Subsidiaries**

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

Pursuant toGeneral Instruction H of Form 10-Q “Omission of Information by CertainWholly-Owned Subsidiaries,” this section includes only management’s narrativeanalysis of the results of operations for the three and six-month periods endedJune 30, 2007, the most recent periods, compared with the three andsix-month periods ended June 30, 2006, the corresponding periods in thepreceding fiscal year.

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

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 Statement of Financial Accounting Standards No. 131, “Disclosures aboutSegments of an Enterprise and Related Information,” and no detailed businessinformation is provided to a chief operating decision maker regarding theCorporation’s stand-alone operations, the Corporation’s results are reported asa single operating segment.

**DISCLOSUREREGARDING FORWARD-LOOKING INFORMATION**

The PrivateSecurities Litigation Reform Act of 1995 provides a “safe harbor” forforward-looking statements made by or on behalf of Union Carbide Corporation(the “Corporation” or “UCC”). This section covers the current performance andoutlook of the Corporation. The forward-looking statements contained in thissection and in other parts of this document involve risks and uncertaintiesthat may affect the Corporation’s operations, markets, products, services,prices and other factors as more fully discussed elsewhere and in filings withthe U.S. Securities and Exchange Commission (SEC). These risks anduncertainties include, but are not limited to, economic, competitive, legal,governmental and technological factors. Accordingly, there is no assurance thatthe Corporation’s expectations will be realized. The Corporation assumes noobligation to provide revisions to any forward-looking statements shouldcircumstances change, except as otherwise required by securities and otherapplicable laws.

**RESULTS OFOPERATIONS**

**Total net sales for the secondquarter of 2007 were $1,899 million compared with $1,776 million for the secondquarter of 2006, an increase of 7 percent. Total net sales were$3,625 million for the first half of 2007 compared with $3,829 million forthe first half of 2006, a decrease of 5 percent.**Selling prices to Dow are based on market prices forthe related products. Average selling prices for most products were higher inthe second quarter of 2007 and on a year-to-date basis compared with the sameperiods of last year, led by ethylene glycol (“EG”), wire and cable compoundsand oxo products. Sales volume was mixed with overall volume up in the secondquarter of 2007 compared with the second quarter of 2006. Volume growth forseveral products (led by ethyleneamines, oxo products, and polypropylene) morethan offset declines in a few of the Corporation’s other products, principallyEG (due to the restructuring of certain sales agreements in the third quarterof 2006). Polyethylene volume improved slightly. Sales volume on a year-to-datebasis was mixed with overall volume down compared with the first half of 2006.On a year-to-date basis, volume was impacted by a decline in EG volume due toscheduled plant turnarounds in the first quarter of 2007 and the restructuringof certain sales agreements in the third quarter of 2006. Total net sales forthe first half of 2006 included significant lump sum technology licensingrevenue. Technology licensing revenue varies from period to period due to thenature of the business.

Cost of sales increased 8percent from $1,603 million in the second quarter of 2006 to $1,730 million inthe second quarter of 2007 principally due to higher feedstock and energy costsand higher sales volume. On a year-to-date basis, cost of sales increased 3percent from $3,239 million to $3,328 million, reflecting higher feedstock andenergy costs.

Equity in earnings ofnonconsolidated affiliates increased $32 million in the second quarter of 2007compared with the same quarter last year, led by a strong improvement inearnings reported by EQUATE Petrochemical Company K.S.C. (“EQUATE”), as well ashigher reported earnings from the OPTIMAL Group (“OPTIMAL”). Year to date,equity in earnings of nonconsolidated affiliates was $239 million compared with$144 million last year. In addition to the items previously mentioned, resultsfor EQUATE and OPTIMAL for the first half of 2006 were lower due to plannedmaintenance turnarounds in the first quarter of 2006. EQUATE’s maintenanceturnaround was completed during the second quarter of 2006.

Sundry expense — netincludes a variety of income and expense items such as the gain or loss onforeign currency exchange, dividends from investments, commissions, charges formanagement services provided by Dow, and gains and losses on sales ofinvestments and assets. Sundry expense — net for the second quarter of 2007 was$17 million compared with $23 million for the second quarter of last year,reflecting lower commission expense. Year to date, sundry expense — net was $27million compared with $44 million for the first six months of last year. Sundryexpense for the first six months of 2007 was favorably impacted by a higherlevel of dividend income and lower commission expense.

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Interest income was $43million in the second quarter of 2007 compared with $35 million in the secondquarter of 2006, due to an increased level of interest bearing assets. Year todate, interest income was $80 million, up from $58 million in the first sixmonths of 2006 due to higher interest rates and a significantly higher level ofinterest-bearing assets.

Interest expense andamortization of debt discount decreased $2 million in the second quarter of2007 compared with the second quarter of 2006. Year to date, interest expenseand amortization of debt discount was $26 million, unchanged from the first sixmonths of 2006.

The effective tax ratefluctuates based on, among other factors, where income is earned, the level ofafter-tax income from joint ventures, and the level of income relative to taxcredits available. The effective tax rate for the second quarter of 2007 was28.8 percent compared with 34 percent for the same quarter last year. Year todate, the effective tax rate was 25.4 percent versus 34.6 percent lastyear. Since most of the earnings from nonconsolidated affiliates are taxed atthe joint venture level, the impact of higher equity earnings decreased theCorporation’s overall effective tax rate.

The Corporation reportednet income of $195 million for the second quarter of 2007, compared with $155million for the second quarter of 2006, reflecting the favorable impact ofhigher equity earnings. Net income for the first half of 2007 declined to $381 millionfrom $438 million for the first half of last year as a significant decline intechnology licensing revenue more than offset the improvement in equityearnings for the first half of 2007.

**OTHER MATTERS**

**Accounting Changes**

See Note B to theConsolidated Financial Statements for a discussion of recent accountingpronouncements.

**CriticalAccounting Policies**

The preparation offinancial statements and related disclosures in conformity with accountingprinciples generally accepted in the United States of America (“GAAP”) 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, 2006 (“2006 10-K”) describes thesignificant accounting policies and methods used in the preparation of theConsolidated Financial Statements. The Corporation’s critical accountingpolicies that are impacted by judgments, assumptions and estimates aredescribed in Management’s Discussion and Analysis of Financial Condition andResults of Operations in the Corporation’s 2006 10-K. Since December 31, 2006,there have been no material changes in the Corporation’s critical accountingpolicies.

**Asbestos-Related Matters**

*Introduction*

The Corporation isand has been involved in a large number of asbestos-related suits filedprimarily in state courts during the past three decades. These suitsprincipally allege personal injury resulting from exposure toasbestos-containing products and frequently seek both actual and punitivedamages. The alleged claims primarily relate to products that UCC sold in thepast, alleged exposure to asbestos-containing products located on UCC’spremises, and UCC’s responsibility for asbestos suits filed against a formersubsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs areunable 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 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 belowprovides information regarding asbestos-related claims filed against theCorporation and Amchem:
|                                                    | ** ** | **2007** | ** ** | **2006** | ** ** |
|----------------------------------------------------|------------|----------|------------|----------|------------|
| Claims  unresolved at January 1                    |       | 111,887  |       | 146,325  |       |
| Claims filed                                       |       | 5,839    |       | 9,130    |       |
| Claims settled,  dismissed or otherwise resolved   |       | (13,486  | )          | (34,327  | )          |
| Claims  unresolved at June 30                      |       | 104,240  |       | 121,128  |       |
| Claimants with  claims against both UCC and Amchem |       | 35,025   |       | 42,096   |       |
| Individual claimants at  June 30                   |       | 69,215   |       | 79,032   |       |

 

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Plaintiffs’ lawyers often sue dozens or even hundreds of defendants inindividual lawsuits on behalf of hundreds or even thousands of claimants. As aresult, the damages alleged are not expressly identified as to UCC, Amchem orany other particular defendant, even when specific damages are alleged withrespect to a specific disease or injury. In fact, there are no personal injurycases in which only the Corporation and/or Amchem are the sole nameddefendants. For these reasons and based upon the Corporation’slitigation and settlement experience, the Corporation does not consider thedamages alleged against it and Amchem to be a meaningful factor in itsdetermination of any potential asbestos liability.

*Estimatingthe Liability*

Based on a studycompleted by Analysis, Research & Planning Corporation (“ARPC”) in January2003, the Corporation increased its December 31, 2002 asbestos-relatedliability for pending and future claims for the 15-year period ending in 2017to $2.2 billion, excluding future defense and processing costs. Since then, theCorporation has compared current asbestos claim and resolution activity to theresults of the most recent ARPC study at each balance sheet date to determinewhether the accrual continues to be appropriate.

In November 2004,the Corporation requested ARPC to review the Corporation’s historical asbestosclaim and resolution activity and determine the appropriateness of updating itsJanuary 2003 study. In January 2005, ARPC provided the Corporation with areport summarizing the results of its study. At December 31, 2004, the recordedasbestos-related liability for pending and future claims was $1.6 billion.Based on the low end of the range in the January 2005 study, the recordedasbestos-related liability for pending and future claims at December 31, 2004would be sufficient to resolve asbestos-related claims against UCC and Amcheminto 2019. As in its January 2003 study, ARPC did provide estimates for alonger period of time in its January 2005 study, but also reaffirmed its prioradvice that forecasts for shorter periods of time are more accurate than thosefor longer periods of time.

InNovember 2005, the Corporation requested ARPC to review the Corporation’s 2005asbestos claim and resolution activity and determine the appropriateness ofupdating its January 2005 study. In response to that request, ARPC reviewed andanalyzed data through October 31, 2005. In January 2006, ARPC stated that anupdate of its study would not provide a more likely estimate of future eventsthan the estimate reflected in its study of the previous year and, therefore,the estimate in that study remained applicable. Based on the Corporation’s ownreview of the asbestos claim and resolution activity and ARPC’s response, theCorporation determined that no change to the accrual was required. At December31, 2005, the recorded asbestos-related liability for pending and future claimswas $1.5 billion.

InNovember 2006, the Corporation requested ARPC to review the Corporation’shistorical asbestos claim and resolution activity and determine theappropriateness of updating its January 2005 study. In response to thatrequest, ARPC reviewed and analyzed data through October 31, 2006 and concludedthat the experience from 2004 through 2006 was sufficient for the purpose offorecasting future filings and values of asbestos claims filed against UCC andAmchem, and could be used in place of previous assumptions to update itsJanuary 2005 study. The resulting study, completed by ARPC in December 2006,stated that the undiscounted cost of resolving pending and futureasbestos-related claims against UCC and Amchem, excluding future defense andprocessing costs, through 2021 was estimated to be between approximately $1.2billion and $1.5 billion. As in its January 2005 study, ARPC provided estimatesfor a longer period of time in its December 2006 study, but also reaffirmed itsprior advice that forecasts for shorter periods of time are more accurate thanthose for longer periods of time.

Based onARPC’s December 2006 study and the Corporation’s own review of the asbestosclaim and resolution activity, the Corporation decreased its asbestos-relatedliability for pending and future claims to $1.2 billion at December 31, 2006which covers the 15-year period ending in 2021 (excluding future defense andprocessing costs). The reduction was $177 million and was shown as “Asbestos-relatedcredit” in the consolidated statements of income for 2006. At December 31,2006, approximately 25 percent of the recorded liability related to pendingclaims and approximately 75 percent related to future claims.

Based onthe Corporation’s review of 2007 activity, the Corporation determined that noadjustment to the accrual was required at June 30, 2007. The asbestos-relatedliability for pending and future claims was $1.2 billion at June 30, 2007.Approximately 29 percent of the recorded liability related to pending claimsand approximately 71 percent related to future claims.

*Defense and Resolution Costs*

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

**Defense andResolution Costs**
|                      | ** **   | **Six Months Ended** | ** ** | **Aggregate Costs** | ** ** |
|----------------------|--------------|--------------------------------|------------|--------------------------|------------|
| **In millions** | *** *** | **June 30,  2007**        | ** ** | **June 30,  2006**  | ** ** | **to Date as of  June 30, 2007** | *** *** |
| Defense costs        |         | $                              | 42         |                     | $          | 28 |   | $ | 523 |   |
| Resolution costs     |         | $                              | 28         |                     | $          | 73 |   | $ | 1,210 |   |

 

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Theaverage resolution payment per asbestos claimant and the rate of new claimfilings has fluctuated both up and down since the beginning of 2001. Union Carbide’smanagement expects such fluctuations to continue in the future based upon anumber of factors, including the number and type of claims settled in aparticular period, the jurisdictions in which such claims arose, and the extentto which any proposed legislative reform related to asbestos litigation isbeing considered.

The Corporation expenses defense costs as incurred.The pretax impact for defense and resolution costs, net of insurance, was $25million in the second quarter of 2007 ($14 million in the second quarter of2006) and $42 million for the first six months of 2007 ($28 million for thefirst six months of 2006), and was reflected in “Cost of sales.”

*Insurance Receivables*

At December 31, 2002, theCorporation increased the receivable for insurance recoveries related to itsasbestos liability to $1.35 billion, substantially exhausting its asbestosproduct liability coverage. The insurance receivable related to the asbestosliability was determined after a thorough review of applicable insurancepolicies and the 1985 Wellington Agreement, to which the Corporation and manyof its liability insurers are signatory parties, as well as other insurancesettlements, with due consideration given to applicable deductibles, retentionsand policy limits, and taking into account the solvency and historical paymentexperience of various insurance carriers. The Wellington Agreement and otheragreements with insurers are designed to facilitate an orderly resolution andcollection of the Corporation’s insurance policies and to resolve issues thatthe insurance carriers may raise.

In September 2003, the Corporation filed a comprehensive insurancecoverage case, now proceeding in the Supreme Court of the State of New York,County of New York, seeking to confirm its rights to insurance for variousasbestos claims and to facilitate an orderly and timely collection of insuranceproceeds. This lawsuit was filed against insurers that are not signatories tothe Wellington Agreement and/or do not otherwise have agreements in place withthe Corporation regarding their asbestos-related insurance coverage, in orderto facilitate an orderly resolution and collection of such insurance policiesand to resolve issues that the insurance carriers may raise. Althoughthe lawsuit is continuing, through the endof the second quarter of 2007, the Corporation had reached settlements withseveral of the carriers involved in this litigation.

The Corporation’sreceivable for insurance recoveries related to its asbestos liability was$478 million at June 30, 2007 and $495 million at December 31, 2006. AtJune 30, 2007 and December 31, 2006, all of the receivable for insurancerecoveries was related to insurers that are not signatories to the WellingtonAgreement and/or do not otherwise have agreements in place regarding theirasbestos-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:

**Receivables forCosts Submitted to Insurance Carriers**
| In millions                  | *** *** | **June 30,  2007** | ** ** | **Dec. 31,  2006** | *** *** |
|-----------------------------------|--------------|-------------------------|------------|-------------------------|--------------|
| Receivables for  defense costs    |         | $                       | 37         |                    | $            | 34 |   |
| Receivables for  resolution costs |         | 257                     |       | 266                     |         |
| Total                             |         | $                       | 294        |                    | $            | 300 |   |

 

After a review of its insurancepolicies, with due consideration given to applicable deductibles, retentionsand policy limits, after taking into account the solvency and historicalpayment experience of various insurance carriers; existing 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 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.

Becauseof the uncertainties described above, management cannot estimate the full rangeof the cost 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.

**ITEM4.  CONTROLS AND PROCEDURES.**

As of the end of theperiod covered by this Quarterly Report on Form 10-Q, the Corporation carriedout an evaluation, under the supervision and with the participation of theCorporation’s Disclosure Committee and the Corporation’s management, includingthe Chief Executive Officer and the Chief Financial Officer, of theeffectiveness of the design and operation of the Corporation’s disclosurecontrols and procedures pursuant to Exchange Act Rule 15d-15(b); and whetherany change has occurred in the Corporation’s internal control over financialreporting pursuant to Exchange Act Rule 15d-15(d). Based upon that evaluation,the Chief Executive Officer and the Chief Financial Officer concluded that theCorporation’s disclosure controls and procedures are effective and that nochange in the Corporation’s internal control over financial reporting occurredduring the Corporation’s most recent fiscal quarter that materially affected,or is reasonably likely to materially affect, the Corporation’s internalcontrol over financial reporting.

**PART II —OTHER INFORMATION**

**ITEM1.  LEGAL PROCEEDINGS.**

No materialdevelopments in asbestos-related matters occurred during the second quarter of2007. For a summary of the history and current status of asbestos-relatedmatters, see Management’s Discussion and Analysis of Financial Condition andResults of Operations, Asbestos-Related Matters; and Note E to the ConsolidatedFinancial Statements.

**ITEM1A.  RISK FACTORS.**

There were no materialchanges in the Corporation’s risk factors in the second quarter of 2007.

**ITEM6.  EXHIBITS.**

See the Exhibit Index onpage 20 of this Quarterly Report on Form 10-Q for exhibits filed with thisreport.

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**Union CarbideCorporation and SubsidsidiariesSignatures**

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, thereuntoduly authorized.
|                     |   |                          | UNION  CARBIDE CORPORATION |   |   |
|---------------------|--------|-------------------------------|----------------------------|--------|--------|
|                |   | Registrant                    |                       |
|                |   |                          |                       |
|                |   |                          |                       |
|                |   |                          |                       |
| Date: July 30, 2007 |   |                          |                       |
|                |   |                          |                       |
|                |   |                          |                       |
|                | By:    | /s/  WILLIAM H. WEIDEMAN      |                       |
|                |   | William H. Weideman           |                       |
|                |   | Vice President and Controller |                       |
|                |   | The Dow Chemical Company      |                       |
|                |   | Authorized Representative of  |                       |
|                |   | Union Carbide Corporation     |                       |
|                |   |                          |                       |
|                |   |                          |                       |
|                |   |                          |                       |
|                | By:    | /s/  EDWARD W. RICH           |                       |
|                |   | Edward W. Rich                |                       |
|                |   | Vice President, Treasurer and |                       |
|                |   | Chief Financial  Officer      |                       |

 

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**Union Carbide Corporation and SubsidiariesExhibit Index**
| EXHIBIT NO. |   | DESCRIPTION                                                               |
|-------------|--------|---------------------------------------------------------------------------|
|        |   |                                                                      |
| 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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