ucc_form10-k2008.htm

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended DECEMBER 31, 2008 Commission file number: 1-1463 UNION CARBIDE CORPORATION (Exact name of registrant as specified in its charter)
New York (State or other jurisdiction of incorporation or organization)				13-1421730 (I.R.S. Employer Identification No.)
1254 Enclave Parkway, Houston, Texas 77077 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: 281-966-2727
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None

	Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
						o Yes þ No

	Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
						o Yes þ No

	Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
						þ Yes o No

	Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the 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 þ		Smaller reporting company o

	Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
						o Yes þ No
	At February 18, 2009, 1,000 shares of common stock were outstanding, all of which were held by the registrant’s parent, The Dow Chemical Company. The registrant meets the conditions set forth in General Instructions I(1)(a) and (b) for Form 10-K and is therefore filing this form with a reduced disclosure format.
Documents Incorporated by Reference None

Union Carbide Corporation

ANNUAL REPORT ON FORM 10-K

For the Fiscal Year Ended December 31, 2008

TABLE OF CONTENTS

PART I

		PAGE
Item 1.	Business.	3
Item 1A.	Risk Factors.	4
Item 1B.	Unresolved Staff Comments.	6
Item 2.	Properties.	6
Item 3.	Legal Proceedings.	6
Item 4.	Submission of Matters to a Vote of Security Holders.	9

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	9
Item 6.	Selected Financial Data.	9
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	10
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	20
Item 8.	Financial Statements and Supplementary Data.	21
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure.	48
Item 9A(T).	Controls and Procedures.	48
Item 9B.	Other Information.	49

PART III
Item 10.	Directors, Executive Officers and Corporate Governance.	49
Item 11.	Executive Compensation.	49
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	49
Item 13.	Certain Relationships and Related Transactions, and Director Independence.	49
Item 14.	Principal Accounting Fees and Services.	49

PART IV
Item 15.	Exhibits, Financial Statement Schedules.	50

SIGNATURES		79

PART I

ITEM 1. BUSINESS.

Union Carbide Corporation (the “Corporation” or “UCC”) is a chemicals and polymers company. In addition to its consolidated operations, the Corporation participates in partnerships and joint ventures (together, “nonconsolidated affiliates”). The Corporation is a wholly owned subsidiary of The Dow Chemical Company (“Dow”). Except as otherwise indicated by the context, the terms “Corporation” or “UCC” as used herein mean Union Carbide Corporation and its consolidated subsidiaries.

The following is a description of the Corporation’s principal products.

Ethylene Oxide/Ethylene Glycol (“EO/EG”)—ethylene oxide (“EO”), a chemical intermediate primarily used in the manufacture of monoethylene glycol (“MEG”), polyethylene glycol, glycol ethers, ethanolamines, surfactants and other performance chemicals and polymers; di- and triethylene glycol, used in a variety of applications, including boat construction, shoe manufacturing, natural gas-drying and other moisture-removing applications, and plasticizers for safety glasses; and tetraethylene glycol, used predominantly in the production of plasticizers for automotive windows. MEG is used extensively in the production of polyester fiber, resin and film, automotive antifreeze and engine coolants, and aircraft anti-icing and deicing fluids.

Industrial Chemicals and Polymers—broad range of products for specialty applications, including pharmaceutical, animal food supplements, personal care, industrial and household cleaning, coatings for beverage and food cans, industrial coatings and many other industrial uses. Product lines include acrolein and derivatives, CARBOWAX™ and CARBOWAX™ SENTRY™ polyethylene glycols and methoxypolyethylene glycols, TERGITOL™ and TRITON™ surfactants, UCAR™ deicing fluids, UCARTHERM™ heat transfer fluids and UCON™ fluids.

Latex—water-based emulsions, including EVOCAR™ vinyl acetate ethylene, NEOCAR™ branched vinyl ester latexes, UCAR™ POLYPHOBE™ rheology modifiers, and UCAR™ all-acrylic, styrene-acrylic and vinyl-acrylic latexes used as key components in decorative and industrial paints, adhesives, textile products, and construction products, such as caulks and sealants.

Polyethylene—includes FLEXOMER™ very low density polyethylene resins used as impact modifiers in other polymers and to produce flexible hose and tubing, frozen-food bags and stretch wrap; TUFLIN™ linear low density and UNIVAL™ high density polyethylene resins used in high-volume applications such as housewares; milk, water, bleach and detergent bottles; grocery sacks; trash bags; packaging; water and gas pipe.

Polypropylene—end-use applications include upholstery; hygiene articles; packaging films; thin wall food containers and serviceware; industrial containers; housewares and appliances; heavy-duty tapes and ropes; and automobile interior panels and trim.

Solvents and Intermediates—includes oxo aldehydes, acids and alcohols used as chemical intermediates and industrial solvents and in herbicides, plasticizers, paint dryers, jet-turbine lubricants, lube oil additives, and food and feed preservatives; and esters, which serve as solvents in industrial coatings and printing inks and in the manufacturing processes for pharmaceuticals and polymers.

Technology Licensing and Catalysts—includes licensing and supply of related catalysts for the UNIPOL™ polypropylene process, catalysts supply for the METEOR™ process for EO/EG and the LP OXO™ process for oxo alcohols; licensing of the UNIPOL™ polyethylene process and sale of related catalysts (including metallocene catalysts) through Univation Technologies, LLC, a 50:50 joint venture with ExxonMobil; and licensing of the METEOR™ process for EO/EG and the LP OXO™ process for oxo alcohols through Dow Technology Investments LLC, a 50:50 joint venture with Dow Global Technologies Inc., a Dow subsidiary.

Vinyl Acetate Monomer—a building block for the manufacture of a variety of polymers used in water-based emulsion paints, adhesives, paper coatings, textiles, safety glass and acrylic fibers.

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Water Soluble Polymers—polymers used to enhance the physical and sensory properties of end-use products in a wide range of applications including food, paints and coatings, pharmaceuticals, oil and gas, personal care, building and construction, and other specialty applications. Key product lines include CELLOSIZE™ hydroxyethyl cellulose, POLYOX™ water-soluble resins, and products for hair and skin manufactured by Amerchol Corporation, a wholly owned subsidiary.

Wire and Cable—polyolefin-based compounds for high-performance insulation, semiconductives and jacketing systems for power distribution, telecommunications, and flame-retardant wire and cable. Key product lines include: REDI-LINK™ polyethylene-based wire and cable compounds, SI-LINK™ polyethylene-based low voltage insulation compounds, UNIGARD™ HP high-performance flame-retardant compounds, UNIGARD™ RE reduced emissions flame-retardant compounds, and UNIPURGE™ purging compounds.

Competition

The chemical industry has been historically competitive and this competitive environment is expected to continue. The chemical divisions of the major international oil companies also provide substantial competition both in the United States and abroad.

Research and Development

The Corporation is engaged in a continuous program of basic and applied research to develop new products and processes, to improve and refine existing products and processes and to develop new applications for existing products. Research and development expenses were $68 million in 2008, $70 million in 2007 and $71 million in 2006. In addition, certain of the Corporation's nonconsolidated affiliates conduct research and development within their business fields.

Patents, Licenses and Trademarks

The Corporation owns approximately 1,364 U.S. and foreign patents that relate to a wide variety of products and processes, has a substantial number of pending patent applications throughout the world and is licensed under a number of patents. These patents expire at various times over the next 20 years. The Corporation also has a large number of trademarks. Although the Corporation considers that its patents, licenses and trademarks in the aggregate constitute a valuable asset, it does not regard its business as being materially dependent upon any single patent, license or trademark.

Principal Partly Owned Companies

UCC's principal nonconsolidated affiliates for 2008 and the Corporation's ownership interest in each are listed below:

·	Nippon Unicar Company Limited – 50 percent – a Japan-based manufacturer of polyethylene and specialty polyethylene compounds.

The OPTIMAL Group of Companies [consisting of OPTIMAL Olefins (Malaysia) Sdn. Bhd. – 23.75 percent; OPTIMAL Glycols (Malaysia) Sdn. Bhd. – 50 percent; OPTIMAL Chemicals (Malaysia) Sdn. Bhd. – 50 percent] – Malaysian companies that operate an ethane/propane cracker, an ethylene glycol facility and a production facility for ethylene and propylene derivatives within a world-scale, integrated chemical complex located in Kertih, Terengganu, Malaysia.

·	Univation Technologies, LLC – 50 percent – a U.S. company that develops, markets and licenses polyethylene process technology and related catalysts.

Financial Information about Foreign and Domestic Operations and Export Sales

In 2008, the Corporation derived 57 percent of its trade sales from customers outside the United States and had 1 percent of its property investment located outside the United States. See Note P to the Consolidated Financial Statements for information on sales to external customers and long-lived assets by geographic area.

Protection of the Environment

Matters pertaining to the environment are discussed in Management's Discussion and Analysis of Financial Condition and Results of Operations, and Notes A and J to the Consolidated Financial Statements.

ITEM 1A. RISK FACTORS.

The factors described below represent the Corporation’s principal risks. Except as otherwise indicated, these factors may or may not occur and the Corporation is not in a position to express a view on the likelihood of any such factor occurring. Other factors may exist that the Corporation does not consider to be significant based on information that is currently available or that the Corporation is not currently able to anticipate.

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Volatility in purchased feedstock and energy costs impacts UCC’s operating costs and adds variability to earnings.

In 2008, purchased feedstock and energy costs continued to rise until the fourth quarter when costs fell sharply. Purchased feedstock and energy costs are expected to remain volatile throughout 2009. When these costs increase, the Corporation is not always able to immediately raise selling prices and, ultimately, its ability to pass on underlying cost increases is greatly dependent on market conditions. As a result, increases in these costs could negatively impact the Corporation’s results of operations.

The Corporation’s parent company, The Dow Chemical Company (“Dow”), is party to a number of claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions, which could impact liquidity for the Corporation.

Dow is a service provider, material debtor and the major customer of the Corporation. Certain of the claims and lawsuits facing Dow seek damages in very large amounts, including purported class actions and lawsuits with numerous named plaintiffs. All such claims are being contested and, with the exception of the possible effect of the asbestos-related liability of UCC and the ongoing litigation with Rohm and Haas Company (“Rohm and Haas”), it is the opinion of Dow’s management that the possibility is remote that the aggregate of all such claims and lawsuits will have a material adverse impact on Dow’s consolidated financial statements. The ultimate resolution of Dow’s litigation with Rohm and Haas could potentially impact sources of liquidity for the Corporation.

The value of investments are influenced by economic and market conditions.

The current economic environment is negatively impacting the fair value of pension assets, which could trigger increased future funding requirements of the pension trust.

Adverse conditions in the global economy and disruption of financial markets could continue to negatively impact UCC’s results of operations.

The continuing economic downturn in the United States and globally could further reduce demand for the Corporation’s products, resulting in a continued decrease in sales volume that could have a negative impact on UCC’s results of operations.

Actual or alleged violations of environmental laws or permit requirements could result in restrictions or prohibitions on plant operations, substantial civil or criminal sanctions, as well as the assessment of strict liability and/or joint and several liability.

The Corporation is subject to extensive federal, state, local and foreign laws, regulations, rules and ordinances relating to pollution, protection of the environment and the generation, storage, handling, transportation, treatment, disposal and remediation of hazardous substances and waste materials. At December 31, 2008, the Corporation had accrued obligations of $67 million for environmental remediation and restoration costs, including $18 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to approximately twice that amount. Costs and capital expenditures relating to environmental, health or safety matters are subject to evolving regulatory requirements and will depend on the timing of the promulgation and enforcement of specific standards which impose the requirements. Moreover, changes in environmental regulations could inhibit or interrupt the Corporation’s operations, or require modifications to its facilities. Accordingly, environmental, health or safety regulatory matters may result in significant unanticipated costs or liabilities.

The Corporation is party to a number of claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions.

The Corporation is involved in a number of legal proceedings and claims with both private 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. With the exception of the possible effect of the asbestos-related liability described below, it is the opinion of the Corporation’s management that the possibility is remote that the aggregate of all such claims and lawsuits will have a material adverse impact on the Corporation’s consolidated financial statements.

The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. At December 31, 2008, the Corporation’s asbestos-related liability for pending and future claims was $934 million and the Corporation’s receivable for insurance recoveries related to its asbestos liability was $403 million. At December 31, 2008, the Corporation also had receivables of $272 million for insurance recoveries for defense and resolution costs. Management believes that it is reasonably possible that the cost of disposing of the Corporation’s asbestos-related claims, including future defense costs, could have a material adverse impact on the Corporation’s consolidated financial statements.

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Local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals.

Growing public and political attention has been placed on protecting critical infrastructure, including the chemical industry, from security threats. Terrorist attacks and natural disasters have increased concern regarding the security of chemical production and distribution. In addition, local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals, which could result in higher operating costs and interruptions in normal business operations.

Weather-related matters could impact the Corporation’s results of operations.

In 2005 and again in the third quarter of 2008, major hurricanes caused significant disruption in UCC’s operations on the U.S. Gulf Coast, logistics across the region and in the supply of certain raw materials which had an adverse impact on volume and cost for some of UCC’s products. If similar weather-related matters occur in the future, it could negatively affect UCC’s results of operations, due to the Corporation’s substantial presence on the U.S. Gulf Coast.

ITEM 1B. UNRESOLVED STAFF COMMENTS.

None.

ITEM 2. PROPERTIES.

The Corporation operates 12 manufacturing sites in four countries. The Corporation considers that its properties are in good operating condition and that its machinery and equipment have been well maintained. The following are the major production sites:

United States:

Hahnville, Louisiana; Texas City and Seadrift, Texas; South Charleston, West Virginia

All of UCC’s plants are owned or leased, subject to certain easements of other persons which, in the opinion of management, do not substantially interfere with the continued use of such properties or materially affect their value.

A summary of properties, classified by type, is contained in Note D to the Consolidated Financial Statements.

ITEM 3. LEGAL PROCEEDINGS.

Asbestos-Related Matters

Introduction

The Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises, and UCC’s responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.

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

The table below provides information regarding asbestos-related claims filed against the Corporation and Amchem:

	2008			2007			2006
Claims unresolved at January 1		90,322			111,887			146,325
Claims filed		10,922			10,157			16,386
Claims settled, dismissed or otherwise resolved		(25,538	)		(31,722	)		(50,824	)
Claims unresolved at December 31		75,706			90,322			111,887
Claimants with claims against both UCC and Amchem		24,213			28,937			38,529
Individual claimants at December 31		51,493			61,385			73,358

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Plaintiffs’ lawyers often sue dozens or even hundreds of defendants in individual lawsuits on behalf of hundreds or even thousands of claimants. As a result, the damages alleged are not expressly identified as to UCC, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only the Corporation and/or Amchem are the sole named defendants. For these reasons and based upon the Corporation’s litigation and settlement experience, the Corporation does not consider the damages alleged against it and Amchem to be a meaningful factor in its determination of any potential asbestos-related liability.

Estimating the Liability

Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for 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 to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, the Corporation has requested ARPC to review Union Carbide’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.

In November 2006, the Corporation requested ARPC to review the Corporation’s historical asbestos claim and resolution activity and determine the appropriateness of updating its January 2005 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2006 and concluded that the experience from 2004 through 2006 was sufficient for the purpose of forecasting future filings and values of asbestos claims filed against UCC and Amchem, and could be used in place of previous assumptions to update the January 2005 study. The resulting study, completed by ARPC in December 2006, stated that the undiscounted cost of resolving pending and future asbestos-related claims 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 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

Based on ARPC’s December 2006 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims to $1.2 billion at 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 the consolidated statements of income.

In November 2007, the Corporation requested ARPC to review the Corporation’s 2007 asbestos claim and resolution activity and determine the appropriateness of updating its December 2006 study. 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 not provide a more likely estimate of future events than the estimate reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on the Corporation’s own review of the asbestos claim and resolution activity and ARPC’s response, the Corporation determined that no change to the accrual was required. At December 31, 2007, the Corporation’s asbestos-related liability for pending and future claims was $1.1 billion.

In November 2008, the Corporation requested ARPC to review the Corporation’s historical asbestos claim and resolution activity and determine the appropriateness of updating its December 2006 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2008. The resulting study, completed by ARPC in December 2008, stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2023 was estimated to be between $952 million and $1.2 billion. As in its earlier studies, ARPC provided estimates for a longer period of time in its December 2008 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

In December 2008, based on ARPC’s December 2008 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims to $952 million, which covered the 15-year period ending 2023, excluding future defense and processing costs. The reduction was $54 million and was shown as “Asbestos-related credit” in the consolidated statements of income. At December 31, 2008, the asbestos-related liability for pending and future claims was $934 million.

At December 31, 2008, approximately 21 percent of the recorded liability related to pending claims and approximately 79 percent related to future claims. At December 31, 2007, approximately 31 percent of the recorded liability related to pending claims and approximately 69 percent related to future claims.

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Defense and Resolution Costs

The following table provides information regarding defense and resolution costs related to asbestos-related claims filed against the Corporation and Amchem:

Defense and Resolution Costs				Aggregate Costs
In millions	2008	2007	2006	to Date as of Dec. 31, 2008
Defense costs	$60	$84	$62	$625
Resolution costs	$116	$88	$117	$1,386

The average resolution payment per asbestos claimant and the rate of new claim filings has fluctuated both up and down since the beginning of 2001. The Corporation’s management expects such fluctuations to continue in the future based upon a number of factors, including the number and type of claims settled in a particular period, the jurisdictions in which such claims arose, and the extent to which any proposed legislative reform related to asbestos litigation is being considered.

The Corporation expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was $53 million in 2008, $84 million in 2007 and $45 million in 2006, and was reflected in “Cost of sales” in the consolidated statements of income.

Insurance Receivables

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

In September 2003, the Corporation filed a comprehensive insurance coverage 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 various asbestos claims and to facilitate an orderly and timely collection of insurance proceeds. This lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with the Corporation regarding their asbestos-related insurance coverage, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. Although the lawsuit is continuing, through the end of 2008, the Corporation had reached settlements with several of the carriers involved in this litigation.

The Corporation’s receivable for insurance recoveries related to its asbestos liability was $403 million at December 31, 2008 and $467 million at December 31, 2007. At December 31, 2008 and December 31, 2007, all of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.

In addition to the receivable for insurance recoveries related to its asbestos liability, the Corporation had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

Receivables for Costs Submitted to Insurance Carriers at December 31
In millions	2008		2007
Receivables for defense costs	$	28	$	18
Receivables for resolution costs		244		253
Total	$	272	$	271

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

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Summary

The amounts recorded for the asbestos-related liability and related insurance receivable described 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, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded.

Because of the uncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing the Corporation and Amchem. Management believes that it is reasonably possible that the cost of disposing of the Corporation’s asbestos-related claims, including future defense costs, could have a material adverse impact on the Corporation's results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

Omitted pursuant to General Instruction I of Form 10-K.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

The Corporation is a wholly owned subsidiary of Dow; therefore, there is no public trading market for the Corporation’s common stock.

ITEM 6. SELECTED FINANCIAL DATA.

Omitted pursuant to General Instruction I of Form 10-K.

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Union Carbide Corporation and Subsidiaries

Item 7. Management’s Discussion and Analysis of Financial Condition

and Results of Operations.

Pursuant to General Instruction I of Form 10-K “Omission of Information by Certain Wholly-Owned Subsidiaries,” this section includes only management's narrative analysis of the results of operations for the year ended December 31, 2008, the most recent fiscal year, compared with the year ended December 31, 2007, the fiscal year immediately preceding it.

References below to “Dow” refer to The Dow Chemical Company and its consolidated subsidiaries, except as otherwise indicated by the context.

Dow conducts its worldwide operations through global businesses. The Corporation’s business activities comprise components of Dow’s global operations rather than stand-alone operations. Because there are no separable reportable business segments for UCC under Statement of Financial Accounting Standards (“SFAS”) No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.

Forward-Looking Information

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements made by or on behalf of Union Carbide Corporation (the “Corporation” or “UCC”). This section covers the current performance and outlook of the Corporation. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Corporation’s operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission. 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 be realized. The Corporation assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

Results of Operations

Total net sales for 2008 were down slightly at $7,326 million compared with $7,493 million in 2007. Sales to Dow in 2008 were $7,107 million compared with $7,282 million in 2007. Selling prices to Dow are based on market prices for the related products. Average selling prices for all major products were higher in 2008 compared with 2007 principally due to higher feedstock and energy costs, led by polyglycols and surfactants, polyethylene, polypropylene, ethanolamines and oxo products. Sales volume was down for 2008 compared with 2007 across most product lines due to softening demand in the second half of 2008.

Cost of sales for 2008 increased $313 million compared with 2007 due to significantly higher feedstock and energy costs. Gross margin for 2008 was $132 million, down from $612 million for 2007 as the increase in selling prices was more than offset by the increase in feedstock and energy costs and overall lower sales volume.

In 2008, UCC recorded a $26 million goodwill impairment loss associated with polypropylene assets. See Note F to the Consolidated Financial Statements.

On December 5, 2008, the Board of Directors of UCC approved a restructuring plan to improve the cost effectiveness of the Corporation’s global operations. As a result, the Corporation recorded restructuring charges of $105 million in the fourth quarter of 2008 which included the write-off of the net book value of certain assets in Texas and Xiaolan, China, and a workforce reduction. On November 30, 2007, the Board of Directors of UCC approved a plan to shut down certain assets and make organizational changes to enhance the efficiency and cost effectiveness of the Corporation's operations. As a result, the Corporation recorded restructuring charges of $55 million in the fourth quarter of 2007 that included the write-off of the net book value of the polypropylene plant in St. Charles, Louisiana, which was shut down in the fourth quarter of 2007, and organizational changes in West Virginia. See Note B to the Consolidated Financial Statements.

Following the December 2008 completion of a study to review its asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims (excluding future defense and processing costs) by $54 million. The reduction was shown as “Asbestos-related credit” in the consolidated statements of income.

Equity in earnings of nonconsolidated affiliates in 2008 was $166 million, down from $500 million in 2007 primarily due to the absence of equity earnings from EQUATE Petrochemical Company K.S.C. (“EQUATE”). In late fourth quarter 2007, the Corporation, through a series of noncash transactions, contributed its share of EQUATE for an increased share in Dow International Holdings Company (“DIHC”).

Sundry income (expense) – net includes a variety of income and expense items such as dividend income, the gain or loss on foreign currency exchange, commissions, charges for management services provided by Dow and gains and losses on sales of investments and assets. Sundry income for 2008 was $243 million compared with $49 million in 2007. Sundry income for

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2008 included dividend income of $297 million from related parties, including $204 million from DIHC and $82 million from Modeland International Holdings Inc.

Interest income for 2008 was $110 million compared with $173 million in 2007, reflecting a decrease in interest rates. Interest expense and amortization of debt discount for 2008 was $48 million compared with $52 million for 2007.

The provision for income taxes was $118 million in 2008 compared with $86 million in 2007. The Corporation’s overall effective tax rate was 26.5 percent for 2008 compared with 7.6 percent for 2007. UCC’s effective tax rate fluctuates based on, among other factors, the level of after-tax income from joint ventures and the level of income relative to available tax credits. The effective tax rate for 2007 was low principally due to a change in the Corporation’s legal ownership structure with respect to its investment in EQUATE, resulting in a favorable impact to the provision for income taxes of $195 million in the fourth quarter of 2007. Also impacting the 2007 rate was the net reversal of valuation allowances of $64 million and higher earnings from the Corporation’s joint ventures. Since most of the earnings from nonconsolidated affiliates are taxed at the joint venture level, the impact of higher equity earnings decreased the Corporation’s overall effective tax rate. The Corporation is included in Dow’s consolidated federal income tax group and consolidated income tax return. The underlying factors affecting UCC’s overall effective tax rates are summarized in Note O to the Consolidated Financial Statements.

The Corporation reported net income of $327 million for 2008 compared with $1,052 million for 2007.

OTHER MATTERS

Recent Accounting Pronouncements

See Note A to the Consolidated Financial Statements for a summary of significant accounting policies and recent accounting pronouncements.

Critical Accounting Policies

The preparation of financial statements and related disclosures in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note A to the Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Following are the Corporation’s critical accounting policies impacted by judgments, assumptions and estimates:

Litigation

The Corporation is subject to legal proceedings and claims arising out of the normal course of business. The Corporation routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an actuarial analysis of historical claims experience for incurred but not reported matters. The Corporation has an active risk management program consisting of numerous insurance policies secured from many carriers. These policies provide coverage that is utilized to minimize the impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note J to the Consolidated Financial Statements.

Asbestos-Related Matters

The Corporation and a former subsidiary, Amchem Products, Inc. (“Amchem”), are and have been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for pending and future claims for the 15-year period ending in 2017 to $2.2 billion, excluding future defense and processing costs. The Corporation also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002. Since then, the Corporation has compared current asbestos claim and resolution activity to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, the Corporation has requested ARPC to review the Corporation’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.

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ARPC in December 2006, stated that the undiscounted cost of resolving pending and future asbestos-related claims 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 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

Based on ARPC’s December 2006 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims $177 million to $1.2 billion at December 31, 2006 which covered the 15-year period ending in 2021, excluding future defense and processing costs.

Following the completion of the review by ARPC in December 2007, as well as the Corporation’s own review of the asbestos claim and resolution activity, the Corporation determined that no change to the asbestos-related liability for pending and future claims was required. At December 31, 2007, the Corporation’s asbestos-related liability for pending and future claims was $1.1 billion.

The Corporation’s receivable for insurance recoveries related to its asbestos liability was $403 million at December 31, 2008 and $467 million at December 31, 2007. In addition, the Corporation had receivables of $272 million at December 31, 2008 and $271 million at December 31, 2007 for insurance recoveries for defense and resolution costs.

The amounts recorded by the Corporation for the asbestos-related liability and related insurance receivable were based upon current, known facts. However, future events, such as the number of new claims to be filed and/or received each year, the average cost of disposing of each such claim, coverage issues among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries for the Corporation to be higher or lower than those projected or those recorded.

For additional information, see Legal Proceedings, Asbestos-Related Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Note J to the Consolidated Financial Statements.

Environmental Matters

The Corporation determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability and emerging remediation technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. In the case of landfills and other active waste management facilities, UCC recognizes the costs over the useful life of the facility. At December 31, 2008, the Corporation had accrued obligations of $67 million for environmental remediation and restoration costs, including $18 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to approximately twice that amount. At December 31, 2007, the Corporation had accrued obligations of $75 million for environmental remediation and restoration costs, including $23 million for the remediation of Superfund sites. For further discussion, see Environmental Matters in Management’s Discussion and Analysis of Financial Condition and Results of Operations and Notes A and J to the Consolidated Financial Statements.

Pension and Other Postretirement Benefits

The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including expected return on plan

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assets, discount rates at which the liabilities could be settled at December 31, 2008, rate of increase in future compensation levels, mortality rates and health care cost trend rates. These assumptions are updated annually and are disclosed in Note L to the Consolidated Financial Statements. In accordance with U.S. GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and therefore affect expense recognized and obligations recorded in future periods.

The Corporation determined the expected long-term rate of return on assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation and the underlying return fundamentals of each asset class. The Corporation’s historical experience with the pension fund asset performance and comparisons to expected returns of peer companies with similar fund assets were also considered. The expected return of each asset class is derived from a forecasted future return confirmed by historical experience. The expected long-term rate of return is an assumption and not what is expected to be earned in any one particular year. The weighted-average long-term rate of return assumption used for determining net periodic pension expense for 2008 was 8.0 percent. This assumption remained unchanged for determining 2009 net periodic pension expense. Future actual pension income/expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Corporation’s pension plans.

The Corporation bases the determination of pension expense or income on a market-related valuation of plan assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and losses have been recognized and amortized. At December 31, 2008, $707 million of net losses remain to be recognized in the calculation of the market-related value of plan assets. These net losses will result in increases in future pension expense as they are recognized in the market-related value of assets and are a component of the total net loss of $1,143 million shown under “Amounts recognized in “Pretax balance in AOCI at end of year” in the table entitled “Change in Projected Benefit Obligations, Plan Assets and Funded Status of all Significant Plans” included in Note L to the Consolidated Financial Statements. The remaining $436 million of net losses represents cumulative changes in plan experience and actuarial assumptions. The net decrease in the market-related value of assets due to the recognition of prior gains and losses is presented in the following table:

Net Decrease in Market-Related Asset Value due to Recognition of Prior Asset Gains and Losses In millions
2009	$	172
2010		158
2011		174
2012		203
Total	$	707

The discount rates utilized to measure the pension and other postretirement benefit obligations are based on the yield on high quality fixed income investments at the measurement date. Future expected actuarially determined cash flows of the plans are matched against the Citigroup Pension Discount Curve (Above Median) to arrive at a single discount rate by plan. The resulting discount rate increased from 6.65 percent at December 31, 2007, to 6.85 percent at December 31, 2008.

A 25 basis point adjustment in the long-term return on assets assumption would change total pension expense for 2009 by approximately $9 million. A 25 basis point increase in the discount rate assumption would lower the total pension expense for 2009 by approximately $1 million. A 25 basis point decrease in the discount rate would increase pension expense by approximately $6 million. A 25 basis point change in the long-term return and discount rate assumptions would have an immaterial impact on the other postretirement benefit expense for 2009.

The assumption for the long-term rate of increase in compensation levels is zero percent for 2009, 4.25 percent for 2010 and 4.50 percent thereafter. Since 2002, the Corporation has used a generational mortality table to determine the duration of its pension and other postretirement obligations.

Based on the 2009 pension assumptions, a reduction in curtailment costs, and changes in the market-related value of assets due to the recognition of prior asset gains, the Corporation expects to record $13 million more in income for pension and other postretirement benefits in 2009 than it did in 2008.

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The value of the qualified plan assets totaled $3.2 billion at December 31, 2008, a decrease of $999 million compared with December 31, 2007. The funded status of the qualified plan, net of benefit obligations was down by $918 million at December 31, 2008 compared with December 31, 2007. The decrease was due to the unfavorable impact of asset returns partially offset by an increase in the assumed discount rate. For 2009, the Corporation does not expect to make cash contributions to its pension and other postretirement benefit plans.

Income Taxes

Deferred tax assets and liabilities are determined based on temporary differences between the financial reporting and tax bases of assets and liabilities, applying enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Based on the evaluation of available evidence, both positive and negative, the Corporation recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered more likely than not.

At December 31, 2008, the Corporation had a net deferred tax asset balance of $477 million, including deferred tax assets for tax loss and tax credit carryforwards of $161 million, of which $1 million is subject to expiration in the years 2009-2013. In order to realize these deferred tax assets for tax loss and tax credit carryforwards, the Corporation needs taxable income of approximately $712 million across multiple jurisdictions. The taxable income needed to realize the deferred tax assets for tax loss and tax credit carryforwards that are subject to expiration between 2009-2013 is $6 million. In evaluating the ability to realize its deferred tax assets, the Corporation relied principally on forecasted taxable income using historical and projected future operating results, the reversal of existing temporary differences and the availability of tax planning strategies.

The Corporation recognizes the financial statement effects of an uncertain tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. At December 31, 2008, the Corporation had uncertain tax positions of $265 million.

The Corporation accrues for non-income tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. At December 31, 2008, the Corporation had a non-income tax contingency reserve of $29 million. For additional information, see Note O to the Consolidated Financial Statements.

Environmental Matters

Environmental Policies

The Corporation is committed to world-class environmental, health and safety (“EH&S”) performance, as demonstrated by a long-standing commitment to Responsible Care®, as well as a strong commitment to achieve the Corporation’s 2015 Sustainability Goals – goals that set the standard for sustainability in the chemical industry by focusing on improvements in UCC’s local corporate citizenship and product stewardship, and by actively pursuing methods to reduce the Corporation’s environmental impact.

The EH&S management system (“EMS”) defines the “who, what, when and how” needed for the businesses to achieve the policies, requirements, performance objectives, leadership expectations and public commitments. EMS is also designed to minimize the long-term cost of environmental protection and to comply with applicable laws and regulations. To ensure effective utilization, EMS is integrated into a company-wide management system for EH&S, Operations, Quality and Human Resources, including implementation of the global EH&S Work Process to improve EH&S performance and to ensure ongoing compliance worldwide.

UCC first works to eliminate or minimize the generation of waste and emissions at the source through research, process design, plant operations and maintenance. Next, UCC finds ways to reuse and recycle materials. Finally, unusable or non-recyclable hazardous waste is treated before disposal to eliminate or reduce the hazardous nature and volume of the waste. Treatment may include destruction by chemical, physical, biological or thermal means. Disposal of waste materials in landfills is considered only after all other options have been thoroughly evaluated. UCC has specific requirements for waste that is transferred to non-UCC facilities, including the periodic auditing of these facilities.

Chemical Security

Public and political attention continues to be placed on the protection of U.S. critical infrastructure, including the chemical industry, from security threats. Terrorist attacks and natural disasters have increased concern about the security of chemical production and distribution. The focus on security is not new to UCC. UCC continues to improve its security plans, placing emphasis on the safety of UCC communities and people by being prepared to meet risks at any level and to address both internal and external identifiable risks. UCC’s security plans are also developed to avert interruptions of normal business work operations which could have a material adverse impact on the Corporation's results of operations, liquidity and financial condition.

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UCC is a Responsible Care® company and adheres to the Responsible Care® Security Code that requires all aspects of security – including facility, transportation, and cyberspace – be assessed and gaps addressed. Through global implementation of the Security Code, including voluntary security enhancements and upgrades made since 2002, UCC has permanently heightened the level of security – not just in the United States, but worldwide. In addition, UCC uses a risk-based approach employing the U.S. Government’s Sandia National Labs methodology to repeatedly assess the risks to sites, systems and processes. UCC has expanded its comprehensive Distribution Risk Review process that had been in place for decades to address potential threats in all modes of transportation across its supply chain. To reduce vulnerabilities, UCC maintains security measures that meet or exceed regulatory and industry security standards in all areas in which UCC operates. Assessment and improvement costs are not considered material to the Corporation's consolidated financial statements.

UCC continually works to strengthen partnerships with local responders, law enforcement, and security agencies, and to enhance confidence in the integrity of its security and risk management program as well as strengthen its preparedness and response capabilities. UCC also works closely with its supply chain partners and strives to educate lawmakers, regulators and communities about its resolve and actions to date which are mitigating security and crisis threats.

Climate Change

There is growing political and scientific consensus that emissions of greenhouse gases (“GHG”) due to human activities continue to alter the composition of the global atmosphere in ways that are affecting the climate. UCC takes global climate change very seriously and is committed to reducing its GHG intensity (pounds of GHG per pound of product), developing climate-friendly products and processes and, over the longer term, implementing technology solutions to achieve even greater climate change improvements.

Environmental Remediation

UCC accrues the costs of remediation of its facilities and formerly owned facilities based on current law and existing technologies. The nature of such remediation includes, for example, the management of soil and groundwater contamination and the closure of contaminated landfills and other waste management facilities. In the case of landfills and other active waste management facilities, UCC recognizes the costs over the useful life of the facility. The policies adopted to properly reflect the monetary impacts of environmental matters are discussed in Note A to the Consolidated Financial Statements. To assess the impact on the consolidated financial statements, environmental experts review currently available facts to evaluate the probability and scope of potential liabilities. Inherent uncertainties exist in such evaluations primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies. These liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Corporation had an accrued liability of $49 million at December 31, 2008 and $52 million at December 31, 2007 related to the remediation of current or former UCC-owned sites.

In addition to current and former UCC-owned sites, under the Federal Comprehensive Environmental Response, Compensation and Liability Act and equivalent state laws (hereafter referred to collectively as “Superfund Law”), UCC is liable for remediation of other hazardous waste sites where UCC allegedly disposed of, or arranged for the treatment or disposal of, hazardous substances. Because Superfund Law imposes joint and several liability upon each party at a site, UCC has evaluated its potential liability in light of the number of other companies that also have been named potentially responsible parties (“PRPs”) at each site, the estimated apportionment of costs among all PRPs, and the financial ability and commitment of each to pay its expected share. Management’s estimate of the Corporation’s remaining liability for the remediation of Superfund sites was $18 million at December 31, 2008 and $23 million at December 31, 2007, which has been accrued, although the ultimate cost with respect to these sites could exceed that amount. The Corporation has not recorded any third-party recovery related to these sites as a receivable.

Information regarding environmental sites is provided below:

Environmental Sites	UCC-owned Sites(1)						Superfund Sites(2)
	2008			2007			2008			2007
Number of sites at January 1		32			33			62			47
Sites added during year		-			1			3			15
Sites closed during year		(1	)		(2	)		(9	)		-
Number of sites at December 31		31			32			56			62
(1) UCC-owned sites are sites currently or formerly owned by UCC, where remediation obligations are imposed (in the United States) by the Resource Conservation Recovery Act or analogous state law. (2) Superfund sites are sites, including sites not owned by UCC, where remediation obligations are imposed by Superfund Law.

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In total, the Corporation’s accrued liability for probable environmental remediation and restoration costs was $67 million at December 31, 2008, compared with $75 million at December 31, 2007. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to approximately twice that amount. It is the opinion of management that the possibility is remote that costs in excess of those disclosed will have a material adverse impact on the Corporation’s consolidated financial statements.

The amounts charged to income on a pretax basis related to environmental remediation totaled $29 million in 2008 and $33 million in 2007. Capital expenditures for environmental protection were $17 million in 2008 and $15 million in 2007.

Asbestos-Related Matters

Introduction

The table below provides information regarding asbestos-related claims filed against the Corporation and Amchem:

	2008			2007			2006
Claims unresolved at January 1		90,322			111,887			146,325
Claims filed		10,922			10,157			16,386
Claims settled, dismissed or otherwise resolved		(25,538	)		(31,722	)		(50,824	)
Claims unresolved at December 31		75,706			90,322			111,887
Claimants with claims against both UCC and Amchem		24,213			28,937			38,529
Individual claimants at December 31		51,493			61,385			73,358

Estimating the Liability

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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 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

Based on ARPC’s December 2006 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims to $1.2 billion at 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 the consolidated statements of income.

Defense and Resolution Costs

The following table provides information regarding defense and resolution costs related to asbestos-related claims filed against the Corporation and Amchem:

Defense and Resolution Costs				Aggregate Costs
In millions	2008	2007	2006	to Date as of Dec. 31, 2008
Defense costs	$60	$84	$62	$625
Resolution costs	$116	$88	$117	$1,386

Insurance Receivables

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to facilitate an orderly resolution and collection of the Corporation’s insurance policies and to resolve issues that the insurance carriers may raise.

Receivables for Costs Submitted to Insurance Carriers at December 31
In millions	2008		2007
Receivables for defense costs	$	28	$	18
Receivables for resolution costs		244		253
Total	$	272	$	271

Summary

Matters Involving the Formation of K-Dow Petrochemicals

On December 13, 2007, Dow and Petrochemical Industries Company (K.S.C.) (“PIC”) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, announced plans to form a 50:50 global petrochemicals joint venture. The proposed joint venture, K-Dow Petrochemicals (“K-Dow”), was expected to have revenues of more than $11 billion and employ more than 5,000 people worldwide.

On November 28, 2008, Dow entered into a Joint Venture Formation Agreement (“JVFA”) with PIC that provided for the establishment of K-Dow. To form the joint venture, Dow would transfer by way of contribution and sale to K-Dow, assets used in the research, development, manufacture, distribution, marketing and sale of polyethylene, polypropylene, polycarbonate, polycarbonate compounds and blends, ethyleneamines, ethanolamines, and related licensing and catalyst technologies; and K-Dow would assume certain related liabilities. It was anticipated that a significant part (but not substantially all) of UCC’s U.S.-based manufacturing assets would be included in the new joint venture.

On December 31, 2008, Dow received a written notice from PIC with respect to the JVFA advising Dow of PIC’s position that certain conditions to closing were not satisfied and, therefore, PIC was not obligated to close the transaction. On January 2, 2009, PIC refused to close the K-Dow transaction in accordance with the JVFA. Dow disagrees with the

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characterizations and conclusions expressed by PIC in the written notice and Dow has informed PIC that it breached the JVFA. On January 6, 2009, Dow announced that it will seek to fully enforce its rights under the terms of the JVFA and various related agreements.

Although Dow is currently prepared to close the K-Dow transaction immediately despite PIC’s breach, Dow has been approached by other interested parties about joint venturing with Dow for the businesses originally intended to be part of K-Dow. Dow is in the process of seeking an alternative joint venture partner for these businesses.

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Union Carbide Corporation and Subsidiaries

Item 7A. Quantitative and Qualitative Disclosures about Market Risk.

UCC’s business operations give rise to market risk exposure due to changes in foreign exchange rates and interest rates. To manage such risks effectively, the Corporation can enter into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. The Corporation does not hold derivative financial instruments for trading purposes.

As a result of investments, production facilities and other operations on a global basis, the Corporation has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Corporation’s foreign exchange risk management is to optimize the U.S. dollar value of net assets and cash flows, keeping the adverse impact of currency movements to a minimum. To achieve this objective, the Corporation will hedge, when appropriate, on a net exposure basis using foreign currency forward contracts, over-the-counter option contracts, cross-currency swaps and nonderivative instruments in foreign currencies. Main exposures are related to assets, liabilities and cash flows denominated in the currencies of Europe, Asia Pacific and Canada.

The main objective of interest rate risk management is to reduce the total funding cost to the Corporation and to alter the interest rate exposure to the desired risk profile. The Corporation’s primary exposure is to the U.S. dollar yield curve. UCC will use interest rate swaps and “swaptions,” when appropriate, to accomplish this objective.

UCC uses value at risk (“VAR”), stress testing and scenario analysis for risk measurement and control purposes. VAR estimates the potential gain or loss in fair market values given a certain move in prices over a certain period of time, using specified confidence levels. Through the end of 2007, the VAR methodology used by the Corporation was based primarily on a variance/covariance statistical model. The year-end daily VAR and average daily VAR for 2008 and 2007 are shown below.

Total Daily VAR at December 31(1)	2008		2007
In millions	Year-end	Average	Year-end	Average
Interest rate	$21	$15	$10	$8
(1) Using a 95 percent confidence level

In 2008, the Corporation changed its primary VAR methodology from a variance/covariance statistical model to a historical simulation model to more effectively capture co-movements in market rates across different instruments. In the new historical simulation model, a 97.5 percent confidence level is used and the historical scenario period includes at least six months of historical data. The new historical simulation model resulted in a total daily VAR of $46 million at December 31, 2008.

See Notes G and N to the Consolidated Financial Statements for further disclosure regarding market risk.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholder of

Union Carbide Corporation

We have audited the accompanying consolidated balance sheets of Union Carbide Corporation and subsidiaries (the "Corporation") as of December 31, 2008 and 2007, and the related consolidated statements of income, stockholder’s equity, comprehensive income, and cash flows for each of the three years in the period ended December 31, 2008. Our audits also included the financial statement schedule listed in the Index at Item 15 (a) 2. These financial statements and financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the financial statements and financial statement schedule based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Corporation is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Corporation's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Union Carbide Corporation and subsidiaries at December 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.

As discussed in Note A to the consolidated financial statements, effective December 31, 2006, Union Carbide Corporation changed its method of accounting for defined benefit pension and other postretirement plans to conform to Statement of Financial Accounting Standards No. 158.

/s/ DELOITTE & TOUCHE LLP
Deloitte & Touche LLP Midland, Michigan February 17, 2009

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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Income

(In millions) For the years ended December 31	2008		2007		2006
Net trade sales	$	219	$	211	$	506
Net sales to related companies		7,107		7,282		7,022
Total Net Sales		7,326		7,493		7,528
Cost of sales		7,194		6,881		6,563
Research and development expenses		68		70		71
Selling, general and administrative expenses		13		19		21
Goodwill impairment loss		26		-		-
Restructuring charges		105		55		14
Asbestos-related credit		54		-		177
Equity in earnings of nonconsolidated affiliates		166		500		395
Sundry income (expense) - net		243		49		(39	)
Interest income		110		173		128
Interest expense and amortization of debt discount		48		52		54
Income before Income Taxes		445		1,138		1,466
Provision for income taxes		118		86		420
Net Income Available for Common Stockholder	$	327	$	1,052	$	1,046
See Notes to the Consolidated Financial Statements.

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Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets

(In millions) At December 31	2008			2007
Assets
Current Assets
Cash and cash equivalents	$	24		$	22
Accounts receivable:
Trade (net of allowance for doubtful receivables - 2008: $1; 2007: $2)		21			26
Related companies		128			487
Other		90			129
Notes receivable from related companies		3,934			3,227
Inventories		187			178
Deferred income taxes and other current assets		64			60
Total current assets		4,448			4,129
Investments
Investments in related companies		972			972
Investments in nonconsolidated affiliates		427			385
Other investments		19			22
Noncurrent receivables		46			46
Noncurrent receivables from related companies		187			306
Total investments		1,651			1,731
Property
Property		7,630			7,509
Less accumulated depreciation		5,744			5,547
Net property		1,886			1,962
Other Assets
Goodwill		-			26
Other intangible assets (net of accumulated amortization - 2008: $135; 2007: $128)		17			22
Deferred income tax assets - noncurrent		439			112
Asbestos-related insurance receivables - noncurrent		658			696
Pension assets		-			699
Deferred charges and other assets		79			88
Total other assets		1,193			1,643
Total Assets	$	9,178		$	9,465
Liabilities and Stockholder's Equity
Current Liabilities
Notes payable - related companies	$	12		$	5
Long-term debt due within one year		249			-
Accounts payable:
Trade		170			239
Related companies		299			391
Other		35			29
Income taxes payable		176			185
Asbestos-related liabilities - current		120			141
Accrued and other current liabilities		198			180
Total current liabilities		1,259			1,170
Long-Term Debt		571			820
Other Noncurrent Liabilities
Pension and other postretirement benefits - noncurent		662			461
Asbestos-related liabilities - noncurrent		824			1,001
Other noncurrent obligations		298			356
Total other noncurrent liabilities		1,784			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		6,094			5,767
Accumulated other comprehensive loss		(844	)		(233	)
Net stockholder's equity		5,562			5,655
Total Liabilities and Stockholder's Equity	$	9,178		$	9,465
See Notes to the Consolidated Financial Statements.

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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows

(In millions) For the years ended December 31	2008			2007			2006
Operating Activities
Net Income Available for Common Stockholder	$	327		$	1,052		$	1,046
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		273			311			301
Provision (Credit) for deferred income tax		60			(238	)		58
Earnings of nonconsolidated affiliates in excess of dividends received		(34	)		(169	)		(24	)
Net gain on sales of property		(14	)		(10	)		-
Restructuring charges		105			55			14
Other (gain) loss, net		-			(1	)		1
Asbestos-related credit		(54	)		-			(177	)
Goodwill impairment loss		26			-			-
Pension contributions		(2	)		(2	)		(2	)
Changes in assets and liabilities:
Accounts and notes receivable		19			(6	)		42
Related company receivables		(348	)		(825	)		(857	)
Inventories		(9	)		21			(18	)
Accounts payable		(63	)		(64	)		12
Related company payables		(85	)		135			(62	)
Other assets and liabilities		(81	)		(51	)		(112	)
Cash provided by operating activities		120			208			222
Investing Activities
Capital expenditures		(252	)		(272	)		(228	)
Proceeds from sales of property		14			22			5
Distributions from nonconsolidated affiliates		-			7			4
Changes in noncurrent receivable from related company		119			(12	)		10
Purchases of investments		(19	)		(7	)		(14	)
Proceeds from sales of investments		20			6			3
Cash used in investing activities		(118	)		(256	)		(220	)
Financing Activities
Changes in short-term notes payable		-			(1	)		(2	)
Payments on long-term debt		-			-			(2	)
Cash used in financing activities		-			(1	)		(4	)
Summary
Increase (Decrease) in cash and cash equivalents		2			(49	)		(2	)
Cash and cash equivalents at beginning of year		22			71			73
Cash and cash equivalents at end of year	$	24		$	22		$	71
See Notes to the Consolidated Financial Statements.

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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Stockholder's Equity

(In millions) For the years ended December 31	2008			2007			2006
Common stock
Balance at beginning and end of year		-			-			-
Additional paid-in capital
Balance at beginning of year	$	121		$	121		$	121
Capital contribution		191			-			-
Balance at end of year		312			121			121
Retained earnings
Balance at beginning of year		5,767			4,782			3,736
Cumulative effect of adopting FIN No. 48		-			(67	)		-
Net income		327			1,052			1,046
Balance at end of year		6,094			5,767			4,782
Accumulated other comprehensive loss, net of tax
Cumulative translation adjustments at beginning of year		(69	)		(72	)		(72	)
Translation adjustments		8			3			-
Balance at end of year		(61	)		(69	)		(72	)
Minimum pension liability at beginning of year		-			-			(12	)
Adjustments		-			-			1
Balance at end of year, 2006 prior to adoption of SFAS No. 158		-			-			(11	)
Reversal of Minimum Pension Liability under SFAS No. 158		-			-			11
Recognition of prior service cost and net gain (loss) under SFAS No. 158		-			-			(411	)
Pension and Other Postretirement Benefit Plans at beginning of year		(164	)		(411	)		-
Net prior service cost (credit)		7			(41	)		-
Net gain (loss)		(626	)		288			-
Pension and Other Postretirement Benefit Plans at end of year		(783	)		(164	)		(411	)
Accumulated investment gain at beginning of year		-			-			-
Net investment results		1			-			-
Balance at end of year		1			-			-
Accumulated derivative gain at beginning of year		-			-			1
Net hedging results		(1	)		-			(1	)
Balance at end of year		(1	)		-			-
Total accumulated other comprehensive loss		(844	)		(233	)		(483	)
Net Stockholder's Equity	$	5,562		$	5,655		$	4,420
See Notes to the Consolidated Financial Statements.


Consolidated Statements of Comprehensive Income

(In millions) For the years ended December 31	2008			2007			2006
Net Income Available for Common Stockholder	$	327		$	1,052		$	1,046
Other Comprehensive Income (Loss), Net of Tax (tax amounts shown below for 2008, 2007, 2006)
Cumulative translation adjustments		8			3			-
Cumulative unrealized gains on investments		1			-			-
Defined benefit pension plans:
Prior service cost (credit) arising during period (net of tax of $2, $(24), $-)		4			(41	)		-
Net gain (loss) arising during period (net of tax of $(331), $160, $-)		(627	)		270			-
Less: Amortization of prior service cost included in net periodic pension costs (net of tax of $2, $-, $-)		3			-			-
Less: Amortization of net loss included in net periodic pension costs (net of tax of $1, $11, $-)		1			18			-
Minimum pension liability adjustment (net of tax of $-, $-, $1)		-			-			1
Net loss on cash flow hedging derivative instruments		(1	)		-			(1	)
Total other comprehensive income (loss)		(611	)		250			-
Comprehensive Income (Loss)	$	(284	)	$	1,302		$	1,046
See Notes to the Consolidated Financial Statements.

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Union Carbide Corporation and Subsidiaries

Notes to the Consolidated Financial Statements

NOTE A SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RECENT ACCOUNTING PRONOUNCEMENTS

Principles of Consolidation and Basis of Presentation

Except as otherwise indicated by the context, the terms “Corporation” and “UCC” as used herein mean Union Carbide Corporation and its consolidated subsidiaries. The accompanying consolidated financial statements of the Corporation were prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Corporation exercises control and, when applicable, entities for which the Corporation has a controlling financial interest. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20–50 percent owned companies, joint ventures and partnerships) are accounted for on the equity basis, except as noted. See Note N for further discussion.

The Corporation is a wholly owned subsidiary of The Dow Chemical Company (“Dow”). In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share,” the presentation of earnings per share is not provided, as it is not required in financial statements of wholly owned subsidiaries.

Dow conducts its worldwide operations through global businesses. The Corporation’s business activities comprise components of Dow’s global operations rather than stand-alone operations. The Corporation sells its products to Dow at market-based prices, in accordance with Dow’s longstanding intercompany pricing policy, in order to simplify the customer interface process. Because there are no separable reportable business segments for UCC under SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information,” and no detailed business information is provided to a chief operating decision maker regarding the Corporation’s stand-alone operations, the Corporation’s results are reported as a single operating segment.

Related Companies

Transactions with the Corporation’s parent company, Dow, or other Dow subsidiaries have been reflected as related company transactions in the consolidated financial statements. See Note N for further discussion.

Use of Estimates in Financial Statement Preparation

The preparation of financial statements in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. The Corporation’s consolidated financial statements include amounts that are based on management’s best estimates and judgments. Actual results could differ from those estimates.

Foreign Currency Translation

While the Corporation’s consolidated subsidiaries are primarily based in the United States, the Corporation has small subsidiaries in Asia Pacific. For those subsidiaries, the local currency has been primarily used as the functional currency. Translation gains and losses of those operations that use local currency as the functional currency are included in the consolidated balance sheets in “Accumulated other comprehensive income (loss)” (“AOCI”). Where the U.S. dollar is used as the functional currency, foreign currency gains and losses are reflected in income.

Environmental Matters

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. These accruals are adjusted periodically as assessment and remediation efforts progress or as additional technical or legal information becomes available. Accruals for environmental liabilities are included in the consolidated balance sheets in “Other noncurrent obligations” at undiscounted amounts.

Environmental costs are capitalized if the costs extend the life of the property, increase its capacity, and/or mitigate or prevent contamination from future operations. Costs related to environmental contamination treatment and cleanup are charged to expense. Estimated future incremental operations, maintenance and management costs directly related to remediation are accrued when such costs are probable and reasonably estimable.

Cash and Cash Equivalents

Cash and cash equivalents include time deposits and readily marketable securities with original maturities of three months or less.

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Financial Instruments

The Corporation calculates the fair value of financial instruments using quoted market prices whenever available. When quoted market prices are not available for various types of financial instruments (such as forwards, options and swaps), the Corporation uses standard pricing models with market-based inputs, which take into account the present value of estimated future cash flows.

The Corporation utilizes derivative instruments to manage exposures to currency exchange rates, commodity prices and interest rate risk. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date. Changes in the fair value of these instruments are reported in income or AOCI, depending on the use of the derivative and whether it qualifies for hedge accounting treatment under the provisions of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted.

Gains and losses on derivative instruments that qualify as cash flow hedges are recorded in AOCI, to the extent the hedges are effective, until the underlying transactions are recognized in income. To the extent effective, gains and losses on derivative and nonderivative instruments used as hedges of the Corporation’s net investment in foreign operations are recorded in AOCI as part of the cumulative translation adjustment. The ineffective portions of cash flow hedges and hedges of net investment in foreign operations, if any, are recognized in income immediately.

Gains and losses on derivative instruments designated and qualifying as fair value hedging instruments, as well as the offsetting losses and gains on the hedged items, are reported in income in the same accounting period. Derivative instruments not designated as hedges are marked-to-market at the end of each accounting period with the results included in income.

Inventories

Inventories are stated at the lower of cost or market. The method of determining cost for each subsidiary varies among last-in, first-out (“LIFO”); first-in, first-out (“FIFO”); and average cost, and is used consistently from year to year.

Property

Land, buildings and equipment are carried at cost less accumulated depreciation. Depreciation is based on the estimated service lives of depreciable assets and is calculated using the straight-line method. Fully depreciated assets are retained in property and accumulated depreciation accounts until they are removed from service. In the case of disposals, assets and related accumulated depreciation are removed from the accounts, and the net amounts, less proceeds from disposal, are included in income.

Impairment and Disposal of Long-Lived Assets

The Corporation evaluates long-lived assets and certain identifiable intangible assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. When undiscounted future cash flows are not expected to be sufficient to recover an asset’s carrying amount, the asset is written down to its fair value. Long-lived assets to be disposed of other than by sale are classified as held and used until they are disposed of. Long-lived assets to be disposed of by sale are classified as held for sale and are reported at the lower of carrying amount or fair value less cost to sell, and depreciation is ceased.

Asset Retirement Obligations

The Corporation records asset retirement obligations as incurred and reasonably estimable, including obligations for which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Corporation. The fair values of obligations are recorded as liabilities on a discounted basis and are accreted over time for the change in present value. Costs associated with the liabilities are capitalized and amortized over the estimated remaining useful life of the asset, generally for periods of 10 years or less.

Investments in Related Companies

Investments in related companies consist of the Corporation’s ownership interests in Dow subsidiaries located in North America, Europe and Latin America. Investments in the Dow subsidiaries have been accounted for using the cost method.

Investments

Investments in debt and marketable equity securities are classified as trading, available-for-sale, or held-to-maturity. Investments classified as trading are reported at fair value with unrealized gains and losses included in income. Those classified as available-for-sale are reported at fair value with unrealized gains and losses recorded in AOCI. Those classified as held-to-maturity are recorded at amortized cost. The cost of investments sold is determined by specific identification. The Corporation routinely reviews available-for-sale securities for other-than-temporary declines in fair value below the cost basis, and when events or changes in circumstances indicate the carrying value of an asset may not be recoverable, the security is written down to fair value.

The excess of the cost of investments in subsidiaries over the values assigned to assets and liabilities is shown as goodwill and is subject to the impairment provisions of SFAS No. 142, “Goodwill and Other Intangible Assets.” Absent any

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impairment indicators, recorded goodwill is tested annually for impairment by comparing the fair value of assets, determined using a discounted cash flow method, with the carrying value.

Revenue

Substantially all of the Corporation’s revenues are from transactions with Dow. Approximately 96 percent of the Corporation’s sales are related to sales of product. The remaining 4 percent are related to the licensing of patents and technology.

Revenue for product sales to related companies is recognized as risk and title to the product transfer to the related company, which occurs either at the time production is complete or FOB (free on board) UCC’s manufacturing facility, in accordance with the sales agreement between the Corporation and Dow. Revenue related to the initial licensing of patents and technology is recognized when earned; revenue related to running royalties is recognized according to licensee production levels.

Revenue for product sales is recognized as risk and title to the product transfer to the customer, which for trade sales, usually occurs at the time shipment is made. Substantially all of the Corporation’s trade sales are sold FOB shipping point or, with respect to countries other than the United States, an equivalent basis. As such, title to the product for trade sales passes when the product is delivered to the freight carrier. UCC’s standard terms of delivery are included in its contracts of sale, order confirmation documents, and invoices. Freight costs and any directly related associated costs of transporting finished product to customers are recorded as “Cost of sales.”

Legal Costs

The Corporation expenses legal costs, including those legal costs expected to be incurred in connection with a loss contingency, as incurred.

Severance Costs

Management routinely reviews its operations around the world in an effort to ensure competitiveness across its businesses and geographic areas. When the reviews result in a workforce reduction related to the shutdown of facilities or other optimization activities, severance benefits are provided to employees primarily under ongoing benefit arrangements. These severance costs are accrued (under SFAS No. 112, “Employers’ Accounting for Postemployment Benefits – an amendment of FASB Statements No. 5 and 43”) once management commits to a plan of termination including the number of employees to be terminated, their job classifications or functions, their locations and the expected completion date.

Income Taxes

The Corporation accounts for income taxes using the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences of temporary differences between the carrying amounts and tax bases of assets and liabilities using enacted rates.

Annual tax provisions include amounts considered sufficient to pay assessments that may result from examinations of prior year tax returns; however, the amount ultimately paid upon resolution of issues raised may differ from the amounts accrued.

The Corporation recognizes the financial statement effects of an uncertain income tax position when it is more likely than not, based on the technical merits, that the position will be sustained upon examination. The Corporation accrues for other tax contingencies when it is probable that a liability to a taxing authority has been incurred and the amount of the contingency can be reasonably estimated. The current portion of uncertain income tax positions is included in “Income taxes payable” and the long-term portion is included in “Other noncurrent obligations” in the consolidated balance sheets.

Provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently invested.

The Corporation is included in Dow’s consolidated federal income tax group and consolidated income tax return. The Corporation uses the separate return method to account for its income taxes; accordingly, there is no difference between the method used to account for income taxes at the UCC level and the formula in the Dow-UCC Tax Sharing Agreement used to compute the amount due to Dow or UCC for UCC’s share of taxable income and tax attributes on Dow’s consolidated income tax return.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation (“FIN”) No. 48, “Accounting for Uncertainty in Income Taxes,” which clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. The interpretation also provides guidance on derecognition,

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classification, interest and penalties, accounting in interim periods, disclosure, and transition. FIN No. 48 was effective for fiscal years beginning after December 15, 2006. On January 1, 2007, the Corporation adopted the provisions of FIN No. 48. The cumulative effect of adoption was a $67 million reduction of retained earnings. See Note O for further information on income taxes.

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R).” The Statement, which was effective December 31, 2006 for the Corporation, requires employers to recognize the funded status of defined benefit postretirement plans as an asset or liability on the balance sheet and to recognize changes in that funded status through comprehensive income. See Note L for further information on pension plans and other postretirement benefits.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements and was effective for fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff Position (“FSP”) FAS No. 157-2, which delayed the effective date of SFAS No. 157 for nonfinancial assets and nonfinancial liabilities, except for items that are recognized or disclosed at fair value in the financial statements on a recurring basis, to fiscal years beginning after November 15, 2008. On January 1, 2008, the Corporation adopted the portion of SFAS No. 157 that was not delayed, and since the Corporation’s existing fair value measurements are consistent with the guidance of the Statement, the partial adoption of the Statement did not have a material impact on the Corporation’s consolidated financial statements. Since the Corporation’s existing fair value measurements for pension assets are also consistent with the guidance of the Statement, the adoption of the Statement for pension and postretirement plans at the December 31, 2008 measurement date did not have a material impact on the Corporation’s consolidated financial statements. In accordance with FSP FAS No. 157-2, the provisions of SFAS No. 157 were not applied to the long-lived asset impairments described in Note B or to the goodwill impairments described in Note F. The Corporation does not expect the adoption of the Statement for nonfinancial assets and nonfinancial liabilities on January 1, 2009 to have a material impact on the Corporation’s consolidated financial statements. See Note H for expanded disclosures about fair value measurements.

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of SFAS No. 133.” The Statement requires enhanced disclosures about an entity’s derivative and hedging activities. The Statement is effective for fiscal years and interim periods beginning after November 15, 2008, which is January 1, 2009 for the Corporation; early adoption is encouraged. The Corporation’s disclosures are included in Note G.

In September 2008, the FASB issued FSP FAS No. 133-1 and FIN No. 45-4, “Disclosures About Credit Derivatives and Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB Interpretation No. 45; and Clarification of the Effective Date of FASB Statement No. 161.” The FSP amends and enhances the disclosure requirements for sellers of credit derivatives (including hybrid instruments that have embedded credit derivatives) and financial guarantees. The FSP was effective for reporting periods ending after November 15, 2008. The Corporation currently does not hold any of these instruments, thus the FSP did not have an impact on the disclosures in the Corporation’s consolidated financial statements at December 31, 2008.

In October 2008, the FASB issued FSP FAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” The FSP clarifies the application of SFAS No. 157, “Fair Value Measurements,” when the market for a financial asset is not active. The FSP was effective upon issuance, including reporting for prior periods for which financial statements had not been issued. The adoption of the FSP did not have a material impact on the Corporation’s consolidated financial statements. See Note H for further information on fair value measurements.

Accounting Standards Issued But Not Yet Adopted

In December 2007, the FASB revised SFAS No. 141, “Business Combinations” (“SFAS No. 141R”), to establish revised principles and requirements for how entities will recognize and measure assets and liabilities acquired in a business combination. The Statement is effective for business combinations completed on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Corporation will apply the guidance 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 of ARB No. 51.” The Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Statement is effective for annual reporting periods beginning on or after December 15, 2008. The Corporation does not expect the adoption of the Statement on January 1, 2009 to have a material impact on the Corporation’s consolidated financial statements. The Corporation will incorporate presentation and disclosure requirements outlined by SFAS No. 160 in the Corporation’s Quarterly Report on Form 10-Q for the period ending 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 the factors an entity should consider in developing renewal or extension assumptions used in determining the useful life of recognized intangible assets under SFAS No. 142, “Goodwill and Other Intangible Assets.” The FSP must be applied

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prospectively to intangible assets acquired in fiscal years beginning after December 15, 2008. The Corporation will apply the guidance of the FSP to intangible assets acquired on or after January 1, 2009.

In November 2008, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 08-6, “Equity Method Investment Considerations.” The Issue is effective in the first reporting period beginning on or after December 15, 2008, which is January 1, 2009 for the Corporation. The Issue addresses accounting for certain transactions and impairment considerations involving equity method investments, in light of SFAS No. 141R and SFAS No. 160. The Corporation will apply the guidance of the Issue to equity method investments acquired on or after January 1, 2009.

In November 2008, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 08-7, “Accounting For Defensive Intangible Assets.” The Issue, which is effective in the first annual reporting period beginning on or after December 15, 2008, which is January 1, 2009 for the Corporation, applies to acquired intangible assets, except for intangible assets used in research and development activities, that are not intended for active use, but rather will be held to prevent others from obtaining access to the asset. The Issue requires such assets to be treated as separate units of accounting and provides guidance on determining the useful life of such assets. The Corporation will apply the guidance of the Issue to defensive intangible assets acquired on or after January 1, 2009.

In December 2008, the FASB issued FSP FAS No. 132R-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.” The FSP requires new disclosures on investment policies and strategies, categories of plan assets, fair value measurements of plan assets, and significant concentrations of risk, and is effective for fiscal years ending after December 15, 2009, with earlier application permitted. The provisions of the FSP are not required for earlier periods that are presented for comparative purposes.

NOTE B RESTRUCTURING

2008 Restructuring

On December 5, 2008, the Board of Directors of UCC approved a restructuring plan to improve the cost effectiveness of the Corporation’s global operations. As a result, the Corporation recorded restructuring charges of $105 million (shown as “Restructuring charges” in the consolidated statements of income) in the fourth quarter of 2008 which included the write-off of the net book value of certain assets in Texas and Xiaolan, China, and a workforce reduction to improve the cost effectiveness and to enhance the efficiency of the Corporation’s operations. The charges included a $57 million write-off of the net book value associated with the shutdown of a facility that manufactures NORDELTM hydrocarbon rubber in Seadrift, Texas, the solution vinyl resins facility in Texas City, Texas and the emulsion systems facility in Xiaolan, China; severance of $24 million for a workforce reduction of 399 people and curtailment costs of $24 million associated with the Corporation’s defined benefit plans (see Note L). At December 31, 2008, a liability of $48 million remained for severance and curtailment costs.

2008 Restructuring Activities In millions	Impairment of Long-Lived Assets			Costs associated with Exit or Disposal Activities		Severance Costs		Total
Restructuring charges recognized in the fourth quarter of 2008	$	57		$	24	$	24	$	105
Charges against reserve		(57	)		-		-		(57	)
Reserve balance at December 31, 2008		-		$	24	$	24	$	48

2007 Restructuring

On November 30, 2007, the Board of Directors of UCC approved a plan to shut down certain assets and make organizational changes to enhance the efficiency and cost effectiveness of the Corporation's operations. As a result, based on decisions made by management, the Corporation recorded restructuring charges of $55 million (shown as “Restructuring charges” in the consolidated statements of income) in the fourth quarter of 2007. The charges included a $26 million write-off of the net book value of the polypropylene manufacturing facility at St. Charles Operations in Hahnville, Louisiana, which was shut down at the end of 2007, severance of $17 million for a workforce reduction of 231 people and curtailment costs of $12 million associated with the Corporation’s defined benefit plans (see Note L). At December 31, 2008, severance of $2 million had been paid to 44 employees, and a liability of $15 million remained for 187 employees. The workforce reduction is expected to be completed by December 31, 2009.

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The following table summarizes the 2007 and 2008 activities related to the Corporation’s 2007 restructuring reserve:

2007 Restructuring Activities In millions	Impairment of Long-Lived Assets			Costs associated with Exit or Disposal Activities		Severance Costs			Total
Restructuring charges recognized in the fourth quarter of 2007	$	26		$	12	$	17		$	55
Charges against reserve		(26	)		-		-			(26	)
Reserve balance at December 31, 2007		-		$	12	$	17		$	29
Cash payments		-			-		(2	)		(2	)
Reserve balance at December 31, 2008		-		$	12	$	15		$	27

2006 Restructuring

In 2006, the Corporation recorded restructuring charges totaling $14 million (shown as “Restructuring charges” in the consolidated statements of income) resulting from decisions made by management in the third quarter to improve the competitiveness of its global operations. The decisions resulted in the write-off of the net book value of three manufacturing facilities totaling $10 million (the largest of which was $8 million associated with the shutdown of the peroxymeric chemicals production facility in St. Charles, Louisiana, in October 2006), and costs totaling $4 million related to the dissolution of a consolidated joint venture in China which ceased operations in October 2006.

NOTE C INVENTORIES

The following table provides a breakdown of inventories:

Inventories at December 31 In millions	2008		2007
Finished goods	$	48	$	17
Work in process		10		40
Raw materials		55		47
Supplies		74		74
Total inventories	$	187	$	178

The reserves reducing inventories from a FIFO basis to a LIFO basis amounted to $115 million at December 31, 2008 and $183 million at December 31, 2007. The inventories that were valued on a LIFO basis, principally U.S. chemicals and plastics product inventories, represented 51 percent of the total inventories at December 31, 2008 and 44 percent of the total inventories at December 31, 2007.

A reduction of certain inventories resulted in the liquidation of some of the Corporation’s LIFO inventory layers, which had an immaterial impact on pretax income in 2008, 2007 and 2006.

NOTE D PROPERTY

Property at December 31	Estimated
In millions	Useful Lives (Years)		2008		2007
Land		-	$	51	$	52
Land and waterway improvements		15-25		225		215
Buildings		5-55		505		498
Machinery and equipment		3-20		6,071		6,060
Utility and supply lines		5-20		85		82
Other property		3-30		379		377
Construction in progress		-		314		225
Total property			$	7,630	$	7,509

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In millions	2008	2007	2006
Depreciation expense	$271	$270	$275
Manufacturing maintenance and repair costs	$211	$223	$199
Capitalized interest	$15	$13	$10

NOTE E NONCONSOLIDATED AFFILIATES

The Corporation’s investments in related companies accounted for by the equity method (“nonconsolidated affiliates”) were $427 million at December 31, 2008 and $385 million at December 31, 2007. Dividends received from nonconsolidated affiliates were $132 million in 2008, $331 million in 2007 and $371 million in 2006.

In late fourth quarter 2007, the Corporation, through a series of noncash transactions, contributed its share of EQUATE Petrochemical Company K.S.C. (“EQUATE”) for an increased share in Dow International Holdings Company (“DIHC”). As a result, the Corporation has an ownership interest in DIHC which is accounted for using the cost method. In accordance with the terms of the contribution agreement, Dow made a capital contribution to UCC in the amount of $191 million in the first quarter of 2008. At December 31, 2008, the Corporation had a 19.13 percent ownership interest in DIHC (18.77 percent at December 31, 2007). For additional information, see Note N.

Undistributed earnings of nonconsolidated affiliates included in retained earnings were $245 million at December 31, 2008 and $576 million at December 31, 2007.

All of the nonconsolidated affiliates in which the Corporation has investments are privately held companies; therefore, quoted market prices are not available.

Principal Nonconsolidated Affiliates

The Corporation’s principal nonconsolidated affiliates and the Corporation’s ownership interest for each at December 31, 2008, 2007 and 2006 are shown below:

Principal Nonconsolidated Affiliates at December 31	Ownership Interest
	2008			2007			2006
EQUATE Petrochemical Company K.S.C.		-			-			42.5	%
Nippon Unicar Company Limited		50	%		50	%		50	%
The OPTIMAL Group of Companies:
OPTIMAL Chemicals (Malaysia) Sdn. Bhd.		50	%		50	%		50	%
OPTIMAL Glycols (Malaysia) Sdn. Bhd.		50	%		50	%		50	%
OPTIMAL Olefins (Malaysia) Sdn. Bhd.		23.75	%		23.75	%		23.75	%
Univation Technologies, LLC		50	%		50	%		50	%

The Corporation’s investment in the principal nonconsolidated affiliates was $420 million at December 31, 2008 and $372 million at December 31, 2007, and its equity in earnings was $167 million in 2008, $495 million in 2007 and $385 million in 2006. The summarized financial information presented below represents the combined accounts (at 100 percent) of the principal nonconsolidated affiliates.

Summarized Balance Sheet Information at December 31
In millions	2008		2007
Current assets	$	840	$	828
Noncurrent assets		1,038		1,086
Total assets	$	1,878	$	1,914
Current liabilities	$	416	$	463
Noncurrent liabilities		399		477
Total liabilities	$	815	$	940

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Summarized Income Statement Information
In millions	2008	2007(1)	2006(1)
Sales	$2,410	$3,278	$2,885
Gross profit	$798	$1,478	$1,177
Net income	$515	$1,223	$911
(1) The summarized income statement information for 2007 and 2006 includes the results for EQUATE.

NOTE F GOODWILL AND OTHER INTANGIBLE ASSETS

During the fourth quarter of 2008, the Corporation performed its annual impairment tests for goodwill. As a result of this review, it was determined that the goodwill associated with polypropylene assets was impaired. Management’s impairment review determined that discounted cash flows did not support the carrying value of the goodwill. This was due to the demand decline in North America and Western Europe; significant new industry capacity which came on stream in 2008 and additional industry capacity which is expected to come on stream in 2009. As a result, the Corporation recognized an impairment loss of $26 million in the fourth quarter of 2008.

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

Other Intangible Assets at December 31			2008							2007
In millions	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Intangible assets with finite lives:
Licenses and intellectual property	$	33	$	(33	)		-	$	33	$	(32	)	$	1
Patents		2		(1	)	$	1		3		(2	)		1
Software		117		(101	)		16		114		(94	)		20
Total other intangible assets	$	152	$	(135	)	$	17	$	150	$	(128	)	$	22

The following table provides information regarding amortization expense:

Amortization Expense In millions	2008	2007	2006
Software, included in “Cost of sales”	$7	$6	$4

Total estimated amortization expense for the next five fiscal years is as follows:

Estimated Amortization Expense for Next Five Years In millions
2009	$6
2010	$5
2011	$4
2012	$2
2013	-

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NOTE G FINANCIAL INSTRUMENTS

Investments

The Corporation’s investments in marketable securities are classified as available-for-sale. The Corporation’s investments in debt securities had contractual maturities of one to ten years at December 31, 2008.

Investing Results
In millions	2008	2007	2006
Proceeds from sales of available-for-sale securities	$13	$2	$2

Fair Value of Financial Instruments at December 31
	2008											2007
In millions		Cost			Gain		Loss		Fair Value			Cost			Gain		Loss			Fair Value
Marketable securities(1):
Debt securities		$	13		$	1		-	$	14		$	19		$	1		-		$	20
Long-term debt including debt due within one year		$	(820	)	$	145		-	$	(675	)	$	(820	)	$	5	$	(9	)	$	(824	)

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

Cost approximates fair value for all other financial instruments.

The Corporation enters into foreign exchange forward contracts to hedge various currency exposures, primarily related to assets and liabilities denominated in foreign currencies. The primary business objective of the activity is to optimize the U.S. dollar value of the Corporation’s assets and liabilities. Assets and liabilities denominated in the same foreign currency are netted, and only the net exposure is hedged. At December 31, 2008, the Corporation had forward contracts to buy, sell or exchange foreign currencies, with expiration dates in the first quarter of 2009, which were immaterial. The Corporation did not designate any derivatives as hedges at December 31, 2008 or December 31, 2007.

During the three-year period ended December 31, 2008, nonconsolidated affiliates of the Corporation had hedging activities that were accounted for as cash flow hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended and interpreted. The Corporation’s proportionate share of the hedging results recorded in accumulated other comprehensive income by the nonconsolidated affiliates is reported as net hedging results in the Corporation’s consolidated statements of stockholder’s equity in accordance with SFAS No. 130, “Reporting Comprehensive Income.”

NOTE H FAIR VALUE MEASUREMENTS

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

Basis of Fair Value Measurements at December 31, 2008		Significant Other Observable Inputs (Level 2)
In millions		Significant Other Observable Inputs (Level 2)
Assets at fair value:
Debt securities(1)		$14

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

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

The prices for Level 2 items (significant other observable inputs) are based on the price a dealer would pay for the security or similar securities. Market inputs are obtained from well established and recognized vendors of market data and placed through tolerance/quality checks.

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NOTE I SUPPLEMENTARY INFORMATION

Accrued and Other Current Liabilities

“Accrued and other current liabilities” were $198 million at December 31, 2008 and $180 million at December 31, 2007. Postretirement benefit obligation, which is a component of “Accrued and other current liabilities,” was $52 million at December 31, 2008 and $54 million at December 31, 2007. No other accrued liabilities were more than 5 percent of total current liabilities.

Other Noncurrent Obligations

“Other noncurrent obligations” were $298 million at December 31, 2008 and $356 million at December 31, 2007. Tax contingency reserve, which is a component of “Other noncurrent obligations,” was $172 million at December 31, 2008 and $141 million at December 31, 2007. No other noncurrent obligations were more than 5 percent of total liabilities.

Sundry Income (Expense) – Net
In millions	2008			2007			2006
Net gain (loss) on sales of assets and securities	$	14		$	10		$	(3	)
Foreign exchange gain		-			1			-
Related company commissions - net		(33	)		(37	)		(40	)
Dividend income - related companies		297			109			37
Other - net		(35	)		(34	)		(33	)
Total sundry income (expense) - net	$	243		$	49		$	(39	)

Other Supplementary Information
In millions	2008		2007		2006
Cash payments for interest	$	59	$	66	$	62
Cash payments for income taxes	$	40	$	233	$	276
Provision for (recovery of) doubtful receivables (1)		-	$	4	$	(1	)
(1) Included in “Selling, general and administrative expenses” in the consolidated statements of income.

NOTE J COMMITMENTS AND CONTINGENT LIABILITIES

Environmental Matters

Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. At December 31, 2008, the Corporation had accrued obligations of $67 million for environmental remediation and restoration costs, including $18 million for the remediation of Superfund sites. This is management’s best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to approximately twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown environmental conditions, changing governmental regulations and legal standards regarding liability, and emerging remediation technologies for handling site remediation and restoration. At December 31, 2007, the Corporation had accrued obligations of $75 million for environmental remediation and restoration costs, including $23 million for the remediation of Superfund sites. It is the opinion of the Corporation’s management that the possibility is remote that costs in excess of those disclosed will have a material adverse impact on the Corporation’s consolidated financial statements.

The following table summarizes the activity in the Corporation’s accrued obligations for environmental matters for the years ended December 31, 2008 and 2007:

Accrued Liability for Environmental Matters
In millions	2008			2007
Balance at January 1	$	75		$	77
Additional accruals		30			33
Charges against reserve		(38	)		(35	)
Balance at December 31	$	67		$	75

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The amounts charged to income on a pretax basis related to environmental remediation totaled $29 million in 2008, $33 million in 2007 and $23 million in 2006. Capital expenditures for environmental protection were $17 million in 2008, $15 million in 2007 and $25 million in 2006.

Litigation

Separately, the Corporation is and has been involved in a large number of asbestos-related suits filed primarily in state courts during the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both actual and punitive damages. The alleged claims primarily relate to products that UCC sold in the past, alleged exposure to asbestos-containing products located on UCC’s premises, and UCC’s responsibility for asbestos suits filed against a former subsidiary, Amchem Products, Inc. (“Amchem”). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation’s products.

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

Based on a study completed by Analysis, Research & Planning Corporation (“ARPC”) in January 2003, the Corporation increased its December 31, 2002 asbestos-related liability for 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 to the results of the most recent ARPC study at each balance sheet date to determine whether the accrual continues to be appropriate. In addition, the Corporation has requested ARPC to review the Corporation’s historical asbestos claim and resolution activity each November since 2004 to determine the appropriateness of updating the most recent ARPC study.

In November 2006, the Corporation requested ARPC to review the Corporation’s historical asbestos claim and resolution activity and determine the appropriateness of updating its January 2005 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2006 and concluded that the experience from 2004 through 2006 was sufficient for the purpose of forecasting future filings and values of asbestos claims filed against UCC and Amchem, and could be used in place of previous assumptions to update its January 2005 study. The resulting study, completed by ARPC in December 2006, stated that the undiscounted cost of resolving pending and future asbestos-related claims 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 2006 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

Based on ARPC’s December 2006 study and the Corporation’s own review of the asbestos claim and resolution activity, the Corporation decreased its asbestos-related liability for pending and future claims to $1.2 billion at 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 the consolidated statements of income for 2006.

In November 2008, the Corporation requested ARPC to review the Corporation’s historical asbestos claim and resolution activity and determine the appropriateness of updating ARPC’s December 2006 study. In response to that request, ARPC reviewed and analyzed data through October 31, 2008. The resulting study, completed by ARPC in December 2008, stated that the undiscounted cost of resolving pending and future asbestos-related claims against UCC and Amchem, excluding future defense and processing costs, through 2023 was estimated to be between $952 million and $1.2 billion. As in its earlier studies, ARPC provided estimates for a longer period of time in its December 2008 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time.

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and was shown as “Asbestos-related credit” in the consolidated statements of income. At December 31, 2008, the asbestos-related liability for pending and future claims was $934 million.

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

Receivables for Costs Submitted to Insurance Carriers at December 31
In millions	2008		2007
Receivables for defense costs	$	28	$	18
Receivables for resolution costs		244		253
Total	$	272	$	271

While it is not possible at this time to determine with certainty the ultimate outcome of any of the legal proceedings and claims referred to in this filing, management believes that adequate provisions have been made for probable losses with respect to pending claims and proceedings, and that, except for the asbestos-related matters described above, the ultimate outcome of all known and future claims, after provisions for insurance, will not have a material adverse impact on the Corporation’s consolidated financial statements. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions provided and available insurance, they will be charged to income when determinable.

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Purchase Commitments

At December 31, 2008, the Corporation had various outstanding commitments for take-or-pay agreements, with terms extending from one to fifteen years. Such commitments were not in excess of current market prices. The fixed and determinable portion of obligations under purchase commitments at December 31, 2008 is presented in the following table:

Fixed and Determinable Portion of Take-or-Pay Obligations at December 31, 2008 In millions
2009	$	13
2010		14
2011		6
2012		4
2013		4
2014 and beyond		14
Total	$	55

Guarantees

The Corporation has undertaken obligations to guarantee the performance of certain nonconsolidated affiliates (including The OPTIMAL Group of Companies and Nippon Unicar Company Limited) if specified triggering events occur. Non-performance under a contract for commercial and/or financial obligations by the guaranteed party would trigger the obligation of the Corporation to make payments to the beneficiary of the guarantees. Financial obligations include debt and lease arrangements.

The following table provides a summary of the final expiration, maximum future payments, and recorded liability reflected in the consolidated balance sheets for these guarantees.

Guarantees In millions	Final Expiration	Maximum Future Payments	Recorded Liability
Guarantees at December 31, 2008	2014	$72	$1
Guarantees at December 31, 2007	2014	$77	$1

Conditional Asset Retirement Obligations

In accordance with FIN No. 47, the Corporation has recognized conditional asset retirement obligations related to asbestos encapsulation as a result of planned demolition and remediation activities at manufacturing and administrative sites in the United States. The aggregate carrying amount of conditional asset retirement obligations was $9 million at December 31, 2008 and December 31, 2007. The discount rate used to calculate the Corporation’s conditional asset retirement obligations was 7.13 percent (5.08 percent at December 31, 2007). These obligations are included in the consolidated balance sheet as “Accrued and other current liabilities.”

The Corporation has not recognized conditional asset retirement obligations for which a fair value cannot be reasonably estimated in its consolidated financial statements. It is the opinion of management that the possibility is remote that such conditional asset retirement obligations, when estimable, will have a material adverse impact on the Corporation’s consolidated financial statements based on current costs.

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NOTE K NOTES PAYABLE AND LONG-TERM DEBT

Notes Payable at December 31 In millions
Notes Payable at December 31 In millions	2008	2007
Notes payable – related companies	$12	$5
Year-end average interest rates	2.70%	5.67%

Long-Term Debt at December 31	2008						2007
	Average						Average
In millions	Rate			2008			Rate			2007
Promissory notes and debentures:
6.70% Notes due 2009		6.70	%	$	249			6.70	%	$	249
7.875% Debentures due 2023		7.88	%		175			7.88	%		175
6.79% Debentures due 2025		6.79	%		12			6.79	%		12
7.50% Debentures due 2025		7.50	%		150			7.50	%		150
7.75% Debentures due 2096		7.75	%		200			7.75	%		200
Other facilities:
Pollution control/industrial revenue bonds, maturity 2012		5.09	%		37			5.09	%		37
Unamortized debt discount		-			(3	)		-			(3	)
Long-term debt due within a year		-			(249	)		-			-
Total long-term debt		-		$	571			-		$	820

Annual Installments on Long-Term Debt for the Next Five Years In millions
2009	$249
2010	-
2011	-
2012	$37
2013	-

The Corporation’s outstanding public debt has been issued under indentures which contain, among other provisions, covenants that the Corporation must comply with while the underlying notes are outstanding. Such covenants are typically based on the Corporation’s size and financial position and include, subject to the exceptions and qualifications contained in the indentures, obligations not to (i) allow liens on principal U.S. manufacturing facilities, (ii) enter into sale and lease-back transactions with respect to principal U.S. manufacturing facilities, or (iii) merge into or consolidate with any other entity or sell or convey all or substantially all of its assets. Failure of the Corporation to comply with any of these covenants could, after the passage of any applicable grace period, result in a default under the applicable indenture which would allow the note holders to accelerate the due date of the outstanding principal and accrued interest on the subject notes. At December 31, 2008, management believes the Corporation was in compliance with the covenants referred to above.

NOTE L PENSION AND OTHER POSTRETIREMENT BENEFITS

Pension Plans

The Corporation currently has a defined benefit pension plan that covers substantially all employees in the United States. Benefits are based on length of service and the employee’s three highest consecutive years of compensation. Employees hired on or after January 1, 2008 earn benefits that are based on a set percentage of annual pay, plus interest. The Corporation also has a non-qualified supplemental pension plan.

The Corporation’s funding policy is to contribute to the plan when pension laws or economics either require or encourage funding. In 2008, UCC did not make any contributions to its qualified pension plan. UCC does not expect to contribute assets to its qualified pension plan in 2009.

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The weighted-average assumptions used to determine pension plan obligations and net periodic benefit costs are provided below:

Pension Plan Assumptions	Benefit Obligations at December 31		Net Periodic Costs for the Year
	2008	2007	2008	2007
Discount rate	6.85%	6.65%	6.65%	5.95%
Rate of increase in future compensation levels	4.50%	4.50%	4.50%	4.50%
Long-term rate of return on assets	-	-	8.00%	8.40%

The Corporation determines the expected long-term rate of return on assets by performing a detailed analysis of historical and expected returns based on the strategic asset allocation and the underlying return fundamentals of each asset class. The Corporation’s historical experience with the pension fund asset performance is also considered. The discount rates utilized to measure the pension and other postretirement benefit obligations are based on the yield on high quality fixed income investments at the measurement date. Future expected actuarially determined cash flows of the plans are matched against the Citigroup Pension Discount Curve (Above Median) to arrive at a single discount rate by plan.

The accumulated benefit obligation for all defined benefit pension plans was $3.4 billion at December 31, 2008 and $3.5 billion at December 31, 2007.

Pension Plans with Accumulated Benefit Obligations in Excess of Plan Assets at December 31
In millions	2008	2007
Projected benefit obligation	$3,419	$18
Accumulated benefit obligation	$3,392	$18
Fair value of plan assets	$3,181	-

Plan Assumptions for Other Postretirement Benefits	Benefit Obligations at December 31		Net Periodic Costs for the Year
	2008	2007	2008	2007
Discount rate	6.95%	6.50%	6.50%	5.85%
Initial health care cost trend rate	9.79%	10.43%	10.43%	8.84%
Ultimate health care cost trend rate	6.00%	6.00%	6.00%	6.00%
Year ultimate trend rate to be reached	2018	2014	2014	2011

Change in Projected Benefit Obligations, Plan Assets and Funded Status of all Significant Plans
	Defined Benefit Pension Plans						Other Postretirement Benefits
In millions	2008			2007			2008			2007
Change in projected benefit obligation:
Benefit obligation at beginning of year	$	3,500		$	3,712		$	490		$	548
Service cost		18			22			2			3
Interest cost		225			214			30			30
Amendments		-			64			-			-
Actuarial changes in assumptions and experience		(39	)		(238	)		(21	)		(55	)
Benefits paid		(285	)		(279	)		(41	)		(43	)
Termination/curtailment cost		9			5			9			7
Other		(9	)		-			-			-
Benefit obligation at end of year	$	3,419		$	3,500		$	469		$	490

Change in plan assets:
Fair value of plan assets at beginning of year	$	4,180		$	4,003			-			-
Actual return (loss) on plan assets		(709	)		466			-			-
Employer contributions		2			2			-			-
Asset transfer		(7	)		(12	)		-			-
Benefits paid		(285	)		(279	)		-			-
Fair value of plan assets at end of year	$	3,181		$	4,180			-			-

Funded status at end of year	$	(238	)	$	680		$	(469	)	$	(490	)

Net amounts recognized in the consolidated balance sheets at December 31:
Noncurrent assets		-		$	699			-			-
Current liabilities	$	(2	)		(2	)	$	(50	)	$	(52	)
Noncurrent liabilities		(236	)		(17	)		(419	)		(438	)
Net amounts recognized in the consolidated balance sheets	$	(238	)	$	680		$	(469	)	$	(490	)

Strategic Target Allocation of Plan Assets
Asset Category	Target Allocation	Range
Equity securities	40%	15 - 50%
Debt securities	43%	33 - 68%
Alternative Investments	17%	9 - 25%
Total	100%

Net Periodic Benefit Cost (Credit) for all Significant Plans
	Defined Benefit Pension Plans									Other Postretirement Benefits
In millions	2008			2007			2006			2008			2007			2006
Service cost	$	18		$	22		$	23		$	2		$	3		$	4
Interest cost		225			214			211			30			30			31
Expected return on plan assets		(310	)		(317	)		(332	)		-			-			-
Amortization of prior service cost (credit)		7			2			2			(2	)		(2	)		(2	)
Amortization of net loss		2			27			31			-			2			3
Termination/curtailment cost(1)		16			5			-			8			6			-
Net periodic benefit cost (credit)	$	(42	)	$	(47	)	$	(65	)	$	38		$	39		$	36

Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income
	Defined Benefit Pension Plans						Other Postretirement Benefits
In millions	2008			2007			2008			2007
Net (gain) loss	$	978		$	(375	)	$	(20	)	$	(55	)
Prior service (credit) cost		(6	)		64			-			1
Amortization of prior service (cost) credit		(7	)		(2	)		2			2
Amortization of net loss		(2	)		(27	)		-			(2	)
Total recognized in other comprehensive (income) loss	$	963		$	(340	)	$	(18	)	$	(54	)
Total recognized in net periodic benefit cost and other comprehensive (income) loss	$	921		$	(387	)	$	20		$	(15	)

Pretax amounts recognized in AOCI at December 31:
Net loss	$	1,143	$	167	$	10		$	30
Prior service cost (credit)		61		74		(10	)		(12	)
Pretax balance in AOCI at end of year	$	1,204	$	241		-		$	18

Estimated Future Benefit Payments at December 31, 2008
In millions	Defined Benefit Pension Plans		Other Postretirement Benefits
2009	$	286	$	52
2010		283		50
2011		278		48
2012		275		45
2013		271		42
2014 through 2018		1,316		200
Total	$	2,709	$	437

Weighted-Average Allocation of Plan Assets at December 31
	2008			2007
Equity securities		16	%		43	%
Debt securities		60	%		36	%
Alternative Investments		24	%		21	%
Total		100	%		100	%

Minimum Operating Lease Commitments at December 31, 2008 In millions
2009	$	6
2010		3
2011		2
2012		2
2013		1
2014 and thereafter		-
Total	$	14

Domestic and Foreign Components of Income Before Income Taxes
In millions	2008			2007			2006
Domestic	$	447		$	1,141		$	1,465
Foreign		(2	)		(3	)		1
Total	$	445		$	1,138		$	1,466

Reconciliation to U.S. Statutory Rate
In millions	2008			2007			2006
Taxes at U.S. statutory rate	$	156		$	399		$	513
Equity earnings effect		(70	)		(121	)		(142	)
Change in EQUATE legal ownership structure		-			(195	)		-
Foreign income taxed at rates other than 35%		1			1			1
U.S. tax effect of foreign earnings and dividends		14			86			94
U.S. business credits		(4	)		(9	)		(28	)
Benefit of dividend income from related companies		(58	)		(34	)		-
Unrecognized tax benefits		16			34			-
Tax contingency reserve adjustments		-			-			66
State and local tax impact		56			(24	)		(59	)
Other – net		7			(51	)		(25	)
Total tax provision	$	118		$	86		$	420
Effective tax rate		26.5	%		7.6	%		28.6	%

Deferred Tax Balances at December 31	2008					2007
In millions	Deferred Tax Assets			Deferred Tax Liabilities		Deferred Tax Assets			Deferred Tax Liabilities
Property	$	1		$	292		-		$	344
Tax loss and credit carryforwards		161			-	$	151			-
Postretirement benefit obligations		662			360		342			343
Other accruals and reserves		470			41		400			51
Inventory		8			-		8			-
Long-term debt		-			1		-			1
Investments		-			1		2			-
Other – net		56			75		66			9
Subtotal	$	1,358		$	770	$	969		$	748
Valuation allowance		(111	)		-		(49	)		-
Total	$	1,247		$	770	$	920		$	748

Total Gross Unrecognized Tax Benefits
In millions	2008			2007
Balance at January 1	$	269		$	251
Increases related to positions taken on items from prior years		15			30
Decreases related to positions taken on items from prior years		(8	)		(29	)
Increases related to positions taken in current year		11			17
Settlement of uncertain tax positions with tax authorities		(22	)		-
Balance at December 31	$	265		$	269

Tax Years Subject to Examination by Major Tax Jurisdiction at December 31
Jurisdiction	Earliest Open Year
Jurisdiction	2008	2007
United States:
Federal income tax	2001	2001
State and local income tax	1996	1989

In millions	United States	Asia Pacific	Rest of World	Total
2008
Sales to external customers (1)	$94	$58	$67	$219
Long-lived assets	$1,872	$9	$5	$1,886
2007
Sales to external customers (1)	$101	$71	$39	$211
Long-lived assets	$1,945	$12	$5	$1,962
2006
Sales to external customers (1)	$352	$118	$36	$506
Long-lived assets	$1,950	$15	$5	$1,970

/s/ PATRICK E. GOTTSCHALK		/s/ EUDIO GIL
Patrick E. Gottschalk President and Chief Executive Officer		Eudio Gil Vice President, Treasurer and Chief Financial Officer

/s/ WILLIAM H. WEIDEMAN
William H. Weideman, Vice President and Controller The Dow Chemical Company Authorized Representative of Union Carbide Corporation

February 12, 2009

In thousands	2008		2007
Audit fees (1)	$	1,747	$	1,669
Audit-related fees (2)		434		252
Tax fees		4		5
Total	$	2,185	$	1,926
(1) The aggregate fees billed for the audit of the Corporation’s annual financial statements, the reviews of the financial statements in Quarterly Reports on Form 10-Q, statutory audits and other regulatory filings.
(2) Primarily for agreed-upon procedures, engagements and audits of employee benefit plans’ financial statements.

Exhibit No.	Description of Exhibit
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.

	Union Carbide Corporation	Schedule II
	Valuation and Qualifying Accounts
In millions	For the Years Ended December 31

COLUMN A		COLUMN B	COLUMN C	COLUMN D		COLUMN E
Description		Balance at Beginning of Year	Additions to Reserves	Deductions from Reserves		Balance at End of Year
2008
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
	For doubtful receivables	$2	-	$1	(1)		$1

2007
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
	For doubtful receivables	$2	-	-			$2

2006
RESERVES DEDUCTED FROM ASSETS TO WHICH THEY APPLY:
	For doubtful receivables	$3	-	$1	(1)		$2

		As at December 31,
		2007 US$’000	2006 US$’000
	Notes
ASSETS
Current assets
Cash and bank balances	5	416,706	151,465
Trade receivables, net	6	145,458	122,773
Prepayments and other assets		25,904	16,593
Due from related parties	14	159,684	149,052
Inventories, net	7	43,016	42,080
		790,768	481,963
Non-current assets
Property, plant and equipment, net	8	1,660,689	1,413,782
Intangible assets, net	9	121,651	132,507
Long-term loans to related parties	14	1,469,770	719,770
		3,252,110	2,266,059
		4,042,878	2,748,022
LIABILITIES AND EQUITY
Current liabilities
Accounts payable		26,920	26,804
Accruals and other liabilities	10	104,434	68,284
Due to related parties	14	28,421	18,158
		159,775	113,246
Non-current liabilities
Long-term debt	15	1,639,820	879,568
Retirement benefit obligation	16	31,192	26,342
Long term incentives		3,102	1,417
Deferred income	11	510,521	288,303
		2,184,635	1,195,630

Commitments and contingencies	21

Capital and reserves
Share capital	12	700,000	700,000
Retained earnings		998,468	739,146
		1,698,468	1,439,146
		4,042,878	2,748,022

			For the years ended December 31,
				2007 US$’000		2006 US$’000		2005 US$’000
	Notes
Sales		14		1,205,713		986,213		961,453
Cost of sales		17		(388,075	)	(367,977	)	(313,545	)
Gross profit				817,638		618,236		647,908
Polypropylene plant management fee		14		1,000		1,000		1,000
General, administrative and selling expenses		17		(51,895	)	(52,434	)	(51,351	)
Operating income				766,743		566,802		597,557
Interest income		14		71,819		29,282		5,754
Foreign exchange loss				(1,363	)	(521	)	(341	)
Other income				1,817		229		1,199
Finance costs		18		(62,276	)	(24,199	)	(10,472	)
Net income before contribution to Kuwait Foundation for Advancement of Sciences (“KFAS”) and Directors’ fees				776,740		571,593		593,697
Contribution to KFAS				(7,270	)	(5,143	)	(5,336	)
Directors’ fees				(148	)	(136	)	(302	)
Net income for the year				769,322		566,314		588,059

			Share capital US$’000		Retained earnings US$’000			Total US$’000
	Note
Balance as at January 1, 2005				700,000		672,773			1,372,773
Dividends paid				-		(558,000	)		(558,000	)
Net income for the year				-		588,059			588,059
Balance as at December 31, 2005				700,000		702,832			1,402,832
Dividends paid				-		(530,000	)		(530,000	)
Net income for the year				-		566,314			566,314
Balance as at December 31, 2006				700,000		739,146			1,439,146
Dividends paid		13		-		(510,000	)		(510,000	)
Net income for the year				-		769,322			769,322
Balance as at December 31, 2007				700,000		998,468			1,698,468

2	ADOPTION OF NEW AND REVISED STANDARDS
	Standards and Interpretations effective in the current period
	In the current year, the Company has adopted IFRS 7 “Financial Instruments: Disclosures” which is effective for annual reporting periods beginning on or after January 1, 2007, and the consequential amendments to IAS 1 “Presentation of Financial Statements”. The impact of the adoption of IFRS 7 and the changes to IAS 1 has been to expand the disclosures provided in these financial statements regarding the Company’s financial instruments and management of capital (see note 20). Four Interpretations issued by the International Financial Reporting Interpretations Committee are effective for the current period. These are: IFRIC 7 Applying the Restatement Approach under IAS 29, Financial Reporting in Hyperinflationary Economies; IFRIC 8 Scope of IFRS 2; IFRIC 9 Reassessment of Embedded Derivatives; and IFRIC 10 Interim Financial Reporting and Impairment. The adoption of these Interpretations has not led to any changes in the Company’s accounting policies.
	Standards and Interpretations in issue not yet adopted At the date of authorisation of these financial statements, the following Standards and Interpretations were issued but not yet effective:
	· IAS 1(Revised) Presentation of Financial Statements	Effective for annual periods beginning on or after 1 January 2009
	· IAS 23 (Revised) Borrowing Costs	Effective for annual periods beginning on or after January 1, 2009
	· IFRS 8 Operating Segments	Effective for annual periods beginning on or after January 1, 2009
	· IFRIC 11 IFRS 2: Group and Treasury Share Transactions	Effective for annual periods beginning on or after March 1, 2007
	· IFRIC 12 Service Concession Arrangements	Effective for annual periods beginning on or after January 1, 2008
	· IFRIC 13 Customer Loyalty Programmes	Effective for annual periods beginning on or after July 1, 2008
	· IFRIC 14 IAS 19 – The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction	Effective for annual periods beginning on or after January 1, 2008

3	SIGNIFICANT ACCOUNTING POLICIES

	Statement of compliance
	The financial statements have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by International Accounting Standards Board (“IASB”).

	Basis of preparation
	The financial statements have been prepared on the historical cost basis except for the revaluation of certain financial instruments. The principal accounting policies are set out below.

	Financial instruments
	Financial assets and financial liabilities are recognized on the Company’s balance sheet when the Company becomes a party to the contractual provisions of the instrument.

	Cash and bank balances
	Cash and bank balances consist of cash on hand, bank current accounts and short term deposits with an original maturity of three months or less when purchased.

	Trade receivables
	Trade receivables are measured at initial recognition at fair value, and are subsequently measured at amortised cost using the effective interest rate method, less any impairment. Interest income is recognised by applying the effective interest rate, except for short-term receivables when the recognition of interest would be immaterial. Appropriate allowances for estimated irrecoverable amounts are recognised in the statement of income when there is objective evidence that the asset is impaired. Significant financial difficulties of the debtor, probability that the debtor will enter bankruptcy or financial reorganisation, and default or delinquency in payments (more than 60 days overdue) are considered indicators that the trade receivable is impaired. The allowance recognised is measured as the difference between the asset’s carrying amount and the present value of estimated future cash flows discounted at the effective interest rate computed at initial recognition.

	Effective interest rate method
	The effective interest method is a method of calculating the amortised cost of a financial asset and of allocating interest income over the relevant period. The effective interest rate is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset, or, where appropriate, a shorter period.

	Trade payables
	Trade payables are initially measured at fair value, and are subsequently measured at amortised cost, using the effective interest rate method.

	Inventories
	Raw materials and finished goods are stated at the lower of weighted average cost or net realisable value. The cost of finished products includes direct materials, direct labour and fixed and variable manufacturing overhead and other costs incurred in bringing inventories to their present location and condition. Spare parts are not intended for resale and are valued at the lower of purchased cost or net realisable value using the weighted average method after making allowance for any obsolete and slow moving and obsolete items. Purchase cost includes the purchase price, import duties, transportation, handling and other direct costs. Net realisable value represents the estimated selling price for inventories less all estimated costs of completion and costs necessary to make the sale.

	Property, plant and equipment
	Property, plant and equipment are carried at cost less accumulated depreciation and any accumulated impairment losses. Depreciation is calculated based on the estimated useful lives of the applicable assets on a straight-line basis commencing when the assets are ready for their intended use, at the following annual rates: Buildings and roads 5% Plant and equipment 5% - 20% Office furniture and equipment 20% The estimated useful lives, residual values and depreciation methods are reviewed at each year end, with the effect of any changes in estimate accounted for on prospective basis. Expenditure incurred to replace a component of an item of property, plant and equipment that is accounted for separately, is capitalised with the carrying amount of the property, plant and equipment being replaced. Other subsequent expenditure is capitalised only when it increases the future economic benefits embodied in the item of fixed asset. All other expenditure is recognised in the statement of income when the expense is incurred. Maintenance and repairs, replacements and improvements of minor importance are expensed as incurred. Significant improvements and replacements of assets are capitalised. Properties in the course of construction for production, rental or administrative purposes, or for purposes not yet determined, are carried at cost, less any recognised impairment loss. Cost includes professional fees and, for qualifying assets, borrowing costs capitalised in accordance with the Company’s accounting policy (see below). Depreciation of these assets, on the same basis as other property, plant and equipment, commences when the assets are ready for their intended use. The gain or loss arising on the disposal or retirement of an item of property, plant and equipment is determined as the difference between the sales proceeds and the carrying amount of the asset and is recognised in the statement of income.

	Intangible assets
	Intangible assets consist of technology and licences for the manufacture of ethylene, EG and PE. Intangibles are carried at cost less accumulated amortisation and any accumulated impairment losses. The intangible assets are amortised from the date of commencement of commercial production on a straight-line basis over twenty years, except for the olefin technology, which is amortised over five years. The estimated useful life and amortisation method are reviewed at the end of each annual reporting period, with the effect of any changes in estimate being accounted for on a prospective basis.

	Retirement benefit cost
	The Company accounts for retirement benefits under IAS 19 “Employee Benefits” and, is payable to employees on completion of employment in accordance with the Kuwaiti Labour Law. The cost of providing retirement benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial gains and losses that exceed 10 per cent of the present value of the Company’s defined benefit obligation at the end of the prior year are amortised over the expected average remaining working lives of the employees. Past service cost is recognised immediately to the extent that the benefits are already vested, and otherwise is amortised on a straight-line basis over the average period until the benefits become vested. The liability is not externally funded. The retirement benefit obligation recognised in the balance sheet represents the present value of the defined benefit obligation as adjusted for unrecognised actuarial gains and losses and unrecognised past service costs.

	Revenue recognition
	Sales net of applicable discounts, are recognised when the revenue is realized or realizable, has been earned, and collectibility is reasonably assured. Revenue is recognised as risk and title transfer to the customer, which usually occurs at the time shipment is made. PE production is sold with freight paid by the Company and EG production is sold FOB (“free on board”) shipping point. Title to the product passes when the product is delivered to the freight carrier. The Company’s terms of sale are included in its contracts of sale, order confirmation documents, and invoices. Freight costs are recorded as “Cost of Sales”. Interest income is accrued on a time basis with reference to the principal outstanding and at the effective interest rate applicable, which is the rate that exactly discounts estimated future cash receipts through the expected life of the financial asset to that asset’s net carrying amount.

	Borrowing costs
	Borrowing costs directly attributable to the construction of qualifying assets, which are assets that necessarily take a substantial period of time to get ready for their intended use are added to the cost of those assets by applying a capitalisation rate on the expenditure on such assets, until such time as the assets are substantially ready for their intended use. The capitalisation rate used by the Company is the weighted average of the borrowing costs applicable to the outstanding borrowings during the period. The remaining borrowing costs are recognised in the statement of income in the period in which they are incurred.

	Translation of foreign currencies
	The functional currency of the Company is United States Dollars (“US$”) and accordingly, the financial statements are presented in US$, rounded to the nearest thousand. The functional currency is different from the currency of the country in which the Company is domiciled since the majority of the Company’s revenue and expenses, and all of the Company’s borrowings, are denominated in US$. Transactions denominated in foreign currencies are translated into US$ at rates of exchange prevailing at the transaction dates. Monetary assets and liabilities denominated in foreign currencies are retranslated into US$ at rates of exchange prevailing at the balance sheet date. The resultant exchange differences are recorded in the statement of income

	Term debt
	Interest bearing debts are measured initially at fair value and are subsequently measured at amortised cost, using the effective interest rate method. Any difference between the proceeds (net of transaction costs) and the settlement or redemption of borrowings is recognised over the term of borrowings in accordance with the Company’s accounting policy for borrowing costs (see above).

	Impairment of tangible and intangible assets
	At each balance sheet date, the Company reviews the carrying amounts of its tangible and intangible assets to determine whether there is any indication that those assets have suffered an impairment loss. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). Where it is not possible to estimate the recoverable amount of an individual asset, the Company estimates the recoverable amount of the cash-generating unit to which the asset belongs. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. If the recoverable amount of an asset (or cash-generating unit) is estimated to be less than its carrying amount, the carrying amount of the asset (cash-generating unit) is reduced to its recoverable amount. An impairment loss is recognised immediately in the statement of income. Where an impairment loss subsequently reverses, the carrying amount of the asset (cash-generating unit) is increased to the revised estimate of its recoverable amount, but so that the increased carrying amount does not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset (cash-generating unit) in prior years. A reversal of an impairment loss is recognised immediately in the statement of income.

	Income Taxes
	The Company, a closed shareholding company incorporated in the State of Kuwait, is not subject to income taxes.

	Derivatives
	Derivatives are initially recognised at fair value at the date a derivative contract is entered into and are subsequently remeasured to their fair value at each balance sheet date. The resulting gain or loss is recognised in the statement of income immediately. Foreign exchange forward contracts are treated as trading instruments and are stated at fair market value with gains or losses included in the statement of income in foreign exchange gain / (loss) in the period they occur.

	Contribution to Kuwait Foundation for the Advancement of Sciences
	The Company is legally required to contribute to the Kuwait Foundation for the Advancement of Sciences (“KFAS”). The Company’s contributions to KFAS are recognized as an expense in the period during which the Company’s contribution is legally required.

4	CRITICAL JUDGEMENTS AND KEY SOURCES OF ESTIMATION UNCERTAINTY
	In the application of the Company’s accounting policies, which are described in note 3, management is required to make judgements, estimates and assumptions about the carrying amounts of assets and liabilities that are not readily apparent from other sources. The estimates and associated assumptions are based on historical experience and other factors that are considered to be relevant. Actual results may differ from these estimates. The estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimate is revised if the revision affects only that period or in the period of the revision and future periods if the revision affects both current and future periods.
	Critical judgements in applying accounting policies The following are the critical judgements, apart from those involving estimations (see below), that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in financial statements. Borrowing costs As described in notes 3 and 8, the Company’s management has considered it appropriate to capitalise borrowing costs directly attributable to the qualifying assets under construction. Impairment of loans and receivables The Company’s management reviews periodically items classified as loans and receivables to assess whether an allowance for impairment should be recorded in the statement of income. Management estimates the amount and timing of future cash flows when determining the level of allowance required. Such estimates are necessarily based on assumptions about several factors involving varying degrees of judgement and uncertainty. Retirement Benefit Obligation The cost of providing retirement benefits is determined using the Projected Unit Credit Method, with actuarial valuations being carried out at each balance sheet date. Actuarial valuations are based on a number of assumptions and require significant judgements made by the management. The management believes that the assumptions used in determining the retirement benefit obligation using actuarial valuation method are reasonable. Key sources of estimation uncertainty The key assumptions concerning the future and other key sources of estimation uncertainty at the balance sheet date are discussed below: Impairment of tangible and intangible assets and useful lives The Company’s management tests annually whether tangible and intangible assets have suffered impairment in accordance with accounting policies stated in note 3, the recoverable amount of an asset is determined based on value-in-use method. This method uses estimated cash flow projections over the estimated useful life of the asset discounted using market rates. During the year the Company reviewed the estimated useful life over which its tangible assets are depreciated and intangible assets are amortised. The Company’s management is satisfied that the estimates of useful life are appropriate. The depreciation and amortisation charged for the year will change significantly if actual life is different than the estimated useful life.

	There was no movement in the allowance for doubtful debts during 2007 and 2006.
		In determining the recoverability of a trade receivable, the Company considers any change in the credit quality of the trade receivable from the date credit was initially granted up to the reporting date. The concentration of credit risk is limited due to the customer base being large and unrelated. Accordingly, the management believe that there is no further credit provision required in excess of the allowance for doubtful debts.

8	PROPERTY, PLANT AND EQUIPMENT
		Buildings and roads			Plant and equipment			Office furniture and equipment			Assets under construction			Total
		US$’000			US$’000			US$’000			US$’000			US$’000
	Cost
	As at January 1, 2006		35,535			1,559,823			88,984			141,841			1,826,183
	Additions		-			53,949			-			356,097			410,046
	Disposals		-			(6,786	)		-			-			(6,786	)
	Transfers		2,530			59,611			6,861			(69,002	)		-
	As at January 1, 2007		38,065			1,666,597			95,845			428,936			2,229,443
	Additions		-			-			-			347,155			347,155
	Disposals		(5,865	)		(28,055	)		(1,156	)		-			(35,076	)
	Transfers		29,056			31,121			(24,816	)		(35,361	)		-
	As at December 31, 2007		61,256			1,669,663			69,873			740,730			2,541,522
	Accumulated depreciation
	As at January 1, 2006		17,136			641,156			65,945			-			724,237
	Charge for the year		1,657			88,678			4,143			-			94,478
	Disposals		-			(3,054	)		-			-			(3,054	)
	As at January 1, 2007		18,793			726,780			70,088			-			815,661
	Charge for the year		1,757			96,811			1,680			-			100,248
	Disposals		(5,865	)		(28,055	)		(1,156	)		-			(35,076	)
	Transfers		15,588			-			(15,588	)		-			-
	As at December 31, 2007		30,273			795,536			55,024			-			880,833
	Carrying amount
	As at December 31, 2007		30,983			874,127			14,849			740,730			1,660,689
	As at December 31, 2006		19,272			939,817			25,757			428,936			1,413,782

11	DEFERRED INCOME
	Deferred income represents reservation right fees accrued to the extent of construction cost incurred by the Company during 2006 and 2007. Such fees are receivable from the Olefins II project entities (see note 14).

12	SHARE CAPITAL
		The share capital of the Company comprises 2,160 million authorised, issued and fully paid up shares of Fils 100 each (December 31, 2006: 2,160 million authorised, issued and fully paid up shares of Fils 100 each) (1000 Fils equals 1 Kuwaiti Dinar).
		The ownership percentages of the shareholders at December 31, 2007 are as follows:
		Shareholder’s name	% of ownership
		Union Carbide Corporation (“UCC”)	42.5%
		Petrochemical Industries Company (“PIC”)	42.5%
		Boubyan Petrochemical Company (“BPC”)	9%
		Al Qurain Petrochemical Industries Company (“QPIC”)	6%
		On December 20, 2007, UCC contributed its 42.5% ownership interest in EQUATE to Union Carbide Investment B.V, a limited liability company incorporated in Netherlands and owned by Dow Europe Holding B.V. However, the regulatory procedures in Kuwait relating to the contribution of ownership were not completed before December 31, 2007. Therefore, Union Carbide Corporation will remain as a shareholder as at the balance sheet date from Kuwaiti regulatory aspects.