10-Q

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934

FOR THE QUARTERLY PERIOD ENDED June 30, 2004

Commission file number 1-3433

THE DOW CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization) 38-1285128
(I.R.S. Employer
Identification No.)

2030 DOW CENTER, MIDLAND, MICHIGAN 48674
(Address of principal executive offices) (Zip Code)

989-636-1000
(Registrant's telephone number, including area code)

Not applicable
(Former name, former address and former fiscal year, if changed since last report)

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.  Yes ý    No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ý    No o

Class	Outstanding at June 30, 2004
Common Stock, par value $2.50 per share	939,431,901 shares

The Dow Chemical Company
Table of Contents

			PAGE
PART I—FINANCIAL INFORMATION
	Item 1. Financial Statements		3
		Consolidated Statements of Income	3
		Consolidated Balance Sheets	4
		Consolidated Statements of Cash Flows	5
		Consolidated Statements of Comprehensive Income	5
		Notes to the Consolidated Financial Statements	6
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		24
		Disclosure Regarding Forward-Looking Information	24
		Results of Operations	24
		Changes in Financial Condition	32
		Other Matters	34
	Item 3. Quantitative and Qualitative Disclosures About Market Risk		40
	Item 4. Controls and Procedures		41
PART II—OTHER INFORMATION
	Item 1. Legal Proceedings		42
	Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities		42
	Item 4. Submission of Matters to a Vote of Security Holders		43
	Item 6. Exhibits and Reports on Form 8-K		44
SIGNATURE			46
EXHIBIT INDEX			47

2

PART I—FINANCIAL INFORMATION
Item 1.    Financial Statements

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income

		Three Months Ended				Six Months Ended
In millions, except per share amounts (Unaudited)		June 30, 2004		June 30, 2003		June 30, 2004			June 30, 2003
Net Sales		$	9,844	$	8,242	$	19,153		$	16,323
	Cost of sales		8,345		6,970		16,252			14,133
	Research and development expenses		262		246		513			483
	Selling, general and administrative expenses		347		354		710			709
	Amortization of intangibles		16		15		45			30
	Restructuring net gain		20		—		20			—
	Equity in earnings of nonconsolidated affiliates		254		90		394			129
	Sundry income (expense)—net		13		52		(15	)		46
	Interest income		21		18		39			38
	Interest expense and amortization of debt discount		182		207		368			422
Income before Income Taxes and Minority Interests			1,000		610		1,703			759
	Provision for income taxes		284		186		488			233
	Minority interests' share in income		31		31		61			48
Income before Cumulative Effect of Change in Accounting Principle			685		393		1,154			478
	Cumulative effect of change in accounting principle		—		—		—			(9	)
Net Income Available for Common Stockholders		$	685	$	393	$	1,154		$	469
Share Data
	Earnings before cumulative effect of change in accounting         principle per common share—basic	$	0.73	$	0.43	$	1.23		$	0.52
	Earnings per common share—basic	$	0.73	$	0.43	$	1.23		$	0.51
	Earnings before cumulative effect of change in accounting         principle per common share—diluted	$	0.72	$	0.43	$	1.22		$	0.52
	Earnings per common share—diluted	$	0.72	$	0.43	$	1.22		$	0.51
	Common stock dividends declared per share of common stock	$	0.335	$	0.335	$	0.67		$	0.67
	Weighted-average common shares outstanding—basic		938.0		917.3		934.9			916.0
	Weighted-average common shares outstanding—diluted		947.9		921.9		945.8			921.8
Depreciation		$	458	$	426	$	920		$	859
Capital Expenditures		$	329	$	272	$	530		$	495

See Notes to the Consolidated Financial Statements.

3

The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets

In millions (Unaudited)			June 30, 2004			Dec. 31, 2003
Assets
Current Assets
	Cash and cash equivalents		$	2,294		$	2,392
	Marketable securities and interest-bearing deposits			43			42
	Accounts and notes receivable:
		Trade (net of allowance for doubtful receivables—2004: $120; 2003: $118)		4,472			3,574
		Other		2,110			2,246
	Inventories			4,360			4,050
	Deferred income tax assets—current			299			698
	Total current assets			13,578			13,002
Investments
	Investment in nonconsolidated affiliates			2,242			1,878
	Other investments			2,006			1,971
	Noncurrent receivables			213			230
	Total investments			4,461			4,079
Property
	Property			40,271			40,812
	Less accumulated depreciation			26,723			26,595
	Net property			13,548			14,217
Other Assets
	Goodwill			3,150			3,226
	Other intangible assets (net of accumulated amortization—2004: $443; 2003: $406)			562			579
	Deferred income tax assets—noncurrent			4,287			4,113
	Asbestos-related insurance receivables—noncurrent			1,086			1,176
	Deferred charges and other assets			1,512			1,499
	Total other assets			10,597			10,593
Total Assets			$	42,184		$	41,891
Liabilities and Stockholders' Equity
Current Liabilities
	Notes payable		$	240		$	258
	Long-term debt due within one year			104			1,088
	Accounts payable:
		Trade		3,068			2,843
		Other		2,328			2,041
	Income taxes payable			236			212
	Deferred income tax liabilities—current			245			241
	Dividends payable			336			331
	Accrued and other current liabilities			2,343			2,520
	Total current liabilities			8,900			9,534
Long-Term Debt				12,241			11,763
Other Noncurrent Liabilities
	Deferred income tax liabilities—noncurrent			1,125			1,124
	Pension and other postretirement benefits—noncurrent			3,620			3,572
	Asbestos-related liabilities—noncurrent			1,696			1,791
	Other noncurrent obligations			3,299			3,556
	Total other noncurrent liabilities			9,740			10,043
Minority Interest in Subsidiaries				405			376
Preferred Securities of Subsidiaries				1,000			1,000
Stockholders' Equity
	Common stock			2,453			2,453
	Additional paid-in capital			83			8
	Unearned ESOP shares			(27	)		(30	)
	Retained earnings			10,519			9,994
	Accumulated other comprehensive loss			(1,726	)		(1,491	)
	Treasury stock at cost			(1,404	)		(1,759	)
	Net stockholders' equity			9,898			9,175
Total Liabilities and Stockholders' Equity			$	42,184		$	41,891

See Notes to the Consolidated Financial Statements.

4

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows

		Six Months Ended
In millions (Unaudited)		June 30, 2004			June 30, 2003
Operating Activities	Income before cumulative effect of change in accounting principle	$	1,154		$	478
	Adjustments to reconcile net income to net cash provided by     operating activities:
	Depreciation and amortization		1,016			935
	Provision for deferred income tax		219			54
	Earnings/losses of nonconsolidated affiliates in excess of         dividends received		(236	)		(45	)
	Minority interests' share in income		61			48
	Net loss on sales on consolidated companies		—			3
	Net gain on sales of investments		(13	)		(16	)
	Net gain on sales of property and businesses		(11	)		(24	)
	Other net (gain) loss		62			(24	)
	Net (gain) loss on sale of nonconsolidated affiliates		(17	)		1
	Net gain on asset divestitures related to formation of         nonconsolidated affiliates		(563	)		—
	Restructuring charges		496			—
	Tax benefit—nonqualified stock option exercises		41			13
	Changes in assets and liabilities that provided (used) cash:
	Accounts and notes receivable		(893	)		(361	)
	Inventories		(336	)		(78	)
	Accounts payable		584			(41	)
	Noncurrent receivables		17			271
	Other assets and liabilities		(862	)		448
	Cash provided by operating activities		719			1,662
Investing Activities	Capital expenditures		(530	)		(495	)
	Proceeds from sales of property and businesses		27			83
	Acquisition of business		(149	)		—
	Investments in consolidated companies		—			(69	)
	Investments in nonconsolidated affiliates		(56	)		(48	)
	Distribution from nonconsolidated affiliate		3			—
	Proceeds from sale of nonconsolidated affiliates		33			8
	Proceeds from asset divestitures related to formation of     nonconsolidated affiliates		845			—
	Purchases of investments		(898	)		(936	)
	Proceeds from sales and maturities of investments		806			886
	Cash provided by (used in) investing activities		81			(571	)
Financing Activities	Changes in short-term notes payable		(100	)		(8	)
	Payments on long-term debt		(1,075	)		(594	)
	Proceeds from issuance of long-term debt		618			833
	Purchases of treasury stock		(7	)		(4	)
	Proceeds from sales of common stock		325			96
	Distributions to minority interests		(32	)		(38	)
	Dividends paid to stockholders		(623	)		(612	)
	Cash used in financing activities		(894	)		(327	)
Effect of Exchange Rate Changes on Cash			(4	)		28
Summary	Increase (Decrease) in cash and cash equivalents		(98	)		792
	Cash and cash equivalents at beginning of year		2,392			1,484
	Cash and cash equivalents at end of period	$	2,294		$	2,276

See Notes to the Consolidated Financial Statements.

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income

		Three Months Ended					Six Months Ended
In millions (Unaudited)		June 30, 2004			June 30, 2003		June 30, 2004			June 30, 2003
Net Income Available for Common Stockholders		$	685		$	393	$	1,154		$	469
Other Comprehensive Income (Loss), Net of Tax
	Net unrealized gains (losses) on investments		(34	)		39		(24	)		32
	Translation adjustments		(81	)		80		(223	)		185
	Minimum pension liability adjustments		(17	)		—		(16	)		(3	)
	Net gains on cash flow hedging derivative instruments		35			18		28			2
	Total other comprehensive income (loss)		(97	)		137		(235	)		216
Comprehensive Income		$	588		$	530	$	919		$	685

See Notes to the Consolidated Financial Statements.

5

The Dow Chemical Company and Subsidiaries
Notes to the Consolidated Financial Statements

(Unaudited)

NOTE A—CONSOLIDATED FINANCIAL STATEMENTS

        The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries ("Dow" or the "Company") were prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for a fair presentation of the results for the periods covered. Certain reclassifications of prior year amounts have been made to conform to current year presentation. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

NOTE B—ACCOUNTING CHANGES

        In June 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations," which requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the related long-lived asset. The liability is adjusted to its present value each period and the asset is depreciated over its useful life. A gain or loss may be incurred upon settlement of the liability. SFAS No. 143 was effective for fiscal years beginning after June 15, 2002. Adoption of SFAS No. 143 on January 1, 2003 resulted in the recognition of an asset retirement obligation of $45 million and a charge of $9 million (net of tax of $5 million), which was included in "Cumulative effect of changes in accounting principles."

        In accordance with SFAS No. 143, the Company has recognized asset retirement obligations related to demolition and remediation activities at manufacturing sites in the United States, Germany, France and The Netherlands. In addition, the Company has recognized obligations related to capping activities at landfill sites in the United States, Canada, Italy and Brazil. The aggregate carrying amount of asset retirement obligations recognized by the Company was $47 million at June 30, 2004 and $46 million at December 31, 2003. These obligations are included in the consolidated balance sheets as "Other noncurrent obligations."

        In the first quarter of 2003, Dow adopted the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation," for new grants of equity instruments (which include stock options, deferred stock grants, and subscriptions to purchase shares under the Company's Employees' Stock Purchase Plan) to employees. As required by SFAS No. 148, "Accounting for Stock-Based Compensation—Transition and Disclosure," the following table provides pro forma results as if the fair value based method had been applied to all outstanding and unvested awards in each period presented:

		Three Months Ended						Six Months Ended
In millions		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Net income, as reported		$	685		$	393		$	1,154		$	469
Add: Stock-based compensation expense included in     reported net income, net of tax			29			8			52			11
Deduct: Total stock-based compensation expense     determined using fair value based method for     all awards, net of tax			(34	)		(19	)		(61	)		(38	)
Pro forma net income		$	680		$	382		$	1,145		$	442
Earnings per share (in dollars):
	Basic—as reported	$	0.73		$	0.43		$	1.23		$	0.51
	Basic—pro forma		0.72			0.42			1.22			0.48
	Diluted—as reported		0.72			0.43			1.22			0.51
	Diluted—pro forma		0.72			0.41			1.21			0.48

6

        In December 2003, the FASB issued revised FASB Interpretation ("FIN") No. 46, "Consolidation of Variable Interest Entities," which replaced FIN No. 46 issued in January 2003. Revised FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support. The Company adopted the original FIN No. 46 during 2003. The application of revised FIN No. 46 did not have an impact on the Company's consolidated financial statements. The Company's disclosures related to variable interest entities can be found in Note M to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

        In December 2003, the FASB revised SFAS No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." The revised standard requires new disclosures in addition to those required by the original standard about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans. As revised, SFAS No. 132 is effective for financial statements with fiscal years ending after December 15, 2003. The interim-period disclosures required by this standard are effective for interim periods beginning after December 15, 2003. See Note H for the Company's interim disclosures regarding pension plans and other postretirement benefits.

        In May 2004, the FASB issued FASB Staff Position ("FSP") No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003." The FSP provides accounting guidance for the effects of the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") to a sponsor of a postretirement health care plan that has concluded that prescription drug benefits available under the plan are "actuarially equivalent" and thus qualify for the subsidy under the Act. The FSP also requires disclosures about the effects of the subsidy for an employer that sponsors a postretirement health care benefit plan that provides prescription drug benefits but for which the employer has not yet been able to determine actuarial equivalency. See Note H for the Company's disclosures regarding the Act.

        In March 2004, the FASB ratified consensuses reached by the Emerging Issues Task Force ("EITF") with respect to EITF Issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments." EITF Issue No. 03-1 addresses recognition, measurement and disclosure of other-than-temporary impairment evaluations for securities within the scope of SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and equity securities that are not subject to the scope of SFAS No. 115 and are not accounted for under the equity method according to Accounting Principles Board Opinion No. 18, "The Equity Method of Accounting for Investments in Common Stock." The recognition and measurement guidance is effective for reporting periods beginning after June 15, 2004. Certain qualitative and quantitative disclosures for SFAS No. 115 securities were effective for fiscal years ending after December 15, 2003. Disclosures for cost method investments are required to be included in annual financial statements prepared for fiscal years ending after June 15, 2004. The Company has determined that its practices are substantially consistent with the application guidance of EITF Issue No. 03-1; therefore, adoption of EITF Issue No. 03-1 is expected to have an immaterial impact on the Company's consolidated financial statements.

        In March 2004, the FASB ratified the consensus reached by the EITF with respect to EITF Issue No. 03-16, "Accounting for Investments in Limited Liability Companies." According to EITF Issue No. 03-16, a limited liability company ("LLC") that maintains a "specific ownership account" for each investor should be viewed similar to a limited partnership for determining whether a noncontrolling investment in an LLC should be accounted for using the cost or equity method. The consensus applies to all investments in LLCs (except those required to be accounted for as debt securities) and is effective for reporting periods beginning after June 15, 2004. The Company has reviewed its investments in LLCs and has determined that Dow's current accounting treatment for these investments is consistent with the guidance in EITF Issue No. 03-16.

NOTE C—IMPAIRMENT OF LONG-LIVED ASSETS

        In the first quarter of 2003, certain studies to determine potential actions relative to non-strategic and under-performing assets were completed and management made decisions regarding the disposition of certain assets. These decisions resulted in the write-off of the net book value of several manufacturing facilities totaling $37 million (the largest of which was $16 million recorded in "Cost of sales" in the Hydrocarbons and Energy segment associated with the impairment of Union Carbide Corporation's ("Union Carbide") Seadrift, Texas, ethylene cracker, which was shut down in the third quarter of 2003), the impairment of Union Carbide's chemical transport vessel (sold in the second quarter of 2003) of $11 million recorded in "Sundry income (expense)—net" in Unallocated and Other, and the write-off of cancelled capital projects totaling $12 million recorded in "Cost of sales" and reflected in Unallocated and Other.

7

        In the first quarter of 2004, Dow continued to evaluate non-strategic and under-performing assets, and management made decisions regarding the disposition of certain of the Company's assets. These decisions resulted in charges totaling $39 million. The two largest items were related to a manufacturing facility for the production of polyols and propylene glycol in Priolo, Italy, and a manufacturing facility for the production of HAMPOSYL surfactants in Nashua, New Hampshire. On April 1, 2004, the Company announced the permanent closure of the Priolo plant; therefore, in the first quarter of 2004, the net book value of $22 million was written down, with a charge to "Cost of sales" in the Performance Plastics segment. In the first quarter of 2004, the Company made the decision to discontinue production of HAMPOSYL surfactants (manufactured by Hampshire Chemical Corp., a wholly owned subsidiary of the Company). The manufacturing facility for this line of business is expected to be closed in the third quarter of 2004; the plant will subsequently be demolished. As a result, in the first quarter of 2004, the Company wrote down the net book value of $9 million against "Cost of sales" in the Performance Chemicals segment. See Note F regarding the write-off of goodwill associated with this line of business.

        See Notes D and F regarding impairments of long-lived assets and a write-off of goodwill in the second quarter of 2004.

NOTE D—RESTRUCTURING

        In the second quarter of 2004, the Company recorded a net pretax gain of $20 million related to restructuring activities. The net gain included gains totaling $563 million related to the divestitures of assets in conjunction with the formation of two new joint ventures, substantially offset by asset impairments of $99 million related to the future sale or shutdown of facilities; the recognition of a liability of $148 million associated with a loan guarantee for Cargill Dow LLC ("Cargill Dow"); and employee-related restructuring charges of $296 million. The net impact of the transactions is shown as "Restructuring net gain" in the consolidated statements of income. The second quarter activities are further described below.

Formation of New Joint Ventures, MEGlobal and Equipolymers

        On June 30, 2004, Dow and Petrochemical Industries Company ("PIC") of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, formed two new joint ventures designed to further develop the commercial relationship of the two companies in the petrochemical industry. The joint ventures are:

•

MEGlobal, a 50:50 joint venture for the manufacture and marketing of monoethylene glycol and diethylene glycol ("EG").



•

Equipolymers, a 50:50 joint venture for the manufacture of purified teraphthalic acid ("PTA") and the manufacture and marketing of polyethylene terephthalate resins ("PET").

        The joint ventures combine Dow's strong existing asset base, technology position and market presence with PIC's commitment to increasing its investment in downstream petrochemical markets. The formation of the joint ventures is an important step in Dow's strategy of pursuing cost advantaged feedstock positions to supply growing markets, and in reducing Dow's capital intensity. MEGlobal and Equipolymers strengthen the integration of these ethylene derivative businesses by strategically shifting future growth to cost-advantaged locations.

        To form MEGlobal, Dow sold a 50 percent interest in its Canadian EG manufacturing assets (included in the Chemicals segment) to PIC for $635 million. Dow and PIC each contributed their respective interests in the Canadian EG manufacturing assets to form the joint venture. The carrying amount of the assets sold included: manufacturing facilities of $24 million, an investment in a nonconsolidated affiliate of $12 million and inventories of $11 million. MEGlobal will produce EG using ethylene purchased from Dow pursuant to a market-based agreement. Proceeds from the sale included a pre-payment of the ethylene supply agreement of $121 million, which will be recognized over the life of the contract. MEGlobal will also market excess EG produced in Dow's plants in the United States and Europe, and may also market EG produced by Dow and PIC affiliates. EG is used as a raw material in the manufacture of polyester fibers, PET, antifreeze formulations and other industrial products.

        To form Equipolymers, Dow sold a 50 percent interest in its PET/PTA business (included in the Plastics segment), which includes manufacturing assets in Germany and Italy, to PIC for $210 million. Dow and PIC each contributed their respective interests in the PET/PTA business to form the joint venture. The carrying amount of the assets sold included: manufacturing facilities of $39 million, receivables of $24 million, goodwill of $22 million, inventories of $21 million, payables of $16 million and other liabilities of $4 million. PTA is a key raw material for the production of PET. PET is a high quality plastic used in the packaging industry, particularly for the production of beverage, food and other liquid containers. See Note F regarding the reduction of goodwill related to the formation of Equipolymers.

        The Company recorded a gain on the sale of the Canadian EG assets of $439 million (included in the Chemicals segment) and a gain on the sale of the PET/PTA business of $124 million (included in the Plastics segment) in the second quarter of 2004.

8

        Beginning July 1, 2004, Dow will account for the joint ventures using the equity method of accounting. In future periods, Dow's share of the earnings/losses of MEGlobal will be reflected in the results for the Chemicals segment; Dow's share of the earnings/losses of Equipolymers will be reflected in the results for the Plastics segment.

Asset Impairments

        In the second quarter of 2004, Dow continued to evaluate non-strategic and under-performing assets, and management made decisions regarding the disposition of certain of the Company's assets. As a result, the Company recorded asset impairments totaling $99 million related to the future sale or shutdown of facilities as follows:

•

In the fourth quarter of 2003, Biopharmaceutical Contract Manufacturing Services ("BCMS"), located in Smithfield, Rhode Island, lost its contract manufacturing relationship with its largest customer. After a review of the business and site was completed in the second quarter of 2004, the Company decided to seek bids to sell BCMS. Based on indications of interest from potential buyers, the assets were written down in the second quarter to their fair value, with a $60 million charge against the Performance Chemicals segment.



•

In the second quarter of 2004, the Company recorded asset impairments totaling $39 million for the shutdown of a latex manufacturing facility ($8 million), the pending sale of a marine terminal ($10 million) and the results of a cash flow analysis of a Specialty Polymers business ($21 million). The impairments resulted in charges against the Performance Chemicals segment of $29 million and Unallocated and Other of $10 million. See Note F regarding a goodwill write-off associated with the Specialty Polymers line of business.

Recognition of Liability Related to Loan Guarantee

        In the second quarter of 2004, the Company completed an assessment of Cargill Dow, a 50:50 joint venture with Cargill, Incorporated. Based on that assessment, the Company concluded that it was probable that its portion of a loan guarantee in place for Cargill Dow would be called, and recognized a liability of $148 million in the second quarter with a charge to Unallocated and Other.

Employee-Related Restructuring Charges

        In the second quarter of 2004, the Company recorded employee-related restructuring charges totaling $296 million. The charges resulted from decisions made by management in the second quarter relative to employment levels as the Company restructured its business organization and finalized plans for additional plant shutdowns and divestitures. The charges included severance of $225 million for a workforce reduction of 2,455 people, most of whom will end their employment with Dow by the end of the third quarter of 2004, and curtailment costs of $71 million associated with Dow's defined benefit plans. The charges were included in the results of Unallocated and Other.

NOTE E—INVENTORIES

        The following table provides a breakdown of inventories at June 30, 2004 and December 31, 2003:

Inventories In millions	June 30, 2004		Dec. 31, 2003
Finished goods	$	2,454	$	2,396
Work in process		919		837
Raw materials		532		373
Supplies		455		444
Total inventories	$	4,360	$	4,050

        The reserves reducing inventories from the first-in, first-out ("FIFO") basis to the last-in, first-out ("LIFO") basis amounted to $608 million at June 30, 2004 and $330 million at December 31, 2003.

9

NOTE F—GOODWILL AND OTHER INTANGIBLE ASSETS

        The following table shows changes in the carrying amount of goodwill for the six months ended June 30, 2004, by operating segment:

In millions		Performance Plastics		Performance Chemicals			Agricultural Sciences		Plastics			Hydrocarbons and Energy		Total
Goodwill at December 31, 2003		$	913	$	781		$	1,320	$	149		$	63	$	3,226
Goodwill write-offs:
	Hampshire businesses		—		(31	)		—		—			—		(31	)
Reduction related to formation of     Equipolymers joint venture			—		—			—		(45	)		—		(45	)
Goodwill at June 30, 2004		$	913	$	750		$	1,320	$	104		$	63	$	3,150

        The Specialty Chemicals business has experienced a significant decline in sales of HAMPOSYL surfactants (manufactured by Hampshire Chemical Corp., a wholly owned subsidiary of the Company). The Company's efforts to reach an acceptable agreement to sell this line of business were unsuccessful. In the first quarter of 2004, the Company made the decision to discontinue production of HAMPOSYL surfactants. The production site for this line of business is expected to be closed in the third quarter of 2004; the plant will subsequently be demolished. As a result, in the first quarter of 2004, the Company wrote off goodwill of $13 million (included in "Amortization of intangibles") associated with this line of business in the Performance Chemicals segment (see Note C).

        The Specialty Polymers business has experienced a continued decline in the sales of a line of products manufactured by Hampshire Chemical Corp., a wholly owned subsidiary of the Company. In the second quarter of 2004, following the completion of an impairment calculation, the Company wrote off goodwill of $18 million (included in "Restructuring net gain") associated with this line of business against the Performance Chemicals segment (see Note D).

        The following table provides information regarding the Company's other intangible assets:

Other Intangible Assets

		At June 30, 2004							At December 31, 2003
In millions		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Intangible assets with finite lives:
	Licenses and intellectual property	$	287	$	(121	)	$	166	$	264	$	(107	)	$	157
	Patents		154		(87	)		67		153		(81	)		72
	Software		322		(169	)		153		315		(153	)		162
	Trademarks		138		(27	)		111		142		(27	)		115
	Other		104		(39	)		65		111		(38	)		73
	Total	$	1,005	$	(443	)	$	562	$	985	$	(406	)	$	579

        The following table provides a summary of acquisitions of intangible assets during the six months ended June 30, 2004:

Acquisitions of Intangible Assets in 2004

In millions		Acquisition Cost		Weighted-average Amortization Period
Intangible assets with finite lives:
	Licenses and intellectual property	$	27	5.1 years
	Patents		2	5.0 years
	Software		16	5.0 years
	Total	$	45	5.1 years

        Amortization expense for other intangible assets (not including software) was $16 million in the second quarter of 2004, compared with $15 million in the same period last year. Year to date, amortization expense for other intangible assets (not including software) was $32 million, compared with $30 million for the first six months of 2003. Amortization expense for software, which is included in "Cost of sales," totaled $9 million in the second quarter of 2004 and $7 million in the second quarter of 2003. Year to date, amortization expense for software was $17 million, compared with $14 million for the first six months of 2003. Total estimated amortization expense for 2004 and the five succeeding fiscal years is as follows:

10

In millions	Estimated Amortization Expense
2004	$	99
2005		91
2006		86
2007		77
2008		61
2009		26

NOTE G—COMMITMENTS AND CONTINGENT LIABILITIES

Litigation

Breast Implant Matters

        The following disclosure should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

        On May 15, 1995, Dow Corning Corporation ("Dow Corning"), in which the Company is a 50 percent shareholder, voluntarily filed for protection under Chapter 11 of the Bankruptcy Code to resolve litigation related to Dow Corning's breast implant and other silicone medical products. On June 1, 2004, Dow Corning's Joint Plan of Reorganization (the "Joint Plan") became effective and Dow Corning emerged from bankruptcy. The Joint Plan contains release and injunction provisions resolving all tort claims brought against various entities, including the Company, involving Dow Corning's breast implant and other silicone medical products.

        To the extent not previously resolved in state court actions, cases involving Dow Corning's breast implant and other silicone medical products filed against the Company are currently pending in the U. S. District Court for the Eastern District of Michigan as a result of being transferred to that court for resolution in the context of the Joint Plan. Should cases involving Dow Corning's breast implant and other silicone medical products be filed against the Company in the future, they will be accorded similar treatment. It is the opinion of the Company's management that the possibility is remote that a resolution of all such cases would have a material adverse impact on the Company's consolidated financial statements.

        As part of the Joint Plan, Dow and Corning Incorporated have agreed to provide a credit facility to Dow Corning in an aggregate amount of $300 million. The Company's share of the credit facility is $150 million and is subject to the terms and conditions stated in the Joint Plan.

DBCP Matters

        Numerous lawsuits have been brought against the Company and other chemical companies, both inside and outside of the United States, alleging that the manufacture, distribution or use of pesticides containing dibromochloropropane ("DBCP") has caused personal injury and property damage, including contamination of groundwater. It is the opinion of the Company's management that the possibility is remote that the resolution of such lawsuits will have a material adverse impact on the Company's consolidated financial statements.

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. The Company had accrued obligations of $381 million at December 31, 2003, for environmental remediation and restoration costs, including $40 million for the remediation of Superfund sites. At June 30, 2004, the Company had accrued obligations of $377 million for environmental remediation and restoration costs, including $35 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 Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration.

11

        On June 12, 2003, the Michigan Department of Environmental Quality ("MDEQ") issued a Hazardous Waste Operating License to the Company's Midland, Michigan, manufacturing site, which included provisions requiring the Company to conduct an investigation to determine the nature and extent of off-site contamination in Midland area soils; Tittabawassee and Saginaw River sediment and floodplain soils; and Saginaw Bay. The operating license required the Company, by August 11, 2003, to propose a detailed Scope of Work for the off-site investigation, for review and approval by the MDEQ. Scope of Work documents were submitted to the MDEQ and were the subject of public comment. On December 12, 2003, MDEQ provided its formal response to the Company's August 11, 2003 Scope of Work documents in the form of a Notice of Deficiency ("Notice") that required the Company respond to the Notice by February 17, 2004. The Company submitted revised Scope of Work documents on February 17, 2004. The Company and the MDEQ are engaged in ongoing discussions regarding how to proceed with corrective action under the operating license. The Company has accrued an obligation of $5 million (included in the total accrued obligation of $377 million at June 30, 2004) with respect to off-site investigation, based on the investigative work that the Company has proposed and has discussed with MDEQ since the submission of the Scope of Work documents.

        It is the opinion of the Company's management that the possibility is remote that costs in excess of those accrued or disclosed will have a material adverse impact on the Company's consolidated financial statements.

Asbestos-Related Matters of Union Carbide Corporation

        The following disclosure should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

        Union Carbide Corporation ("Union Carbide"), a wholly owned subsidiary of the Company, 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 Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide's premises, and Union Carbide's responsibility for asbestos suits filed against a former Union Carbide 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 Union Carbide'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 Union Carbide and Amchem, increased in 2001, 2002 and the first half of 2003. The rate of filing significantly abated in the second half of 2003 and the first half of 2004. Union Carbide expects more asbestos-related suits to be filed against Union Carbide and Amchem in the future, and will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

        At the end of 2001 and through the third quarter of 2002, Union Carbide had concluded it was not possible to estimate its cost of disposing of asbestos-related claims that might be filed against Union Carbide and Amchem in the future due to a number of reasons. During the third and fourth quarters of 2002, Union Carbide worked with Analysis, Research & Planning Corporation ("ARPC"), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, including asbestos, to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Union Carbide and Amchem. ARPC concluded that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against Union Carbide and Amchem because of various uncertainties associated with the litigation of those claims. Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised Union Carbide that it would be possible to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims likely to face Union Carbide and Amchem if the following assumptions were made:

•

In the near term, the number of future claims to be filed against Union Carbide and Amchem will be at a level consistent with levels experienced immediately prior to 2001.



•

The number of future claims to be filed against Union Carbide and Amchem will decline at a fairly constant rate each year from 2003.



•

The percentage of claims settled by Union Carbide and Amchem out of the total claims resolved (whether by settlement or dismissal) will be consistent with the percentage for 2001 and 2002.



•

The average settlement value for pending and future claims will be equivalent to those experienced during 2001 and 2002.

12

        Based on the resulting study completed by ARPC in January 2003, Union Carbide 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. Approximately 28 percent of the recorded liability related to pending claims and approximately 72 percent related to future claims.

        At each balance sheet date, Union Carbide compares current asbestos claim and resolution activity to the assumptions in the ARPC study to determine whether the accrual continues to be appropriate. In addition, in November 2003, Union Carbide requested ARPC to review the asbestos claim and resolution activity during 2003 and determine the appropriateness of updating its study. In response to that request, ARPC reviewed and analyzed data through November 25, 2003 to determine the number of asbestos-related filings and costs associated with 2003 activity. In January 2004, ARPC stated that an update at that time would not provide a more likely estimate of future events than that reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on Union Carbide's own review of the asbestos claim and resolution activity and ARPC's response, Union Carbide determined that no change to the accrual was required at that time. Management noted, however, that the total number of claims filed in 2003 did exceed the number of claims assumed to be filed in the ARPC study. After consultation with outside counsel and other consultants, management believes this fact was strongly influenced by the pending national legislation and tort reform initiatives in key states. The total number of claims filed and received in the first half of 2004 was in line with the number of claims assumed to be filed in the ARPC study. Based on Union Carbide's review of 2004 activity, Union Carbide determined that no change to the accrual was required at June 30, 2004.

        Union Carbide's asbestos-related liability for pending and future claims was $1.8 billion at June 30, 2004 and $1.9 billion at December 31, 2003. At June 30, 2004, approximately 36 percent of the recorded liability related to pending claims and approximately 64 percent related to future claims. At December 31, 2003, approximately 33 percent of the recorded liability related to pending claims and approximately 67 percent related to future claims.

        At December 31, 2002, Union Carbide increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. Combined with the previously mentioned increase in the asbestos-related liability at December 31, 2002, this resulted in a net income statement impact to Union Carbide of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002. The insurance receivable related to the asbestos liability was determined by Union Carbide after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which Union Carbide 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. Union Carbide's receivable for insurance recoveries related to its asbestos liability was $864 million at June 30, 2004 and $1.0 billion at December 31, 2003. At June 30, 2004, $505 million of the receivable was due from 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, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

Receivables for Costs Submitted to Insurance Carriers

In millions	June 30, 2004		Dec. 31, 2003
Receivables for defense costs	$	89	$	94
Receivables for resolution costs		358		255
Total	$	447	$	349

        Union Carbide's insurance policies generally provide coverage for asbestos liability costs, including coverage for both resolution and defense costs. As previously noted, Union Carbide increased its receivable for insurance recoveries related to its asbestos liability at December 31, 2002, thereby recording the full favorable income statement impact of its insurance coverage in 2002. Accordingly, defense and resolution costs recovered from insurers reduce Union Carbide's insurance receivable. Prior to increasing the insurance receivable related to the asbestos liability at December 31, 2002, the impact on Union Carbide's results of operations for defense costs was the amount of those costs not covered by insurance. Since Union Carbide expenses defense costs as incurred, defense costs for asbestos-related litigation (net of insurance) have impacted, and will continue to impact, results of operations. The pretax impact for defense and resolution costs, net of insurance, was $48 million in the second quarter of 2004 ($18 million in the second quarter of 2003) and $73 million in the first six months of 2004 ($48 million in the first six months of 2003), and was reflected in "Cost of sales."

13

        In September 2003, Union Carbide filed a comprehensive insurance coverage case in the Circuit Court for Kanawha County in Charleston, West Virginia, seeking to confirm its rights to insurance for various asbestos claims. Although Union Carbide already has settlements in place concerning coverage for asbestos claims with many of its insurers, including those covered by the 1985 Wellington Agreement, this lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with Union Carbide regarding their asbestos-related insurance coverage. Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is collectible. Union Carbide reached this conclusion after a further 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 amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon currently known facts. However, projecting 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 Union Carbide to be higher or lower than those projected or those recorded.

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

        It is the opinion of Dow's management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense costs, could have a material adverse impact on the Company's results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

DuPont Dow Elastomers L.L.C. Matters

        The U.S., Canadian and European competition authorities have initiated separate investigations into alleged anticompetitive behavior by certain participants in the synthetic rubber industry. DuPont Dow Elastomers L.L.C. ("DDE"), a 50:50 joint venture with E.I. du Pont de Nemours and Company ("DuPont"), and certain subsidiaries of the Company (but as to the investigation in Europe only) have responded, or are in the process of responding, to requests for documents and are otherwise cooperating in the investigations. Separately, related civil actions have been filed in various U.S. federal and state courts. Certain of these actions have named the Company. Although these investigations and related litigation are still at an early stage, based on the current status, DDE is expected to record a pretax charge of approximately $150 million. In that regard, on April 8, 2004, DuPont issued a press release stating that DuPont and the Company had entered into a series of agreements that, among other things: enables DuPont to direct DDE's response to these investigations and related litigation; results in DuPont funding 100 percent of any potential DDE liabilities and costs up to $150 million, with DuPont also funding more than 75 percent of the excess, if any; and grants the Company the option to acquire certain DDE assets in a cashless transaction which, if exercised, would obligate DuPont to acquire the Company's remaining equity interest in DDE.

Other Litigation Matters

        In addition to the breast implant, DBCP, environmental and DDE matters, the Company is party to a number of other claims and lawsuits arising out of the normal course of business with respect to commercial matters, including product liability, governmental regulation and other actions. Certain of these actions purport to be class actions and seek damages in very large amounts. All such claims are being contested. Dow has an active risk management program consisting of numerous insurance policies secured from many carriers at various times. These policies provide coverage that will be utilized to minimize the impact, if any, of the contingencies described above.

Summary

        Except for the possible effect of Union Carbide's asbestos-related liability described above, it is the opinion of the Company's management that the possibility is remote that the aggregate of all claims and lawsuits will have a material adverse impact on the Company's consolidated financial statements.

14

Purchase Commitments

        At December 31, 2003, the Company had five major agreements for the purchase of ethylene-related products in North America. The purchase prices are determined on a cost-of-service basis, which, in addition to covering all operating expenses and debt service costs, provides the owner of the manufacturing plants with a specified return on capital. Total purchases under the agreements were $580 million in 2003. On January 1, 2004, seven additional agreements for the purchase of ethylene-related products in North America became effective. On January 1, 2005, another agreement for the purchase of ethylene-related products in North America will become effective. The Company's commitments associated with all of these agreements are included in the table below.

        At December 31, 2003, the Company had various outstanding commitments for take or pay and throughput agreements, including the purchase agreements referred to above, with terms extending from one to 20 years. Such commitments were at prices not in excess of current market prices. The fixed and determinable portion of obligations under these purchase commitments at December 31, 2003 is presented in the following table:

Fixed and Determinable Portion of Take or Pay and Throughput Obligations at December 31, 2003 In millions
2004	$	1,358
2005		1,222
2006		1,110
2007		993
2008		903
2009 through expiration of contracts		3,713
Total	$	9,299

        In addition to the take or pay obligations at December 31, 2003, the Company had outstanding purchase commitments which ranged from one to 20 years for steam, electrical power, materials, property and other items used in the normal course of business of approximately $302 million. In general, such commitments were at prices not in excess of current market prices.

        At December 31, 2003, the Company was also committed to lease PET manufacturing facilities under construction in Germany. This lease was assigned to Equipolymers, a new 50:50 joint venture, in the second quarter of 2004, following the formation of that joint venture in the second quarter (see Note D).

        In the first quarter of 2004, the Company entered into a throughput agreement for the right to use a liquefied natural gas terminal in North America. The fixed and determinable portion of the obligation requires payments of $70 million per year for 20 years beginning in 2007. In addition, in the first quarter of 2004, the Company entered into an agreement for the purchase of power in North America that requires payments of $56 million in 2006, $54 million in 2007 and $35 million in 2008. On July 1, 2004, the Company entered into an agreement for marine terminal services in Texas with required payments of $8 million in 2004, $15 million in 2005, $12 million in 2006, $10 million in 2007, $10 million in 2008, and $28 million in 2009 and beyond.

Guarantees

        The Company provides a variety of guarantees, as described more fully in the following sections.

Guarantees

        Guarantees arise during the ordinary course of business from relationships with customers and nonconsolidated affiliates when the Company undertakes an obligation to guarantee the performance of others (via delivery of cash or other assets) if specified triggering events occur. Non-performance under a contract by the guaranteed party triggers the obligation of the Company. Such non-performance usually relates to commercial obligations or loans.

Residual Value Guarantees

        The Company provides guarantees related to leased assets specifying the residual value that will be available to the lessor at lease termination through sale of the assets to the lessee or third parties.

15

        The following tables provide a summary of the aggregate terms, maximum future payments and associated liability reflected in the consolidated balance sheets for each type of guarantee:

Guarantees at June 30, 2004

In millions	Final Expiration	Maximum Future Payments		Recorded Liability
Guarantees	2010	$	763	$	166
Residual value guarantees	2015		1,397		—
Total		$	2,160	$	166

Guarantees at December 31, 2003

In millions	Final Expiration	Maximum Future Payments		Recorded Liability
Guarantees	2009	$	888	$	48
Residual value guarantees	2015		1,431		—
Total		$	2,319	$	48

        See Note D for information regarding the recognition of a liability in the second quarter of 2004 related to a loan guarantee for a nonconsolidated affiliate.

NOTE H—PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS

Net Periodic Benefit Cost for All Significant Plans

	Defined Benefit Pension Plans
	Three Months Ended						Six Months Ended
In millions	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Service cost	$	66		$	60		$	132		$	121
Interest cost		199			193			399			386
Expected return on plan assets		(268	)		(271	)		(537	)		(542	)
Amortization of prior service cost		5			5			11			10
Amortization of net loss		6			3			13			6
Special termination/curtailment cost		40			2			40			3
Net periodic benefit cost (credit)	$	48		$	(8	)	$	58		$	(16	)

Net Periodic Benefit Cost for All Significant Plans

	Other Postretirement Benefits
	Three Months Ended						Six Months Ended
In millions	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Service cost	$	6		$	8		$	12		$	16
Interest cost		65			70			98			104
Expected return on plan assets		(6	)		(5	)		(12	)		(10	)
Amortization of prior service credit		(3	)		(2	)		(6	)		(4	)
Amortization of net loss		2			2			4			4
Special termination/curtailment cost		31			—			31			—
Net periodic benefit cost	$	95		$	73		$	127		$	110

Employer Contributions

Pension Plans

        The Company has defined benefit pension plans that cover employees in the United States and a number of other countries. The U.S. funded plan covering the parent company is the largest plan. Benefits are based on length of service and the employee's three highest consecutive years of compensation.

16

        The Company's funding policy is to contribute to those plans when pension laws and economics either require or encourage funding. As previously disclosed in the Company's financial statements for the year ended December 31, 2003, Dow expects to contribute $37 million to its U.S. qualified pension plan trust in 2004. Contributions of $6 million were made in the first half of 2004. The Company also has non-qualified supplemental pension plans. As previously disclosed, benefit payments to retirees under these plans are expected to be $24 million in 2004. In the first half of 2004, benefit payments of $8 million were made.

Other Postretirement Benefits

        The Company provides certain health care and life insurance benefits to retired employees. The U.S. plan covering the parent company is the largest plan. The plan provides health care benefits, including hospital, physicians' services, drug and major medical expense coverage, and life insurance benefits. For employees hired before January 1, 1993, the plan provides benefits supplemental to Medicare when retirees are eligible for these benefits. The Company and the retiree share the cost of these benefits, with the Company portion increasing as the retiree has increased years of credited service. There is a cap on the Company portion. These benefits are subject to change at any time.

        The Company funds most of the cost of these health care and life insurance benefits as incurred. Dow previously disclosed in its financial statements for the year ended December 31, 2003, that it does not expect to contribute assets to its U.S. other postretirement benefits plan trust in 2004. Consistent with that expectation, no contributions were made in the first half of 2004. As previously disclosed, benefit payments to retirees under these plans are expected to be $165 million in 2004. In the first half of 2004, benefit payments of $111 million were made.

        On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the "Act") was signed into law. The Act expanded Medicare to include, for the first time, coverage for prescription drugs. At present, detailed regulations necessary to implement the Act have not been issued, including those that would specify the manner in which actuarial equivalency must be determined, the evidence required to demonstrate actuarial equivalency, and the documentation requirements necessary to be entitled to the subsidy.

        The Company's net periodic postretirement benefit cost does not reflect any amount associated with the subsidy because the Company is unable to conclude whether the benefits provided by the Company's retiree medical plans are actuarially equivalent to Medicare Part D under the Act until further governmental regulations are issued.

NOTE I—EARNINGS PER SHARE CALCULATIONS

	Three Months Ended June 30, 2004				Three Months Ended June 30, 2003
Dollars and shares in millions
	Basic		Diluted		Basic		Diluted
Net income available for common stockholders	$	685	$	685	$	393	$	393
Weighted-average common shares outstanding		938.0		938.0		917.3		917.3
Add back dilutive effect of stock options and awards		—		9.9		—		4.6
Weighted-average common shares for EPS calculations		938.0		947.9		917.3		921.9
Earnings per common share	$	0.73	$	0.72	$	0.43	$	0.43

	Six Months Ended June 30, 2004				Six Months Ended June 30, 2003
Dollars and shares in millions
	Basic		Diluted		Basic			Diluted
Income before cumulative effect of change in     accounting principle	$	1,154	$	1,154	$	478		$	478
Cumulative effect of change in accounting principle		—		—		(9	)		(9	)
Net income available for common stockholders	$	1,154	$	1,154	$	469		$	469
Weighted-average common shares outstanding		934.9		934.9		916.0			916.0
Add back dilutive effect of stock options and awards		—		10.9		—			5.8
Weighted-average common shares for EPS calculations		934.9		945.8		916.0			921.8
Earnings per common share before cumulative effect of     change in accounting principle	$	1.23	$	1.22	$	0.52		$	0.52
Earnings per common share	$	1.23	$	1.22	$	0.51		$	0.51

17

NOTE J—OPERATING SEGMENTS AND GEOGRAPHIC AREAS

		Three Months Ended						Six Months Ended
In millions		June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Operating segment sales
	Performance Plastics	$	2,294		$	1,908		$	4,458		$	3,755
	Performance Chemicals		1,624			1,404			3,200			2,775
	Agricultural Sciences		1,029			927			1,953			1,695
	Plastics		2,325			1,877			4,559			3,851
	Chemicals		1,370			1,048			2,646			2,097
	Hydrocarbons and Energy		1,127			985			2,186			1,944
	Unallocated and Other		75			93			151			206
	Total	$	9,844		$	8,242		$	19,153		$	16,323
Operating segment EBIT (1)
	Performance Plastics	$	268		$	163		$	459		$	299
	Performance Chemicals		113			185			255			307
	Agricultural Sciences		271			233			502			363
	Plastics		399			159			706			296
	Chemicals		726			101			899			135
	Hydrocarbons and Energy		—			8			(1	)		(13	)
	Unallocated and Other		(616	)		(50	)		(788	)		(244	)
	Total	$	1,161		$	799		$	2,032		$	1,143
Geographic area sales
	United States	$	3,771		$	3,395		$	7,242		$	6,498
	Europe		3,451			2,873			6,899			5,870
	Rest of World		2,622			1,974			5,012			3,955
	Total	$	9,844		$	8,242		$	19,153		$	16,323

(1)

The Company uses EBIT (which Dow defines as earnings before interest, income taxes and minority interests) as its measure of profit/loss for segment reporting purposes. EBIT includes all operating items relating to the businesses and excludes items that principally apply to the Company as a whole. A reconciliation of EBIT to "Net Income Available for Common Stockholders" is provided below:

	Three Months Ended				Six Months Ended
In millions	June 30, 2004		June 30, 2003		June 30, 2004		June 30, 2003
EBIT	$	1,161	$	799	$	2,032	$	1,143
+ Interest income		21		18		39		38
-  Interest expense and amortization of debt discount		182		207		368		422
-  Provision for income taxes		284		186		488		233
-  Minority interests' share in income		31		31		61		48
+ Cumulative effect of change in accounting principle		—		—		—		(9	)
Net Income Available for Common Stockholders	$	685	$	393	$	1,154	$	469

        Transfers of products between operating segments are generally valued at cost. Transfers of products to the Agricultural Sciences segment from the other segments, however, are generally valued at market-based prices. The revenues generated by these transfers were immaterial in the first half of 2004 and 2003.

        In the first quarter of 2004, the Company made changes to its internal organizational structure. While this reorganization did not result in a change to Dow's operating segments, several of the businesses within the operating segments were renamed. The Corporate Profile included below reflects these changes:

18

Corporate Profile

Dow is a leading science and technology company that provides innovative chemical, plastic and agricultural products and services to many essential consumer markets. In 2003, Dow had annual sales of approximately $33 billion and employed approximately 46,000 people. The Company serves customers in 183 countries and a wide range of markets that are vital to human progress, including food, transportation, health and medicine, personal and home care, and building and construction, among others. The Company has 180 manufacturing sites in 37 countries and supplies more than 3,500 products grouped within the operating segments listed below:

PERFORMANCE PLASTICS

Applications: automotive interiors, exteriors, chassis/power train and body engineered systems • building and construction, thermal and acoustic insulation, roofing • communications technology, telecommunication cables, electrical and electronic connectors • footwear • home and office furnishings: kitchen appliances, power tools, floor care products, mattresses, carpeting, flooring, furniture padding, office furniture • information technology equipment and consumer electronics • packaging, food and beverage containers, protective packaging • sports and recreation equipment • wire and cable insulation and jacketing materials for power utility and telecommunications

Building and Construction business manufactures and markets an extensive line of insulation and cushion packaging foam solutions. The Building and Construction business has been the recognized leader in extruded polystyrene insulation marketed with the STYROFOAM brand for more than 50 years and offers an extensive line of science based insulation solutions. The business also manufactures foam solutions for a wide range of applications including cushion packaging, electronics protection, material handling and defense packaging.

•

Products: ENVISION custom foam laminates; ETHAFOAM polyethylene foam; EQUIFOAM comfort products; IMMOTUS acoustic panels; LAMDEX polyolefin foam; PROPEL polypropylene foam; QUASH sound management foam; SARAN vapor retarder film and tape; STYROFOAM brand products (including extruded polystyrene, STYROFOAM WEATHERMATE PLUS housewraps and all-purpose tape); SYNERGY soft touch foam; TRYMER polyisocyanurate foam

Dow Automotive business delivers innovative solutions for automotive interior, exterior, chassis/power train and body engineered systems applications. As a leading global supplier of resins, engineering plastic materials, fluids, adhesives, sealants, epoxy dampers, structural bonding and reinforcement products, and thermal and acoustical management solutions, Dow Automotive has been recognized for its automotive components and systems. The business also provides research and development, design expertise and advanced engineering.

•

Products: BETABRACE reinforcing composites; BETADAMP acoustical damping systems; BETAFOAM NVH and structural foams; BETAGUARD sealers; BETAMATE structural adhesives; BETASEAL glass bonding systems; CALIBRE polycarbonate resins; DOW polypropylene resins and automotive components made with DOW polypropylene; Injection-molded dashmats and underhood barriers; INSPIRE performance polymers; INTEGRAL adhesive film; MAGNUM ABS resins; PULSE engineering resins; QUESTRA crystalline polymers; RETAIN recycle content resins; SPECTRIM reaction moldable polymers; STRANDFOAM polypropylene foam

Engineering Plastics business offers one of the broadest ranges of engineering polymers and compounds of any global plastics supplier. The business complements its product portfolio with technical and commercial capabilities to develop solutions that deliver improved performance to customers while lowering their total cost.

•

Products: CALIBRE polycarbonate resins; EMERGE advanced resins; INCLOSIA solutions; ISOPLAST engineering thermoplastic polyurethane resins; MAGNUM ABS resins; PELLETHANE thermoplastic polyurethane elastomers; PREVAIL engineering thermoplastic resins; PULSE engineering resins; QUESTRA crystalline polymers; TYRIL SAN resins

Epoxy Products and Intermediates business manufactures a wide range of epoxy products, as well as intermediates used by other major epoxy producers. Dow is a leading global producer of epoxy products, supporting customers with high-quality raw materials, technical service and production capabilities.

•

Products: Acetone; Acrylic monomers; Allyl chloride; Bisphenol A; D.E.H. epoxy catalyst resins; D.E.N. epoxy novolac resins; D.E.R. epoxy resins (liquids, solids and solutions); Epichlorohydrin; Epoxy acrylates; OPTIM glycerine; Phenol; UV specialty epoxies

19

Polyurethanes and Thermoset Systems business is a leading global producer of polyurethane raw materials and thermoset systems. Differentiated by its ability to globally supply a high-quality, consistent and complete product range, this business emphasizes both existing and new business developments while facilitating customer success with a global market and technology network.

•

Products: DERAKANE and DERAKANE MOMENTUM epoxy vinyl ester resins; THE ENHANCER and LIFESPAN carpet backings; FROTH-PAK polyurethane spray foam; GREAT STUFF polyurethane foam sealant; INSTA-STIK roof insulation adhesive; ISONATE pure and modified methylene diphenyl diisocyanate (MDI); PAPI polymeric MDI; Propylene glycol; Propylene oxide; SPECFLEX copolymer polyols; SYNTEGRA waterborne polyurethane dispersions; TILE BOND roof tile adhesive; VORACOR, VORALAST, VORALUX and VORASTAR polyurethane systems; VORANATE toluene diisocyanate (TDI); VORANOL and VORANOL VORACTIV polyether and copolymer polyols; WOODSTALK fiberboard products

Technology Licensing and Catalyst business includes licensing and supply of related catalysts for the UNIPOL polypropylene process, the METEOR process for ethylene oxide (EO) and ethylene glycol (EG), the LP OXO process for oxo alcohols, and the QBIS bisphenol A process. Licensing of the UNIPOL polyethylene process and related catalysts, including metallocene catalysts, are handled through Univation Technologies, LLC, a 50:50 joint venture co-owned by Union Carbide. The business also includes UOP LLC, a 50:50 joint venture co-owned by Union Carbide, which supplies process technology, catalysts, molecular sieves and adsorbents to the petroleum refining, petrochemical and gas processing industries.

•

Products: LP OXO process technology; METEOR EO/EG process technology and catalysts; QBIS bisphenol A process technology and DOWEX QCAT catalyst; SHAC catalysts; UNIPOL process technology

Wire and Cable Compounds business is the leading global producer of a variety of performance polyolefin products that are marketed worldwide for wire and cable applications. Chief among these are polyolefin-based compounds for high-performance insulation, semiconductives and jacketing systems for power distribution, telecommunications and flame-retardant wire and cable.

•

Products: REDI-LINK polyethylene; SI-LINK crosslinkable polyethylene; UNIGARD high-performance flame-retardant compounds; UNIGARD reduced emissions flame-retardant compounds; UNIPURGE purging compounds; Wire and cable insulation and jacketing compounds; ZETABON coated metal cable armor

The Performance Plastics segment also includes an extensive line of specialty plastic films.

PERFORMANCE CHEMICALS

Applications: agricultural and pharmaceutical products and processing • building materials • chemical processing and intermediates • food processing and ingredients • household products • paints, coatings, inks, adhesives, lubricants • personal care products • pulp and paper manufacturing, coated paper and paperboard • textiles and carpet • water purification

Acrylics and Oxide Derivatives business is the world's largest supplier of glycol ethers and amines, and produces an array of products serving a diverse set of market applications, including coatings, household and personal care products, gas treating and agricultural products.

•

Products: Acrolein derivatives; Acrylic acid/Acrylic esters; Alkyl alkanolamines; DRYTECH superabsorbent polymers; Ethanolamines; Ethylene oxide- and propylene oxide-based glycol ethers; Ethyleneamines; Isopropanolamines

Dow Latex business is the world's largest supplier of synthetic latex. Within Dow Latex, Emulsion Polymers is the most globally diverse of the styrene-butadiene latex suppliers, and the largest supplier of latex for coating paper and paperboard used in magazines, catalogues and food packaging. UCAR Emulsion Systems is a leading global supplier of water-based emulsions used as key components in decorative and industrial paints, adhesives, textile products, and construction products such as caulks and sealants.

•

Products: Acrylic latex; Butadiene-vinylidene latex; NEOCAR branched vinyl ester latexes; POLYPHOBE rheology modifiers; Polystyrene latex; Styrene-acrylate latex; Styrene-butadiene latex; UCAR all-acrylic, styrene-acrylic and vinyl-acrylic latexes

20

Specialty Chemicals provides products used as functional ingredients or processing aids in the manufacture of a diverse range of products. Applications include agricultural and pharmaceutical products and processing, building and construction, chemical processing and intermediates, food processing and ingredients, household products, coatings, pulp and paper manufacturing, and transportation. Dow Haltermann Custom Processing provides contract and custom manufacturing services to other specialty chemical and agricultural chemical producers.

•

Products: CARBOWAX polyethylene glycols and methoxypolyethylene glycols; Diphenyloxide; DOW polypropylene glycols; DOWFAX, TERGITOL and TRITON surfactants; DOWTHERM, SYLTHERM and UCARTHERM heat transfer fluids; UCAR deicing fluids; UCON fluids; VERSENE chelating agents; Fine and specialty chemicals from the Dow Haltermann Custom Processing business; Test and reference fuels, printing ink distillates, pure hydrocarbons and esters, and derivatives from Haltermann Products, a wholly owned subsidiary of Dow

Specialty Polymers business provides a diverse portfolio of multi-functional ingredients and polymers for numerous markets and applications. Within Specialty Polymers, Liquid Separations uses several technologies to separate dissolved minerals and organics from water, making purer water for human and industrial uses. Specialty Polymers businesses also market a range of products that enhance the physical and sensory properties of end-use products in a wide range of applications including food, pharmaceuticals, oilfields, paints and coatings, personal care, and building and construction.

•

Products: Basic nitroparaffins and nitroparaffin-based specialty chemicals of ANGUS Chemical Company; Biocides; CELLOSIZE hydroxyethyl cellulose; DOWEX ion exchange resins; ETHOCEL ethylcellulose resins; FILMTEC membranes; METHOCEL cellulose ethers; POLYOX water-soluble resins; products for hair/skin care from Amerchol Corporation, a wholly owned subsidiary of Dow

The Performance Chemicals segment also includes peroxymeric chemicals, solution vinyl resins and other specialty chemicals, as well as contract manufacturing services for the pharmaceutical industry.

AGRICULTURAL SCIENCES

Applications: control of weeds, insects and diseases in plants • pest management • seeds • traits (genes) for crops and agriculture

Dow AgroSciences business is a global leader in providing pest management, agricultural and crop biotechnology products. The business develops, manufactures and markets products for crop production; weed, insect and plant disease management; and industrial and commercial pest management. Dow AgroSciences is building a leading plant genetics and biotechnology business in crop seeds and traits for seeds.

•

Products: CLINCHER herbicide; DITHANE fungicide; DURSBAN and LORSBAN insecticides; FORTRESS fungicide; GALLANT herbicide; GARLON herbicide; GLYPHOMAX herbicide; GRANDSTAND herbicide; HERCULEX I insect protection; KEYSTONE herbicide; LONTREL herbicide; MUSTANG herbicide; MYCOGEN seeds; NATREON canola and high-oleic sunflower oils; PHYTOGEN cottonseeds; SENTRICON Termite Colony Elimination System; STARANE herbicide; STINGER herbicide; TELONE soil fumigant; TORDON herbicide; TRACER NATURALYTE insect control; VIKANE structural fumigant

PLASTICS

Applications: adhesives • appliances and appliance housings • agricultural films • automotive parts and trim • beverage bottles • bins, crates, pails and pallets • building and construction • coatings • consumer and durable goods • consumer electronics • disposable diaper liners • fibers and nonwovens • films, bags and packaging for food and consumer products • hoses and tubing • household and industrial bottles • housewares • hygiene and medical films • industrial and consumer films and foams • information technology • oil tanks and road equipment • plastic pipe • toys, playground equipment and recreational products • wire and cable compounds

21

Polyethylene business is the world's leading supplier of polyethylene-based solutions through sustainable product differentiation. Through the use of multiple catalyst and process technologies, Dow offers one of the industry's broadest ranges of polyethylene solutions for a wide variety of applications.

•

Products: AFFINITY polyolefin plastomers; AMPLIFY functional polymers; ASPUN fiber grade resins; ATTANE ultra low density polyethylene (ULDPE) resins; CONTINUUM bimodal polyethylene resins; DOW high density polyethylene (HDPE) resins; DOW low density polyethylene (LDPE) resins; DOW XLA elastic fiber for the textile industry; DOWLEX polyethylene resins; ELITE enhanced polyethylene (EPE) resins; FLEXOMER very low density polyethylene (VLDPE) resins; PRIMACOR copolymers; SARAN barrier resins and films; TUFLIN linear low density polyethylene (LLDPE) resins; UNIVAL HDPE resins

Polypropylene business, a major global polypropylene supplier, provides a broad range of products and solutions tailored to customer needs by leveraging Dow's leading manufacturing and application technology, research and product development expertise, extensive market knowledge and strong customer relationships.

•

Products: Homopolymer polypropylene resins; Impact copolymer polypropylene resins; INSPIRE performance polymers; Random copolymer polypropylene resins

Polystyrene business, the global leader in the production of polystyrene resins, is uniquely positioned with geographic breadth and participation in a diversified portfolio of applications. Through market and technical leadership and low cost capability, Dow continues to improve product performance and meet customer needs.

•

Products: STYRON A-TECH advanced technology polystyrene resins; STYRON general purpose polystyrene resins; STYRON high-impact polystyrene resins; STYRON ignition-resistant polystyrene resins

The Plastics segment also includes polybutadiene rubber, polyethylene terephthalate (PET), purified terephthalic acid (PTA), styrene-butadiene rubber, several specialty resins and DuPont Dow Elastomers L.L.C., a co-owned 50:50 joint venture.

CHEMICALS

Applications: agricultural products • alumina • automotive antifreeze, coolant systems • carpet and textiles • chemical processing • dry cleaning • dust control • household cleaners and plastic products • inks • metal cleaning • packaging, food and beverage containers, protective packaging • paints, coatings and adhesives • personal care products • petroleum refining • pharmaceuticals • plastic pipe • pulp and paper manufacturing • snow and ice control • soaps and detergents • water treatment

Core Chemicals business is a leading global producer of each of its basic chemical products, which are sold to many industries worldwide, and also serve as key raw materials in the production of a variety of Dow's performance and plastics products.

•

Products: Acids; Alcohols; Aldehydes; Caustic soda; Chlorine; Chloroform; COMBOTHERM blended deicer; DOWFLAKE calcium chloride; DOWPER dry cleaning solvent; Esters; Ethylene dichloride (EDC); LIQUIDOW liquid calcium chloride; MAXICHECK procedure for testing the strength of reagents; MAXISTAB stabilizers for chlorinated solvents; Methyl chloride; Methylene chloride; Monochloroacetic acid (MCAA); Oxo products; PELADOW calcium chloride pellets; Perchloroethylene; SAFE-TAINER closed-loop delivery system; Trichloroethylene; Vinyl acetate monomer (VAM); Vinyl chloride monomer (VCM); Vinylidene chloride (VDC)

Ethylene Oxide/Ethylene Glycol business is the world's leading producer of ethylene oxide, used primarily for internal consumption, and ethylene glycol, which is sold for use in polyester fiber, PET for food and beverage container applications, polyester film and antifreeze.

•

Products: Ethylene glycol (EG); Ethylene oxide (EO)

HYDROCARBONS AND ENERGY

Applications: polymer and chemical production • power

22

Hydrocarbons and Energy business encompasses the procurement of fuels, natural gas liquids and crude oil-based raw materials, as well as the supply of monomers, power and steam for use in Dow's global operations. Dow is the world leader in the production of olefins and styrene.

•

Products: Benzene; Butadiene; Butylene; Cumene; Ethylene; Propylene; Styrene; Power, steam and other utilities

Dow Ventures includes Advanced Electronic Materials, Industrial Biotechnology, Pharmaceutical Technologies, and Growth Platforms, which focuses on identifying and pursuing new commercial opportunities.

The results of Dow Ventures; Venture Capital; the Company's insurance operations and environmental operations; as well as Cargill Dow LLC and Dow Corning Corporation, both of which are Dow co-owned 50:50 joint ventures, are included in Unallocated and Other.

23

The Dow Chemical Company and Subsidiaries
PART I, Item 2.    Management's Discussion and Analysis of Financial Condition
and Results of Operations

DISCLOSURE REGARDING 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 The Dow Chemical Company and its subsidiaries ("Dow" or the "Company"). This section covers the current performance and outlook of the Company and each of its operating segments. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Company'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 ("SEC"). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Company's expectations will be realized. The Company 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

OVERVIEW

        The Company's management and employees continued to focus on the steps outlined in Dow's 2003 Action Plan (announced in January 2003), designed to further improve Dow's earnings and financial position. For 2004, a new action plan was adopted that is specifically focused on: price/volume management; sustaining productivity improvements achieved in 2003; continued discipline in capital spending, with targeted total spending of $1.3 billion in 2004; additional shutdowns of non-competitive assets; and further divestitures of non-strategic assets. Progress was made in these areas in the second quarter. Dow's results showed broad-based improvements across all operating segments and geographic areas. The results for the quarter included increased sales—with strong volume and favorable price momentum—good control on expenses and higher operating rates, which combined to more than offset historically high feedstock and energy costs, resulting in significantly improved earnings for the quarter. Capital spending was up in the second quarter, but remains on track to achieve the Company's 2004 goal. Included in Dow's results for the second quarter was a net gain of $20 million related to restructuring activities. Dow's results for the second quarter of 2004 are discussed further in this Management's Discussion and Analysis of Financial Condition and Results of Operations.

Selected Financial Data

	Three Months Ended						Six Months Ended
In millions, except per share amounts	June 30, 2004			June 30, 2003			June 30, 2004			June 30, 2003
Sales	$	9,844		$	8,242		$	19,153		$	16,323
Cost of sales		8,345			6,970			16,252			14,133
% of sales		85	%		85	%		85	%		87	%
Research and development, and selling, general and     administrative expenses		609			600			1,223			1,192
% of sales		6	%		7	%		6	%		7	%
Effective tax rate		28.4	%		30.5	%		28.7	%		30.7	%
Net income available for common stockholders	$	685		$	393		$	1,154		$	469
Earnings per common share—basic	$	0.73		$	0.43		$	1.23		$	0.51
Earnings per common share—diluted	$	0.72		$	0.43		$	1.22		$	0.51
Operating rate percentage		85	%		79	%		87	%		79	%

24

        Net sales for the second quarter of 2004 were $9.8 billion, up 19 percent from $8.2 billion in the second quarter of last year, setting a new quarterly sales record for the Company. Compared with the same quarter last year, volume was up 11 percent while prices improved 8 percent (see Sales Volume and Price table on page 31). Volume growth was broad-based with substantial increases in all operating segments, except Hydrocarbons and Energy, which was down 8 percent due to lower sales of monomers, resulting from stronger internal demand. From a geographic standpoint, volume was up in all geographic areas. Volume was especially strong in Asia Pacific and Latin America. Compared with the first half of last year, prices were up in all geographic areas and all operating segments, with the most significant increases in Asia Pacific and in the basics businesses. Prices increased due to improved industry fundamentals, the continuing increase in feedstock and energy costs, and the favorable impact of currency on sales in Europe, which accounted for approximately 30 percent of the increase. Sales for the first six months of 2004 were $19.2 billion, up 17 percent from $16.3 billion in the first half of last year. Compared with last year, volume growth accounted for 9 percent of the increase, while price increases added 8 percent. Year to date, approximately half of the increase in prices was due to currency.

        Gross margin for the second quarter of 2004 was $1.5 billion, compared with $1.3 billion in the second quarter of last year. Gross margin improved as higher selling prices of approximately $685 million (including the favorable impact of currency in Europe), as well as volume growth and the impact of improved operating rates, more than offset an increase of approximately $620 million in feedstock and energy costs, the negative impact of currency on costs and an increase in scheduled maintenance costs. Year to date, gross margin was $2.9 billion, compared with $2.2 billion in the first six months of 2003.

        The Company's global plant operating rate for its chemicals and plastics businesses was 85 percent in the second quarter of 2004, compared with 79 percent in the second quarter of 2003. Operating rates continued to improve as the Company increased run rates to support growing demand, reflecting improved economic conditions around the world. For the first half of 2004, Dow's global plant operating rate was 87 percent, up from 79 percent for the same period of 2003.

        Personnel count was 45,855 at June 30, 2004, down from 46,372 at December 31, 2003 and 47,868 at June 30, 2003. Headcount continued to decline as the Company remained focused on the steps outlined in the action plan.

        Operating expenses (research and development, and selling, general and administrative expenses) were $609 million in the second quarter of 2004, up $9 million or 2 percent, from $600 million in the second quarter of last year. Research and development expenses increased $16 million, primarily due to spending on growth initiatives in the Agricultural Sciences segment, while selling, general and administrative expenses declined $7 million. Compared with the second quarter of last year, an increase in selling expenses was more than offset by a decline in administrative expenses. For the first half of 2004, operating expenses totaled $1,223 million and were up $31 million or 3 percent from $1,192 million in the first half of 2003. The increase was primarily due to higher research and development spending on growth initiatives and the start-up of two pilot plants in the first quarter of 2004.

        Amortization of intangibles was $16 million in the second quarter of 2004, compared with $15 million in the second quarter of last year. For the first two quarters of 2004, amortization of intangibles was $45 million, up from $30 million for the same period of 2003. The increase in amortization of intangibles was primarily due to the first quarter write-off of goodwill associated with the Company's manufacturing facility in Nashua, New Hampshire, that produces HAMPOSYL surfactants. In the first quarter of 2004, the Company made the decision to discontinue production of HAMPOSYL surfactants. The production site for this line of business is expected to be closed in the third quarter of 2004; the plant will subsequently be demolished. As a result, in the first quarter of 2004, the Company wrote off goodwill of $13 million associated with this line of business in the Performance Chemicals segment. See Notes C and F to the Consolidated Financial Statements for additional information.

        In the second quarter of 2004, the Company recorded a net pretax gain of $20 million related to restructuring activities. The net impact of these transactions, shown as "Restructuring net gain" in the consolidated statements of income, included gains totaling $563 million related to the divestitures of assets in conjunction with the formation of two new joint ventures, MEGlobal and Equipolymers, substantially offset by asset impairments of $99 million related to the future sale or shutdown of facilities; the recognition of a liability of $148 million associated with a loan guarantee for Cargill Dow LLC ("Cargill Dow"), reflected in Unallocated and Other; and employee-related restructuring charges of $296 million, reflected in Unallocated and Other. The gain for MEGlobal was $439 million and was reflected in the Chemicals segment. The gain for Equipolymers was $124 million and was reflected in the Plastics segment. The employee-related restructuring charges included severance of $225 million for a workforce reduction of 2,455 people, most of whom will end their employment with Dow by the end of the third quarter of 2004, and curtailment costs of $71 million associated with Dow's defined benefit plans. For additional information, see Notes D and F to the Consolidated Financial Statements.

25

        The following table summarizes the impact of restructuring activities in the second quarter of 2004:

Impact of Restructuring Activities

	Three Months Ended June 30, 2004
In millions, except per share amounts	Pretax Impact(1)			Impact on Net Income(2)			Impact on EPS(3)
Employee-related restructuring charges	$	(296	)	$	(200	)	$	(0.21	)
Gains on divestitures of assets related to formation of     MEGlobal and Equipolymers joint ventures		563			379			0.40
Asset impairments		(99	)		(69	)		(0.08	)
Recognition of liability related to Cargill Dow loan guarantee		(148	)		(93	)		(0.10	)
Total	$	20		$	17		$	0.01

(1)

Impact on "Income before Income Taxes and Minority Interests"

(2)

Impact on "Net Income Available for Common Stockholders"

(3)

Impact on "Earnings per common share—diluted"

        Dow's share of the earnings of nonconsolidated affiliates was $254 million in the second quarter of 2004, compared with $90 million in the second quarter of last year. For the first six months of 2004, equity earnings were $394 million, compared with $129 million for the same period last year. Equity earnings increased primarily due to stronger results from the OPTIMAL Group ("OPTIMAL"), EQUATE Petrochemical Company K.S.C. ("EQUATE"), DuPont Dow Elastomers L.L.C., and UOP LLC. Equity earnings in the second quarter of this year also included the favorable impact of the recognition of investment tax allowances by one of the Company's joint ventures.

        Sundry income (expense) includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, and gains and losses on sales of investments and assets. Sundry income (expense) for the second quarter of 2004 was net income of $13 million compared with net income of $52 million in the second quarter of 2003. Year to date, sundry income (expense) was a net expense of $15 million compared with net income of $46 million in the first half of 2003. Sundry income (expense) was lower than last year primarily due to a loss of approximately $30 million on the sale of assets recorded in the first quarter of 2004 and an unfavorable swing in foreign exchange hedging results.

        Net interest expense (interest expense less capitalized interest and interest income) was $161 million in the second quarter of 2004, down from $189 million in the second quarter of last year. Year to date, net interest expense was $329 million, down from $384 million for the first six months of 2003. Compared with last year, net interest expense declined primarily due to a reduction in total debt.

        The effective tax rate for the second quarter was 28.4 percent, versus 30.5 percent for the second quarter of 2003. The effective tax rate for the first six months of the year was 28.7 percent, compared with 30.7 percent for the same period last year. The Company's effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to tax credits available. In 2004, stronger earnings were reported by a number of the Company's joint ventures, and since most of the earnings from these companies are taxed at the joint venture level, the impact of higher equity earnings has reduced Dow's overall effective tax rate.

        Net income for the second quarter of 2004 was $685 million or $0.72 per share, compared with $393 million or $0.43 per share for the second quarter of 2003. Net income for the first six months of 2004 was $1.2 billion or $1.22 per share, compared with $469 million or $0.51 per share for the same period of 2003. Last year, net income for the first quarter was reduced by an after-tax charge of $9 million related to the adoption of Statement of Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset Retirement Obligations" (reflected in "Cumulative effect of change in accounting principle"). See Note B to the Consolidated Financial Statement for additional information regarding SFAS No. 143.

SEGMENT RESULTS

        The Company uses EBIT (which Dow defines as earnings before interest, income taxes and minority interests) as its measure of profit/loss for segment reporting purposes. EBIT includes all operating items relating to the businesses and excludes items that principally apply to the Company as a whole. See Note J to the Consolidated Financial Statements for a reconciliation of EBIT to "Net Income Available for Common Stockholders."

26

        In the first quarter of 2004, the Company made changes to its internal organizational structure. While this reorganization did not result in a change to Dow's operating segments, several of the businesses within the operating segments were renamed. The Corporate Profile included in Note J to the Consolidated Financial Statements reflects these changes. See Note J for additional information regarding the Company's operating segments.

PERFORMANCE PLASTICS

        Performance Plastics sales were $2,294 million for the second quarter of 2004, up 20 percent from $1,908 million in the second quarter of 2003. Volume grew 17 percent from last year, while prices increased 3 percent due to the favorable impact of currency in Europe. EBIT for the segment was $268 million in the second quarter, up from $163 million in the same period of last year, as the impact of increased volumes, higher selling prices and improved operating rates more than offset the higher cost of raw materials.

        Building & Construction sales for the second quarter of 2004 were up 14 percent from a year ago as the global building industry showed continued resiliency with strong demand for extruded polystyrene. Volume improved 8 percent, consistent with a strong residential construction market in North America. Prices, up 6 percent with increases in all geographic areas except Latin America, were favorably impacted by currency in Europe. EBIT improved versus the same quarter of 2003, as the impact of price improvements, increased volume and improved operating rates more than offset an increase in raw material costs.

        Dow Automotive sales for the second quarter of 2004 were up 8 percent from a year ago, setting a new all-time quarterly sales record. Compared with the second quarter of last year, volume grew 4 percent, as sales to Dow's existing customer base grew due to continued solid product performance from glass and plastic bonding and body engineered systems. Dow Automotive continued to perform well outside of its traditional customer base with significant geographic growth in Europe and Asia Pacific. Prices increased 4 percent, favorably impacted by currency in Europe. Price increases were successfully implemented to offset baseline increases in feedstock costs, primarily driven by high propylene costs. EBIT for the business increased from last year as higher selling prices and increased volumes more than offset higher raw material costs.

        Engineering Plastics sales for the quarter were up 22 percent versus the second quarter of 2003, reflecting a 24 percent growth in volume and a 2 percent decline in prices. Volume growth was driven by an increase in demand for compounds and blends within the appliance and electronics industries, and by strong demand for polycarbonate within the optical media industry in North America and Europe. While prices were favorably impacted by the strengthening Euro, local prices decreased under intense competitive pressure. EBIT for the second quarter of 2004 improved due to volume growth and improved operating rates.

        Sales of Epoxy Products and Intermediates for the second quarter were up 32 percent from last year, as volume grew 28 percent and prices rose 4 percent. Demand was strong as the level of economic activity increased in all geographic areas, especially within the coatings industry in North America. All liquid epoxy resin plants in North America ran at high production rates to meet domestic consumption and strong export demand. Price increases were supported by higher capacity utilization within the industry and were broad-based, with increases reported in all geographic areas, except Latin America. EBIT improved significantly as volume growth, improved operating rates and higher prices more than offset an increase in raw material costs.

        Polyurethanes and Thermoset Systems sales for the quarter were up 23 percent from the second quarter of 2003. Volume increased 19 percent, with strong demand in the appliance and construction industries for polyols and methylene diphenyl diisocyanate. Demand also improved for propylene glycol and rigid foams. Compared with last year, prices rose 4 percent. EBIT for the second quarter of 2004 improved as strong volume, higher selling prices and improved operating rates more than offset the impact of increased raw material costs.

        Wire and Cable Compound sales for the second quarter were up 23 percent from last year, due to volume growth of 24 percent, slightly offset by a decline in prices of 1 percent. Volume continued to improve due to increased demand within the telecommunication cable industry. EBIT improved due to an improvement in volume and operating rates.

        Technology Licensing and Catalyst sales for the second quarter were up 18 percent from a year ago due to improved catalyst royalties and licenses related to ethylene glycol technology. EBIT improved from last year, reflecting improved equity earnings from UOP LLC and Univation Technologies, LLC.

27

        For the first six months of the year, Performance Plastics sales were $4,458 million, up 19 percent from $3,755 million in the same period last year. Volume grew 14 percent, while prices rose 5 percent due to the favorable impact of currency in Europe. Year to date, EBIT for the segment was $459 million, up significantly from $299 million in the first half of 2003, as the impact of increased volumes, higher selling prices and improved operating rates more than offset the higher cost of raw materials. Year-to-date EBIT for 2004 was negatively impacted by the first quarter write-down of the net book value of the Company's polyols production facility in Priolo, Italy ($22 million), following Dow's decision to shut the facility down (see Note C to the Consolidated Financial Statements).

PERFORMANCE CHEMICALS

        Performance Chemicals sales for the second quarter of 2004 were $1,624 million, up 16 percent from $1,404 million in the second quarter of last year due to volume growth of 12 percent and increased prices of 4 percent. Approximately 60 percent of the increase in prices was due to the favorable impact of currency in Europe. EBIT for the second quarter was $113 million, down from $185 million in the second quarter of 2003. Results for the segment for the second quarter of 2004 were negatively impacted by asset impairments totaling $89 million as follows: a $60 million write-down of the Company's contract manufacturing plant in Smithfield, Rhode Island, resulting from the pending disposal of the site; a $21 million partial write-down of a Hampshire Chemical business; and an $8 million write-off of a latex manufacturing facility, which was shut down in the second quarter of 2004 (see Notes D and F to the Consolidated Financial Statements for additional information). Excluding the asset impairments, EBIT improved as higher selling prices, volume growth, improved operating rates and higher equity earnings from OPTIMAL more than offset an increase in feedstock costs.

        Acrylics and Oxide Derivatives sales for the quarter were up 39 percent from the second quarter of 2003, due to volume growth of 28 percent and price increases of 11 percent, including the favorable impact of currency. Volume for acrylics increased primarily due to the acquisition of the acrylates business of Celanese AG on February 2, 2004. Oxide derivatives volume improved due to increased demand for coatings (glycol ethers) and wet strength resin (amines). Prices increased due to a tight supply/demand balance in glycol ethers, ethanolamines and ethyleneamines, resulting in some margin restoration. Increases in volume and price, the favorable impact of improved raw materials contracts, and higher equity earnings from OPTIMAL resulted in a significant increase in EBIT over last year.

        Dow Latex sales for the quarter improved 9 percent compared with the second quarter of 2003. Volume improved 7 percent, while prices increased 2 percent, due to the favorable impact of currency in Europe. Volume for styrene-butadiene latex sold into the coated paper and carpet industries was up significantly. Volume was up 14 percent for UCAR Emulsion Systems based on strong global industry demand for paints. Despite improved volume and selling prices, EBIT for the second quarter declined primarily due to increased raw material costs. EBIT in the second quarter was also negatively impacted by the $8 million write-off of a latex manufacturing facility.

        Specialty Chemicals sales improved 11 percent versus second quarter of 2003 with a 7 percent increase in volume and a 4 percent increase in price, due to the favorable impact of currency in Europe. Both volume and price improved for functional solutions and surfactants in the quarter. Despite improvements in volume and selling prices, EBIT for the second quarter of 2004 was flat compared with last year, due in part to higher raw material costs.

        Specialty Polymers sales in the second quarter of 2004 were up 7 percent from the same period of last year. Volume increased 6 percent; prices increased 1 percent, due to the favorable impact of currency in Europe and Asia Pacific. Volume growth was broad-based with increases in all geographic areas. Sales were strong for ANGUS Chemical Company's products, biocides, CELLOSIZE cellulose ethers, liquid separations and METHOCEL cellulose ethers. EBIT for the second quarter of 2004 declined from the same quarter of 2003 due to a $21 million write-down of a Hampshire Chemical business.

        Performance Chemicals sales were $3,200 million in the first six months of the year, up 15 percent from $2,775 million in the first half of 2003. Compared with last year, volume improved 10 percent, while prices increased 5 percent, primarily due to the favorable impact of currency in Europe and Asia Pacific. EBIT for the first six months of 2004 was $255 million compared with $307 million in 2003. In addition to the asset impairments totaling $89 million recorded in the second quarter of 2004, year-to-date EBIT was negatively impacted by charges recorded in the first quarter related to the shutdown of Hampshire Chemical's Nashua, New Hampshire, manufacturing site. The first quarter charges included a $9 million write-down of the net book value of the facility and a $13 million write-off of goodwill. The site is expected to be closed in the third quarter of 2004; the plant will subsequently be demolished. See Notes C, D and F to the Consolidated Financial Statements for additional information. Excluding these charges, year-to-date EBIT for 2004 improved compared with 2003 as volume growth, higher selling prices and improved equity earnings more than offset the impact of increased feedstock costs.

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AGRICULTURAL SCIENCES

        Sales for the Agricultural Sciences segment in the second quarter of 2004 were $1,029 million, up 11 percent from $927 million in the second quarter of 2003, setting a new quarterly record for sales. Volume was up 9 percent, with gains in all geographic areas, while prices improved 2 percent, primarily due to the favorable impact of currency in Europe, Canada, and Asia Pacific. Volume improved due in part to improved agricultural industry conditions worldwide. Volume growth for insecticides was driven by increased sales for spinosad insect control products. Strong volume growth for herbicides was reported in Europe and the United States. Herbicide sales were especially strong for cereal herbicides—florasulam and fluroxypyr, following the launch of a new formulation—and cyhalofop, a rice herbicide. EBIT for the second quarter of 2004 was $271 million, another new quarterly record, up from $233 million in the second quarter of 2003. Strong volume growth and improved pricing contributed to the improvement in EBIT.

        For the first six months of 2004, Agricultural Sciences sales were $1,953 million, up 15 percent from $1,695 million in 2003. Volume grew 12 percent, while prices increased 3 percent, primarily due to the favorable impact of currency in Europe, Asia Pacific and Canada. EBIT for the first half of 2004 was $502 million, up significantly from $363 million last year. The year-over-year improvement in EBIT was the result of strong volume growth, favorable product mix, improved pricing and improved plant utilization.

PLASTICS

        Plastics sales for the second quarter of 2004 were $2,325 million, up 24 percent from $1,877 million a year ago. Compared with last year, volume grew 14 percent, while prices improved 10 percent. Approximately one-third of the price increase was due to the favorable impact of currency in Europe. Double-digit volume growth was reported in all geographic areas, as economic recovery continued to gather momentum and overall demand increased. In the second quarter of 2004, volumes returned to more historic levels, slightly above volumes experienced prior to 2003. In the second quarter of last year, volumes declined significantly as customers worked to reduce the inventories they had built in anticipation of higher prices and the war in Iraq. Selling prices in the second quarter of 2004 were up primarily due to higher feedstock and energy costs. EBIT for the second quarter was $399 million, up significantly from $159 million in the second quarter of 2003. Results for the second quarter of 2004 included a gain of $124 million associated with the divestiture of assets in conjunction with the formation of Equipolymers, a new 50:50 joint venture with Petrochemical Industries Company of Kuwait (see Note D to the Consolidated Financial Statements). In addition, EBIT for the second quarter improved as higher selling prices and improved equity earnings from EQUATE and DuPont Dow Elastomers offset the unfavorable impact of higher feedstock costs.

        Polyethylene sales were up 24 percent from the second quarter of 2003 as volume increased by 14 percent and prices rose 10 percent, including the favorable impact of currency in Europe. Double-digit volume growth was reported in most geographic areas, as the continuing global economic recovery resulted in higher overall polyethylene demand. Higher prices were also reported in all geographic areas, reflecting efforts by the business to offset the impact of higher feedstock costs. EBIT for the quarter improved significantly from the second quarter of 2003, as higher selling prices, higher operating rates and improved equity earnings from EQUATE more than offset the increase in feedstock costs.

        Polypropylene sales were up 27 percent over the second quarter of 2003, as volume increased 16 percent and prices increased 11 percent, including the favorable impact of currency in Europe. Improving economic conditions in North America and Europe resulted in an increase in volume; however, availability of propylene in Europe continued to be limited, causing a negative impact on the production capabilities of the business. Price increases, driven by higher feedstock costs, were reported in all geographic areas. Despite higher selling prices and cost reduction efforts, EBIT declined from the same quarter of last year due to the negative impact of higher feedstock costs.

        Polystyrene sales for the second quarter of 2004 were up 36 percent as volume increased 23 percent and prices improved 13 percent, including the favorable impact of currency in Europe. Volume improved significantly over 2003 levels with double-digit growth in all geographic areas. As with the other Plastics businesses, volume was down significantly in the second quarter of last year as customers worked to reduce inventories they had built in the first quarter of 2003. Demand increased as the economic recovery continued in the second quarter of this year and volumes returned to levels comparable with those experienced prior to 2003. Price improvement was also reported in all geographic areas as the business raised prices in response to higher styrene monomer costs. EBIT for the second quarter of 2004 declined from last year as higher feedstock costs more than offset the benefit of improved volume and increased selling prices.

29

        Plastics sales for the first six months of 2004 were $4,559 million, up 18 percent from $3,851 million in the first half of 2003. Compared with last year, prices increased 11 percent and volume grew 7 percent; the favorable impact of currency on sales accounted for approximately 40 percent of the increase in prices. Year to date, EBIT was $706 million, up significantly from $296 million in the first six months of 2003, as higher selling prices, stronger volume, higher equity earnings, and the gain from the sale of assets in conjunction with the formation of Equipolymers more than offset the impact of higher feedstock costs.

CHEMICALS

        Second quarter sales for the Chemicals segment were $1,370 million, up 31 percent from $1,048 million for the second quarter of last year, due to a 14 percent increase in prices and a 17 percent increase in volume. Price increases were especially strong for ethylene glycol, driven by improving supply/demand balances, as well as higher feedstock and energy costs. Volume improved primarily due to increasing demand for ethylene glycol and for vinyl chloride monomer ("VCM"). The increase in VCM volume was driven by strong customer demand for polyvinyl chloride. VCM prices increased slightly during the quarter. While caustic soda volumes improved in the second quarter, prices were down from the second quarter of last year. EBIT for the quarter was $726 million, up significantly from $101 million in the second quarter of 2003. Results for the second quarter of 2004 included a gain of $439 million associated with the divestiture of assets in conjunction with the formation of MEGlobal, a new 50:50 joint venture with Petrochemical Industries Company of Kuwait (see Note D to the Consolidated Financial Statements). In addition, EBIT for the second quarter included improved margins and higher equity earnings from OPTIMAL and EQUATE.

        For the first half of 2004, sales for the Chemicals segment were $2,646 million, up 26 percent from $2,097 million last year, as prices rose 13 percent and volume grew 13 percent. Year to date, EBIT was $899 million, up significantly from $135 million in the first six months of 2003 as the benefit of higher selling prices and higher equity earnings, as well as the gain on the sale of assets related to the formation of MEGlobal, more than offset the increases in feedstock and energy costs.

HYDROCARBONS AND ENERGY

        Hydrocarbons and Energy sales for the second quarter of 2004 were $1,127 million, up 14 percent from $985 million in the second quarter of 2003. A 22 percent increase in selling prices was partially offset by an 8 percent decline in volume. Volume was down versus last year primarily due to lower sales of monomers, resulting from stronger internal demand. Year-to-date sales for the segment were $2,186 million, up 12 percent from $1,944 million in the first half of 2003, principally due to an increase in prices. Increases in selling prices in 2004 over last year were driven by higher feedstock costs.

        The Hydrocarbons and Energy business transfers materials to Dow's derivative businesses at cost. Hydrocarbons and Energy EBIT for the quarter was zero, compared with $8 million in the second quarter of last year. EBIT for the first six months of 2004 was a loss of $1 million compared with a loss of $13 million for the same period of 2003. EBIT in the first half of last year was negatively impacted by a $16 million impairment charge recorded in the first quarter associated with Union Carbide's ethylene production facility in Seadrift, Texas, which was shut down in the third quarter of 2003.

UNALLOCATED AND OTHER

        Included in the results for Unallocated and Other are:

•

expenses related to Dow Ventures,



•

asbestos-related defense and resolution costs,



•

overhead and other cost recovery variances not allocated to the operating segments,



•

results of insurance operations,



•

gains and losses on sales of financial assets,



•

foreign exchange hedging results, and



•

Dow's share of the earnings/losses of Dow Corning and Cargill Dow.

        EBIT for the second quarter of 2004 was a loss of $616 million compared with a loss of $50 million in the second quarter of 2003. EBIT was negatively impacted by the following items: employee-related restructuring charges, including severance of $225 million and curtailment costs of $71 million; the recognition of a $148 million liability associated with a loan guarantee for Cargill Dow; and the write-down of a marine terminal of $10 million (to be sold in the third quarter of 2004). See Note D to the Consolidated Financial Statements for additional information on these restructuring charges.

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        EBIT for the first six months of 2004 was a loss of $788 million compared with a loss of $244 million for the same period of 2003. In addition to the items previously mentioned for the second quarter of 2004, EBIT for the first half of 2004 was negatively impacted by asbestos-related defense and resolution costs, net of insurance, of $73 million and losses on the sales of assets of approximately $36 million. EBIT for the first half of last year was unfavorably impacted by asbestos-related defense and resolution costs, net of insurance, of $48 million and costs associated with decisions made in the first quarter of last year relative to under-performing and non-strategic assets (which resulted in the $11 million write-down of Union Carbide's chemical transport vessel, sold in the second quarter of 2003; and the write-off of cancelled capital projects totaling $12 million).

Sales Volume and Price by Operating Segment and Geographic Area

		Three Months Ended June 30, 2004						Six Months Ended June 30, 2004
Percentage change from prior year
		Volume		Price		Total		Volume		Price		Total
Operating segments
	Performance Plastics	17	%	3	%	20	%	14	%	5	%	19	%
	Performance Chemicals	12	%	4	%	16	%	10	%	5	%	15	%
	Agricultural Sciences	9	%	2	%	11	%	12	%	3	%	15	%
	Plastics	14	%	10	%	24	%	7	%	11	%	18	%
	Chemicals	17	%	14	%	31	%	13	%	13	%	26	%
	Hydrocarbons and Energy	(8	)%	22	%	14	%	(1	)%	13	%	12	%
	Total	11	%	8	%	19	%	9	%	8	%	17	%
Geographic area sales
	United States	6	%	5	%	11	%	6	%	5	%	11	%
	Europe	9	%	11	%	20	%	7	%	11	%	18	%
	Rest of World	23	%	10	%	33	%	17	%	10	%	27	%
	Total	11	%	8	%	19	%	9	%	8	%	17	%

OUTLOOK

        For the chemical industry, improving global GDP and industrial production are expected to drive higher demand during the remainder of 2004, and with limited additional capacity additions, supply/demand balances should continue to tighten. Ethylene glycol is relatively tight and is expected to remain so for the balance of the year. With improved demand for caustic soda and the anticipated seasonal slowdown in polyvinyl chloride, chlor-alkali is also tightening. The ethylene chain is expected to show improvement towards the end of the year.

        Continued volatility in feedstock and energy costs add uncertainty to the profit outlook. Purchased feedstock and energy costs are expected to increase further in the third quarter from unprecedented levels in the second quarter of 2004. The year-over-year increase is expected to be substantial, continuing to put significant pressure on margins. Compared with the second quarter, prices are expected to increase in the third quarter for most major products, roughly keeping pace with the increase in feedstock and energy costs. Excluding the agricultural business and the impact of the second quarter divestitures (i.e., related to the formation of MEGlobal and Equipolymers), volume should improve slightly from the second quarter in most businesses, as strengthening economic conditions are expected to offset the typical summer slowdown in Europe and North America. With the end of the agricultural season in the northern hemisphere, the Company's agricultural business is expected to follow its normal seasonal pattern with modestly positive results for the second half of the year. Structural costs are expected to improve in the third quarter versus the second quarter of 2004 due to lower expenses for planned turnarounds and the positive impact of organizational restructuring.

        Moving forward, Dow will maintain a sharp focus on controlling costs, improving productivity and restoring margins. The Company is well positioned to benefit from stronger global economic conditions and improving industry fundamentals, and therefore expects financial performance to improve through the remainder of 2004 compared with last year.

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CHANGES IN FINANCIAL CONDITION

        The Company's cash flows from operating, investing and financing activities, as reflected in the Consolidated Statements of Cash Flows, are summarized in the following table:

		Six Months Ended
In millions		June 30, 2004			June 30, 2003
Cash provided by (used in):
	Operating activities	$	719		$	1,662
	Investing activities		81			(571	)
	Financing activities		(894	)		(327	)
	Effect of exchange rate changes on cash		(4	)		28
Net change in cash and cash equivalents		$	(98	)	$	792

        Despite a significant improvement in earnings in the first six months of 2004, cash provided by operating activities declined versus the same period of last year due to an increase in working capital requirements and the payment of performance awards to employees of $390 million in the first quarter of this year. Last year, cash provided by operating activities included the receipt of a $275 million income tax refund related to U.S. net operating losses and the collection of a noncurrent receivable of $263 million.

        Cash provided by investing activities in the first six months of 2004 increased versus the same period of last year due to proceeds from the divestiture of assets related to the formation of MEGlobal and Equipolymers, 50:50 joint ventures with Petrochemical Industries Company of Kuwait, which were partially offset by the use of cash to acquire the acrylates business of Celanese AG.

        Cash used in financing activities in the first six months of 2004 increased compared with the same period of last year, principally due to net higher payments to reduce short- and long-term debt, which were only partially offset by higher proceeds from sales of common stock (related to the exercise of stock options and the employees' stock purchase plan).

        The following tables present working capital, total debt and certain balance sheet ratios at June 30, 2004 versus December 31, 2003:

Working Capital In millions	June 30, 2004		Dec. 31, 2003
Current assets	$	13,578	$	13,002
Current liabilities		8,900		9,534
Working capital	$	4,678	$	3,468
Current ratio		1.53:1		1.36:1
Days-sales-outstanding-in-receivables		42		42
Days-sales-in-inventory		55		56

Total Debt In millions		June 30, 2004			Dec. 31, 2003
Notes payable		$	240		$	258
Long-term debt due within one year			104			1,088
Long-term debt			12,241			11,763
	Gross debt	$	12,585		$	13,109
Cash and cash equivalents		$	2,294		$	2,392
Marketable securities and interest-bearing deposits			43			42
	Net debt	$	10,248		$	10,675
Gross debt as a percent of total capitalization			52.7	%		55.4	%
Net debt as a percent of total capitalization			47.6	%		50.3	%

32

        As part of its ongoing financing activities, Dow routinely issues promissory notes under its U.S. and Euromarket commercial paper programs. At June 30, 2004, there were no commercial paper borrowings outstanding. In the event Dow is unable to access these short-term markets, due to a systemic disruption or other extraordinary events, Dow has the ability to access liquidity through its committed and available credit facilities with various U.S. and foreign banks totaling $3.0 billion in support of its working capital requirements and commercial paper borrowings. These facilities include a $1.25 billion 364-day revolving credit facility, which matures in April 2005, and a $1.75 billion 5-year revolving credit facility, which matures in April 2009. Additional unused credit facilities totaling $930 million were available for use by foreign subsidiaries.

        At June 30, 2004, the Company had $3,455 million of SEC-registered securities available for issuance under U.S. shelf registrations, as well as Euro 1.5 billion (approximately $1.8 billion) available for issuance under the Company's Euro Medium Term Note Program.

        The following table summarizes the Company's contractual obligations and commercial commitments at December 31, 2003. Additional information related to these obligations can be found in Notes J, K, L, M and S to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

Contractual Obligations at December 31, 2003		Payments Due by Year
In millions		2004		2005		2006		2007		2008		2009 and beyond		Total
Long-term debt (1)		$	1,088	$	625	$	1,434	$	1,340	$	612	$	7,752	$	12,851
Deferred income tax liabilities—noncurrent (2)			—		—		—		—		—		1,124		1,124
Pension and other postretirement benefits			225		280		350		464		545		1,871		3,735
Other noncurrent obligations (3)			194		413		114		116		51		4,459		5,347
Other contractual obligations:
	Minimum operating lease commitments		233		212		162		96		79		523		1,305
	Purchase commitments—take or pay and     throughput obligations		1,358		1,222		1,110		993		903		3,713		9,299
	Purchase commitments—other (4)		176		22		18		18		16		52		302
Total contractual obligations		$	3,274	$	2,774	$	3,188	$	3,027	$	2,206	$	19,494	$	33,963

(1)

Includes "Long-term debt due within one year" of $1,088 million and capital lease obligations of $89 million.

(2)

Deferred tax liabilities may vary according to changes in tax laws, tax rates and the operating results of the Company. As a result, it is impractical to determine whether there will be a cash impact to an individual year. Therefore, all noncurrent deferred income tax liabilities have been reflected in "2009 and beyond."

(3)

Annual payments to resolve asbestos litigation will vary based on changes in defense strategies, changes in state and national law, and claims filing and resolution rates. As a result, it is impractical to determine the anticipated payments in any given year. Therefore, the noncurrent asbestos-related liability of $1,791 million has been reflected in "2009 and beyond."

(4)

Includes outstanding purchase orders and other commitments, obtained through a survey of the Company, greater than $1 million.

        The following table provides the Company's expected cash requirements for interest at June 30, 2004:

	Payments Due by Year
Expected Cash Requirements for Interest at June 30, 2004 In millions
	2004		2005		2006		2007		2008		2009 and beyond		Total
Expected cash requirements for interest	$	807	$	757	$	709	$	637	$	563	$	518	$	3,991

        In the first quarter of 2004, the Company entered into a throughput agreement for the right to use a liquefied natural gas terminal in North America. The fixed and determinable portion of the obligation requires payments of $70 million per year for 20 years beginning in 2007. Additionally, in the first quarter of 2004, the Company entered into an agreement for the purchase of power in North America with required payments of $56 million in 2006, $54 million in 2007 and $35 million in 2008. On July 1, 2004, the Company entered into an agreement for marine terminal services in Texas with required payments of $8 million in 2004, $15 million in 2005, $12 million in 2006, $10 million in 2007, $10 million in 2008, and $28 million in 2009 and beyond.

        The Company also had outstanding guarantees at June 30, 2004. Additional information related to these guarantees can be found in the "Guarantees" table provided in Note G to the Consolidated Financial Statements.

33

        On July 30, 2004, the Company paid a quarterly dividend of $0.335 per share to shareholders of record on June 30, 2004. Since 1912, the Company has paid a dividend every quarter and, in each instance, Dow has maintained or increased the amount of the dividend, adjusted for stock splits. During that 92-year period, Dow has increased the amount of the quarterly dividend 45 times (approximately 12 percent of the time) and maintained the amount of the quarterly dividend approximately 88 percent of the time.

OTHER MATTERS

Accounting Changes

        See Note B to the Consolidated Financial Statements for a discussion of accounting changes.

Critical Accounting Policies

        The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America ("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 in the Company's Annual Report on Form 10-K for the year ended December 31, 2003 describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. Following are the Company's critical accounting policies impacted by judgments, assumptions and estimates:

Litigation

        The Company is subject to legal proceedings and claims arising out of the normal course of business. The Company 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 analysis of historical claims experience for incurred but not reported matters. Dow 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 G to the Consolidated Financial Statements.

Asbestos-Related Matters of Union Carbide Corporation

        Union Carbide Corporation ("Union Carbide"), a wholly owned subsidiary of the Company, and a former Union Carbide 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, Union Carbide 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. Union Carbide also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002.

        At each balance sheet date, Union Carbide compares current asbestos claim and resolution activity to the assumptions used in the ARPC study to determine whether the accrual continues to be appropriate. Based on Union Carbide's review of 2004 activity, Union Carbide determined that no change to the accrual was required at June 30, 2004.

        Union Carbide's asbestos-related liability for pending and future claims was $1.8 billion at June 30, 2004 and $1.9 billion at December 31, 2003. Union Carbide's receivable for insurance recoveries related to its asbestos liability was $864 million at June 30, 2004 and $1.0 billion at December 31, 2003. In addition, Union Carbide had receivables for insurance recoveries of $447 million at June 30, 2004 and $349 million at December 31, 2003 for defense and resolution costs.

        The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable were based upon currently known facts. However, projecting 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 Union Carbide to be higher or lower than those projected or those recorded.

34

        For additional information, see Asbestos-Related Matters of Union Carbide Corporation in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note G to the Consolidated Financial Statements.

Environmental Matters

        The Company 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 conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Company had accrued obligations of $381 million at December 31, 2003, for environmental remediation and restoration costs, including $40 million for the remediation of Superfund sites. At June 30, 2004, the Company had accrued obligations of $377 million for environmental remediation and restoration costs, including $35 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 Company has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. For further discussion, see Note G to the Consolidated Financial Statements in this filing and Environmental Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

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 assets, discount rates at which the liabilities could be settled at December 31, 2003, 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 G to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003. In accordance with 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 expected long-term rate of return on assets is developed with input from the Company's actuarial firm, which includes the actuary's review of the asset class return expectations of several respected consultants and economists, based on broad equity and bond indices. The Company's historical experience with the pension fund asset performance and comparisons to expected returns of peer companies with similar fund assets is also considered. The long-term rate of return assumption used for determining net periodic pension expense for 2003 was 9 percent. This assumption was maintained at 9 percent for determining 2004 net periodic pension expense. The Company's historical actual return averaged 9.4 percent for the ten-year period ending December 31, 2003. The actual rate of return in 2003 was 22 percent. Future actual pension expense will depend on future investment performance, changes in future discount rates and various other factors related to the population of participants in the Company's pension plans.

        The Company 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. For the year ending December 31, 2003, $1.4 billion of net losses remain to be recognized by the U.S. qualified plans 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. The increase or decrease in the market-related value of assets due to the recognition of prior gains and losses is presented in the following table:

35

Increase (Decrease) in Market-Related Asset Value Due to Recognition of Prior Asset Gains and Losses In millions
2004	$	(696	)
2005		(589	)
2006		(270	)
2007		128
Total	$	(1,427	)

        The discount rate utilized for determining future pension obligations of the U.S. qualified plans is based on long-term bonds receiving an AA-or better rating by a recognized rating agency. The resulting discount rate decreased from 6.75 percent at December 31, 2002, to 6.25 percent at December 31, 2003.

        For 2004, the Company decreased its assumption for the long-term rate of increase in compensation levels for the U.S. qualified plans from 5 percent for 2003 to 4.5 percent.

        Based on the revised pension assumptions and changes in the market-related value of assets due to the recognition of prior asset gains and losses, the Company expects to record approximately $32 million of incremental expense for all U.S. pension and other postretirement benefits in 2004.

        The value of the U.S. qualified plan assets increased from $7.7 billion at December 31, 2002, to $8.6 billion at December 31, 2003. The investment performance increased the funded status of the U.S. qualified plans, net of benefit obligations, by $362 million from December 31, 2002 to December 31, 2003. This increase was somewhat mitigated by a decline in the discount rate assumption. For 2004, the Company expects to make cash contributions of approximately $226 million for all of the U.S. 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 Company recognizes future tax benefits, such as net operating loss carryforwards and tax credit carryforwards, to the extent that realizing these benefits is considered to be more likely than not.

        At June 30, 2004, the Company had a net deferred tax asset balance of $3.2 billion, after valuation allowances of $240 million.

        In evaluating the ability to realize the deferred tax assets, the Company relies 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.

        At December 31, 2003, the Company had deferred tax assets for tax loss and tax credit carryforwards of $1.8 billion, $277 million of which is subject to expiration in the years 2004-2008. In order to realize these deferred tax assets for tax loss and tax credit carryforwards, the Company needs taxable income of approximately $5.5 billion 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 2004-2008 is approximately $950 million.

        For additional information, see Note S to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

Asbestos-Related Matters of Union Carbide Corporation

        The following disclosure should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2003.

        Union Carbide Corporation ("Union Carbide"), a wholly owned subsidiary of the Company, 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 Union Carbide sold in the past, alleged exposure to asbestos-containing products located on Union Carbide's premises, and Union Carbide's responsibility for asbestos suits filed against a former Union Carbide 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 Union Carbide's products.

36

        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 Union Carbide and Amchem, increased in 2001, 2002 and the first half of 2003. The rate of filing significantly abated in the second half of 2003 and the first half of 2004. Union Carbide expects more asbestos-related suits to be filed against Union Carbide 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 Union Carbide and Amchem:

	Six Months Ended June 30, 2004		Twelve Months Ended December 31, 2003
Claims unresolved at beginning of period	193,891		200,882
Claims filed	34,013		122,586
Claims settled, dismissed or otherwise resolved	(24,389	)	(129,577	)
Claims unresolved at end of period	203,515		193,891
Claimants with claims against both Union     Carbide and Amchem	69,647		66,656
Individual claimants at end of period	133,868		127,235

        A review of a representative sample of cases outstanding at December 31, 2003 showed that in more than 98 percent of the cases filed against Union Carbide and Amchem, no specific amount of damages is alleged or, if an amount is alleged, it merely represents jurisdictional amounts or amounts to be proven at trial. This percentage increased with the more recently filed cases included in the review. Even in those situations where specific damages are alleged, the claims frequently seek the same amount of damages, irrespective of the disease or injury. 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, even when specific damages are alleged with respect to a specific disease or injury, those damages are not expressly identified as to Union Carbide, Amchem or any other particular defendant. In fact, there are no personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union Carbide's litigation and settlement experience, Union Carbide does not consider the damages alleged against Union Carbide and Amchem to be a meaningful factor in its determination of any potential asbestos liability.

        At the end of 2001 and through the third quarter of 2002, Union Carbide had concluded it was not possible to estimate its cost of disposing of asbestos-related claims that might be filed against Union Carbide and Amchem in the future due to a number of reasons. During the third and fourth quarters of 2002, Union Carbide worked with Analysis, Research & Planning Corporation ("ARPC"), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, including asbestos, to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against Union Carbide and Amchem. ARPC concluded that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against Union Carbide and Amchem because of various uncertainties associated with the litigation of those claims. Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised Union Carbide that it would be possible to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims likely to face Union Carbide and Amchem if the following assumptions were made:

•

In the near term, the number of future claims to be filed against Union Carbide and Amchem will be at a level consistent with levels experienced immediately prior to 2001.



•

The number of future claims to be filed against Union Carbide and Amchem will decline at a fairly constant rate each year from 2003.



•

The percentage of claims settled by Union Carbide and Amchem out of the total claims resolved (whether by settlement or dismissal) will be consistent with the percentage for 2001 and 2002.



•

The average settlement value for pending and future claims will be equivalent to those experienced during 2001 and 2002.

        Based on the resulting study completed by ARPC in January 2003, Union Carbide 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. Approximately 28 percent of the recorded liability related to pending claims and approximately 72 percent related to future claims.

37

        At each balance sheet date, Union Carbide compares current asbestos claim and resolution activity to the assumptions in the ARPC study to determine whether the accrual continues to be appropriate. In addition, in November 2003, Union Carbide requested ARPC to review the asbestos claim and resolution activity during 2003 and determine the appropriateness of updating its study. In response to that request, ARPC reviewed and analyzed data through November 25, 2003 to determine the number of asbestos-related filings and costs associated with 2003 activity. In January 2004, ARPC stated that an update at that time would not provide a more likely estimate of future events than that reflected in its study of the previous year and, therefore, the estimate in that study remained applicable. Based on Union Carbide's own review of the asbestos claim and resolution activity and ARPC's response, Union Carbide determined that no change to the accrual was required at that time. Management noted, however, that the total number of claims filed in 2003 did exceed the number of claims assumed to be filed in the ARPC study. After consultation with outside counsel and other consultants, management believes this fact was strongly influenced by the pending national legislation and tort reform initiatives in key states. The total number of claims filed and received in the first half of 2004 was in line with the number of claims assumed to be filed in the ARPC study. Based on Union Carbide's review of 2004 activity, Union Carbide determined that no change to the accrual was required at June 30, 2004.

        The annual average resolution payment per asbestos claimant and the rate of new claim filings has fluctuated both up and down since the beginning of 2001. Union Carbide's management expects such fluctuations to continue in the future based upon 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.

        Union Carbide's asbestos-related liability for pending and future claims was $1.8 billion at June 30, 2004 and $1.9 billion at December 31, 2003. At June 30, 2004, approximately 36 percent of the recorded liability related to pending claims and approximately 64 percent related to future claims. At December 31, 2003, approximately 33 percent of the recorded liability related to pending claims and approximately 67 percent related to future claims.

        At December 31, 2002, Union Carbide increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion, substantially exhausting its asbestos product liability coverage. Combined with the previously mentioned increase in the asbestos-related liability at December 31, 2002, this resulted in a net income statement impact to Union Carbide of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002. The insurance receivable related to the asbestos liability was determined by Union Carbide after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which Union Carbide 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. Union Carbide's receivable for insurance recoveries related to its asbestos liability was $864 million at June 30, 2004 and $1.0 billion at December 31, 2003. At June 30, 2004, $505 million of the receivable was due from 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, Union Carbide had receivables for defense and resolution costs submitted to insurance carriers for reimbursement as follows:

Receivables for Costs Submitted to Insurance Carriers

In millions	June 30, 2004		Dec. 31, 2003
Receivables for defense costs	$	89	$	94
Receivables for resolution costs		358		255
Total	$	447	$	349

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

Defense and Resolution Costs

In millions	Six Months Ended June 30, 2004		Twelve Months Ended December 31, 2003
Defense costs for the period	$	47	$	110
Aggregate defense costs to date		305		258
Resolution costs for the period		148		293
Aggregate resolution costs to date		774		626

38

        Union Carbide's insurance policies generally provide coverage for asbestos liability costs, including coverage for both resolution and defense costs. As previously noted, Union Carbide increased its receivable for insurance recoveries related to its asbestos liability at December 31, 2002, thereby recording the full favorable income statement impact of its insurance coverage in 2002. Accordingly, defense and resolution costs recovered from insurers reduce Union Carbide's insurance receivable. Prior to increasing the insurance receivable related to the asbestos liability at December 31, 2002, the impact on Union Carbide's results of operations for defense costs was the amount of those costs not covered by insurance. Since Union Carbide expenses defense costs as incurred, defense costs for asbestos-related litigation (net of insurance) have impacted, and will continue to impact, results of operations. The pretax impact for defense and resolution costs, net of insurance, was $48 million in the second quarter of 2004 ($18 million in the second quarter of 2003) and $73 million in the first six months of 2004 ($48 million in the first six months of 2003), and was reflected in "Cost of sales."

        In September 2003, Union Carbide filed a comprehensive insurance coverage case in the Circuit Court for Kanawha County in Charleston, West Virginia, seeking to confirm its rights to insurance for various asbestos claims. Although Union Carbide already has settlements in place concerning coverage for asbestos claims with many of its insurers, including those covered by the 1985 Wellington Agreement, this lawsuit was filed against insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place with Union Carbide regarding their asbestos-related insurance coverage. Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is collectible. Union Carbide reached this conclusion after a further 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 amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon currently known facts. However, projecting 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 Union Carbide to be higher or lower than those projected or those recorded.

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

        It is the opinion of Dow's management that it is reasonably possible that the cost of Union Carbide disposing of its asbestos-related claims, including future defense costs, could have a material adverse impact on the Company's results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

39

The Dow Chemical Company and Subsidiaries
PART I, Item 3.    Quantitative and Qualitative Disclosures About Market Risk

        Dow's business operations give rise to market risk exposure due to changes in foreign exchange rates, interest rates, commodity prices and other market factors such as equity prices. To manage such risks effectively, the Company enters into hedging transactions, pursuant to established guidelines and policies, which enable it to mitigate the adverse effects of financial market risk. Derivatives used for this purpose are designated as hedges per SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," where appropriate. A secondary objective is to add value by creating additional non-specific exposure within established limits and policies; derivatives used for this purpose are not designated as hedges per SFAS No. 133. The potential impact of creating such additional exposures is not material to the Company's results.

        The global nature of Dow's business requires active participation in the foreign exchange markets. As a result of investments, production facilities and other operations on a global basis, the Company has assets, liabilities and cash flows in currencies other than the U.S. dollar. The primary objective of the Company'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 Company hedges 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 and liabilities denominated in the currencies of Europe, Asia Pacific and Canada; bonds denominated in foreign currencies—mainly the Euro and Japanese yen; and economic exposure derived from the risk that currency fluctuations could affect the U.S. dollar value of future cash flows. The majority of the foreign exchange exposure is related to European currencies and the Japanese yen.

        The main objective of interest rate risk management is to reduce the total funding cost to the Company and to alter the interest rate exposure to the desired risk profile. Dow uses interest rate swaps, "swaptions," and exchange-traded instruments to accomplish this objective. The Company's primary exposure is to the U.S. dollar yield curve.

        Inherent in Dow's business is exposure to price changes for several commodities. Some exposures can be hedged effectively through liquid tradable financial instruments. Cracker feedstocks and natural gas constitute the main commodity exposures. Over-the-counter and exchange traded instruments are used to hedge these risks when feasible.

        Dow has a portfolio of equity securities derived from its acquisition and divestiture activity. This exposure is managed in a manner consistent with the Company's market risk policies and procedures.

        Dow 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. On an ongoing basis, the Company estimates the maximum gain or loss that could arise in one day, given a two-standard-deviation move in the respective price levels. These amounts are relatively insignificant in comparison to the size of the equity of the Company. The VAR methodology used by Dow is based primarily on the variance/covariance statistical model. The year-end VAR and average quarterly VAR for the aggregate of non-trading and trading positions for 2003 and 2002 are shown below:

	2003				2002
Total Daily VAR at December 31* In millions
	Year-end		Average		Year-end		Average
Foreign exchange	$	1	$	2	$	7	$	10
Interest rate		109		108		94		83
Equity exposures, net of hedges		2		2		3		4
Commodities		12		14		17		11

*

Using a 95 percent confidence level

        Management believes there have been no material changes in market risk or in risk management policies since December 31, 2003.

40

The Dow Chemical Company and Subsidiaries
PART I, Item 4.    Controls and Procedures

        As of the end of the period covered by this Quarterly Report on Form 10-Q, the Company carried out an evaluation, under the supervision and with the participation of the Company's Disclosure Committee and the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company (including its consolidated subsidiaries) required to be included in the Company's periodic SEC filings. No change in the Company's internal control over financial reporting occurred during the Company's most recent fiscal quarter that materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.

41

The Dow Chemical Company and Subsidiaries
PART II—OTHER INFORMATION

ITEM 1.    LEGAL PROCEEDINGS

Asbestos-Related Matters of Union Carbide Corporation

        No material developments regarding this matter occurred during the second quarter of 2004. For a summary of the history and current status of this matter, see Management's Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters of Union Carbide Corporation; and Note G to the Consolidated Financial Statements.

Environmental Matters

        Union Carbide Corporation ("Union Carbide"), a wholly owned subsidiary of the Company, is currently negotiating with the United States Environmental Protection Agency to resolve violations of the Resource Conservation and Recovery Act alleged to have occurred over the five-year period ended on July 1, 2004, relative to management of accumulated process solvent residue in tanker trailers at Union Carbide's catalyst plant in Norco, Louisiana. Under a contemplated agreement, Union Carbide will pay a civil penalty and will fund and perform an environmentally beneficial project, together totaling in excess of $100,000.

ITEM 2.    CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

        On August 3, 1999, the Board of Directors terminated its 1997 authorization which allowed the Company to repurchase shares of Dow common stock. Since that time, the only shares purchased by the Company are those shares received from employees and non-employee directors to pay taxes owed to the Company as a result of the exercise of stock options or the delivery of stock grants. For information regarding the Company's stock option plans, see Note N to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year-ended December 31, 2003.

42

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

        The annual meeting of stockholders of The Dow Chemical Company was held on May 13, 2004. At that meeting the following directors were elected to serve three-year terms to expire at the annual meeting in 2007: Arnold A. Allemang, John C. Danforth*, Jeff M. Fettig, James M. Ringler and William S. Stavropoulos. Andrew N. Liveris was elected to serve a one-year term to expire at the annual meeting in 2005. In addition, the terms of the following directors continued after that meeting: Jacqueline K. Barton, Anthony J. Carbone, J. Michael Cook, Willie D. Davis, Barbara Hackman Franklin, Keith R. McKennon, J. Pedro Reinhard, Harold T. Shapiro and Paul G. Stern.

        The following table gives a brief description of each matter voted upon at the above referenced annual meeting and, as applicable, the number of votes cast for, against or withheld, as well as the number of abstentions and broker nonvotes.

Description of Matter		For	Against	Withheld	Abstentions	Broker Nonvotes
1. Election of Directors:             Class III
	Arnold A. Allemang	798,870,773	N/A	21,107,911	N/A	N/A
	John C. Danforth*	796,960,073	N/A	23,018,611	N/A	N/A
	Jeff M. Fettig	797,629,465	N/A	22,349,219	N/A	N/A
	James M. Ringler	807,023,665	N/A	12,955,019	N/A	N/A
	William S. Stavropoulos	797,868,062	N/A	22,110,622	N/A	N/A
Class I
	Andrew N. Liveris	799,767,128	N/A	20,211,556	N/A	N/A
2. Ratification of the appointment of Deloitte &     Touche LLP as the Company's independent     auditors for 2004		795,027,959	19,344,009	N/A	5,606,716	N/A
3. Amendment of the Restated Certificate of     Incorporation for the annual election     of Directors		804,930,213	8,275,316	N/A	6,773,155	N/A
4. Stockholder Proposal on Bhopal		40,417,050	618,594,737	N/A	61,384,414	99,582,483

*

Ambassador John C. Danforth retired from the Company's Board of Directors effective June 24, 2004, upon his confirmation as U.S. Ambassador to the United Nations.

N/A—Not applicable

43

ITEM 6.    EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits.

See the Exhibit Index on page 47 of this Quarterly Report on Form 10-Q for exhibits filed with this report.

(b)

Reports on Form 8-K.

The following Current Reports on Form 8-K were filed by the Company during the second quarter of 2004:

On April 12, 2004, the Company filed a Current Report on Form 8-K that included a press release issued by E.I. du Pont de Nemours and Company on April 8, 2004. The press release included a joint announcement by DuPont and Dow regarding agreements entered into by the two companies to address ongoing antitrust investigations related to DuPont Dow Elastomers L.L.C., a 50:50 joint venture between DuPont and Dow.

On April 29, 2004, the Company filed a Current Report on Form 8-K that included a press release issued on April 29, 2004, announcing the first quarter of 2004 earnings for the Company.

On May 6, 2004, the Company filed a Current Report on Form 8-K that included Exhibit 12.1 (Computation of Ratio of Earnings to Fixed Charges), which included prior period ratios adjusted to reflect the recalculation of those ratios to include preferred security dividends from the Company's consolidated subsidiaries.

On June 1, 2004, the Company filed a Current Report on Form 8-K that included a press release issued on June 1, 2004, in which Dow and Petrochemical Industries Company of Kuwait jointly announced the formation of two new joint ventures, MEGlobal and Equipolymers.

The following Current Reports on Form 8-K were filed by the Company subsequent to the second quarter of 2004:

On July 1, 2004, the Company filed a Current Report on Form 8-K that included a press release issued by MEGlobal on July 1, 2004, announcing the receipt of full regulatory approval and commencement of operations of MEGlobal, a 50:50 joint venture between the Company and Petrochemical Industries Company of Kuwait.

On July 1, 2004, the Company filed a Current Report on Form 8-K that included a press release issued by Equipolymers on July 1, 2004, announcing the receipt of full regulatory approval and commencement of operations of Equipolymers, a 50:50 joint venture between the Company and Petrochemical Industries Company of Kuwait.

On July 29, 2004, the Company filed a Current Report on Form 8-K that included a press release issued on July 29, 2004, announcing the second quarter of 2004 earnings for the Company.

On August 2, 2004, the Company filed a Current Report on Form 8-K that included a press release issued on August 2, 2004, announcing that Andrew N. Liveris, president and chief operating officer, will become president and chief executive officer effective November 1, 2004.

44

The Dow Chemical Company and Subsidiaries
Trademark Listing

The following trademarks or service marks of The Dow Chemical Company appear in this report:

AFFINITY, AMPLIFY, ASPUN, ATTANE, BETABRACE, BETADAMP, BETAFOAM, BETAGUARD, BETAMATE, BETASEAL, CALIBRE, COMBOTHERM, CONTINUUM, D.E.H., D.E.N., D.E.R., DERAKANE, DERAKANE MOMENTUM, DOW, DOW XLA, DOWEX, DOWEX QCAT, DOWFAX, DOWFLAKE, DOWLEX, DOWPER, DOWTHERM, DRYTECH, ELITE, EMERGE, THE ENHANCER, ENVISION, ETHAFOAM, EQUIFOAM, ETHOCEL, INCLOSIA, IMMOTUS, INSPIRE, INTEGRAL, ISONATE, ISOPLAST, LAMDEX, LIFESPAN, LIQUIDOW, MAGNUM, MAXICHECK, MAXISTAB, METHOCEL, OPTIM, PAPI, PELADOW, PELLETHANE, PREVAIL, PRIMACOR, PROPEL, PULSE, QBIS, QUASH, QUESTRA, RETAIN, SAFE-TAINER, SARAN, SPECFLEX, SPECTRIM, STRANDFOAM, STYROFOAM, STYROFOAM WEATHERMATE PLUS, STYRON, STYRON A-TECH, SYNERGY, SYNTEGRA, TRYMER, TYRIL, VERSENE, VORACOR, VORACTIV, VORALAST, VORALUX, VORANATE, VORANOL, VORASTAR, ZETABON

The following trademarks or service marks of Dow AgroSciences LLC appear in this report:

CLINCHER, DITHANE, DURSBAN, FORTRESS, GALLANT, GARLON, GLYPHOMAX, GRANDSTAND, HERCULEX I, KEYSTONE, LONTREL, LORSBAN, MUSTANG, NATREON, SENTRICON, STARANE, STINGER, TELONE, TORDON, TRACER NATURALYTE, VIKANE

The following trademark of Dow BioProducts Ltd. appears in this report: WOODSTALK

The following trademark of Dow Corning Corporation appears in this report: SYLTHERM

The following trademark of FilmTec Corporation appears in this report: FILMTEC

The following trademarks of Flexible Products Company appear in this report:

FROTH-PAK, GREAT STUFF, INSTA-STIK, TILE BOND

The following trademark of Hampshire Chemical Corp. appears in this report: HAMPOSYL

The following trademark of Mycogen Corporation appears in this report: MYCOGEN

The following trademark of PhytoGen Seed Company, LLC appears in this report: PHYTOGEN

The following trademarks or service marks of Union Carbide Corporation or its subsidiaries appear in this report:

CARBOWAX, CELLOSIZE, FLEXOMER, LP OXO, METEOR, NEOCAR, POLYOX, POLYPHOBE, REDI-LINK, SHAC, SI-LINK, TERGITOL, TRITON, TUFLIN, UCAR, UCARTHERM, UCON, UNIGARD, UNIPOL, UNIPURGE, UNIVAL

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The Dow Chemical Company and Subsidiaries
Signature

        Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	THE DOW CHEMICAL COMPANY Registrant
Date: August 3, 2004
	/s/ FRANK H. BROD Frank H. Brod Vice President and Controller

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The Dow Chemical Company and Subsidiaries
Exhibit Index

EXHIBIT NO.	DESCRIPTION
3(i)	A copy of the Restated Certificate of Incorporation of The Dow Chemical Company as filed with the Secretary of State in the State of Delaware on May 18, 2004.
23	Analysis, Research & Planning Corporation's Consent.
31(a)	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)	Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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The Dow Chemical Company Table of Contents

PART I—FINANCIAL INFORMATION Item 1. Financial Statements

The Dow Chemical Company and Subsidiaries Consolidated Statements of Income
The Dow Chemical Company and Subsidiaries Consolidated Balance Sheets
The Dow Chemical Company and Subsidiaries Consolidated Statements of Cash Flows
The Dow Chemical Company and Subsidiaries Consolidated Statements of Comprehensive Income
The Dow Chemical Company and Subsidiaries Notes to the Consolidated Financial Statements
The Dow Chemical Company and Subsidiaries PART I, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Dow Chemical Company and Subsidiaries PART I, Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Dow Chemical Company and Subsidiaries PART I, Item 4. Controls and Procedures
The Dow Chemical Company and Subsidiaries PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES

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

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

The Dow Chemical Company and Subsidiaries Trademark Listing
The Dow Chemical Company and Subsidiaries Signature
The Dow Chemical Company and Subsidiaries Exhibit Index

EX-3.(I)

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EXHIBIT 3(i)

The Dow Chemical Company and Subsidiaries
Restated Certificate of Incorporation

Originally incorporated on June 11, 1947, as The Dow Chemical Company (Delaware)

ARTICLE I
NAME

        The name of the corporation (which is hereinafter referred to as the "Company") is The Dow Chemical Company.

ARTICLE II
ADDRESS OF REGISTERED OFFICE; NAME OF REGISTERED AGENT

        The address of the registered office of the Company in the State of Delaware is Corporation Trust Center, 1209 Orange Street, in the City of Wilmington, County of New Castle. The name of its registered agent at that address is The Corporation Trust Company.

ARTICLE III
PURPOSE AND POWERS

        The purpose of the Company is to engage in any lawful act or activity for which a corporation may now or hereafter be organized under the General Corporation Law of Delaware. It shall have all powers that may now or hereafter be lawful for a corporation to exercise under the General Corporation Law of Delaware.

ARTICLE IV
CAPITAL STOCK

        Section 4.1    Total Number of Shares of Stock.    The total number of shares of stock of all classes that the Company shall have authority to issue is one billion seven hundred fifty million shares. The authorized capital stock is divided into two hundred fifty million shares of Preferred Stock of the par value of one dollar each (hereinafter the "Preferred Stock") and one billion five hundred million shares of Common Stock of the par value of two dollars and fifty cents each (hereinafter the "Common Stock").

        Section 4.2    Preferred Stock.

(a)

The two hundred fifty million shares of Preferred Stock of the Company may be issued from time to time in one or more series, the shares of each series to have such voting powers, full or limited, or no voting powers, and such designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, as are stated and expressed herein or in the resolution or resolutions providing for the issue of such series, adopted by the Board of Directors as hereinafter provided.



(b)

Authority is hereby expressly granted to the Board of Directors of the Company, subject to the provisions of this Article IV and to the limitations prescribed by the General Corporation Law of Delaware, to authorize the issue of one or more series of Preferred Stock and with respect to each such series to fix by resolution or resolutions providing for the issue of such series the voting powers, full or limited, if any, of the shares of such series and the designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, the determination or fixing of the following:



(i)

The designation of such series;



(ii)

The dividend rate of such series, the conditions and dates upon which such dividends shall be payable, the relation which such dividends shall bear to the dividends payable on any other class or classes of stock or any other series of any class of stock of the Company, and whether such dividends shall be cumulative or non-cumulative;

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(iii)

Whether the shares of such series shall be subject to redemption by the Company and, if made subject to such redemption, the times, prices and other terms and conditions of such redemption;



(iv)

The terms and amount of any sinking fund provided for the purchase or redemption of the shares of such series;



(v)

Whether or not the shares of such series shall be convertible into or exchangeable for shares of any other class or classes of any stock or any other series of any class of stock of the Company, and, if provision is made for conversion or exchange, the times, prices, rates, adjustments, and other terms and conditions of such conversion or exchange;



(vi)

The extent, if any, to which the holders of shares of such series shall be entitled to vote with respect to the election of directors or otherwise;



(vii)

The restrictions, if any, on the issue or reissue of any additional Preferred Stock; and



(viii)

The rights of the holders of the shares of such series upon the dissolution of, or upon the distribution of assets of, the Company.

        Section 4.3    Common Stock.    The one billion five hundred million shares of Common Stock of the Company shall be of one and the same class. Subject to all of the rights of the Preferred Stock provided for by resolution or resolutions of the Board of Directors pursuant to this Article IV or by the General Corporation Law of Delaware, the holders of Common Stock shall have full voting powers on all matters requiring stockholder action, each share of such Common Stock being entitled to one vote and having equal rights of participation in the dividends and assets of the Company.

ARTICLE V
BOARD OF DIRECTORS

        Section 5.1    Power of the Board of Directors.    The business and affairs of the Company shall be managed by or under the direction of its Board of Directors. In furtherance, and not in limitation, of the powers conferred by the laws of the State of Delaware, the Board of Directors is expressly authorized to:

(a)

Amend, alter, change, adopt or repeal the Bylaws of the Company; provided, however, that no Bylaws hereafter adopted shall invalidate any prior act of the directors that would have been valid if such Bylaws had not been adopted;



(b)

Determine the rights, powers, duties, rules and procedures that affect the power of the Board of Directors to manage and direct the business and affairs of the Company, including the power to designate and empower committees of the Board of Directors, to elect, appoint and empower the officers and other agents of the Company, and to determine the time and place of, and the notice requirements for Board meetings, as well as quorum and voting requirements for, and the manner of taking Board action; and



(c)

Exercise all such powers and do all such acts as may be exercised by the Company, subject to the provisions of the laws of the State of Delaware, this Certificate of Incorporation, and any Bylaws of the Company.

        Section 5.2    Number of Directors.    The number of directors constituting the entire Board of Directors shall be not less than six nor more than twenty-one, as authorized from time to time exclusively by a vote of a majority of the entire Board of Directors. As used in this Certificate of Incorporation, the term "entire Board of Directors" means the total authorized number of directors that the Company would have if there were no vacancies.

        Section 5.3    Annual Election of Directors.    Except with respect to directors who may be elected solely by the holders of shares of any class or series of Preferred Stock, at the 2005 Annual Meeting of Stockholders, the successors of the directors whose terms expire at that meeting shall be elected for a term expiring at the 2006 Annual Meeting of Stockholders (which number of directors shall be approximately one-third of the total number of directors of the Company); at the 2006 Annual Meeting of Stockholders, the successors of the directors whose terms expire at that meeting shall be elected for a term

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expiring at the 2007 Annual Meeting of Stockholders (which number of directors shall be approximately two-thirds of the total number of directors of the Company); and at each Annual Meeting of Stockholders thereafter, the directors shall be elected for terms expiring at the next Annual Meeting of Stockholders.

        Section 5.4    Vacancies.    Except as otherwise required by law and subject to the rights of the holders of any class or series of Preferred Stock, any vacancies in the Board of Directors for any reason and any newly created directorships resulting by reason of any increase in the number of directors may be filled only by the Board of Directors, acting by a majority of the remaining directors then in office, although less than a quorum, and any directors so chosen shall hold office until the next Annual Meeting of Stockholders or until their successors are elected and qualified.

        Section 5.5    Removal of Directors.    Except as otherwise required by law and subject to the rights of the holders of any class or series of Preferred Stock, any director, or the entire Board of Directors, may be removed from office at any time, with or without cause only by the affirmative vote of the holders of at least 80% of the voting power of all of the shares of capital stock of the Company then entitled to vote generally in the election of directors, voting together as a single class.

ARTICLE VI
INDEMNIFICATION; LIMITATION OF LIABILITY

        Section 6.1    Indemnification.    Directors, officers, employees and agents of the Company may be indemnified by the Company to such extent as is permitted by the laws of the State of Delaware and as the Bylaws may from time to time provide.

        Section 6.2    Limitation of Liability of Directors.    A Director of the Company shall not be personally liable to the Company or its stockholders for monetary damages for breach of fiduciary duty as a Director to the fullest extent permitted by the General Corporation Law of Delaware as the same now exists or hereafter may be amended.

ARTICLE VII
BUSINESS COMBINATION TRANSACTIONS

        Section 7.1    Higher Vote Required for Certain Business Combinations.    In addition to any affirmative vote required by the General Corporation Law of Delaware and except as otherwise expressly provided in Section 7.3 of this Article VII, any Business Combination Transaction (as defined in Section 7.2(c) below) shall require the affirmative vote of the holders of at least 80% of the voting power of all of the shares of capital stock of the Company then entitled to vote generally in the election of directors, voting together as a single class. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law or in any agreement with any national securities exchange or otherwise.

        Section 7.2    Certain Definitions.    For purposes of this Article VII:

(a)

"Affiliate" or "Associate" shall have the respective meanings ascribed to such terms in Rule 12b-2 of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as in effect on December 31, 1985.



(b)

"Beneficial Owner" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act, as in effect on December 31, 1985.



(c)

"Business Combination Transaction" shall mean:



(i)

Any merger or consolidation of the Company or any Subsidiary with (A) an Interested Stockholder or (B) any other Person (whether or not itself an Interested Stockholder) which is, or after such merger or consolidation would be, an Affiliate or Associate of an Interested Stockholder; or

50

(ii)

Any sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions) to or with, or proposed by or on behalf of, an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder of any assets of the Company or any Subsidiary constituting not less than 5% of the total assets of the Company as reported in the consolidated balance sheet of the Company as of the end of the most recent quarter with respect to which such balance sheet has been prepared; or



(iii)

The issuance or transfer by the Company or any Subsidiary (in one transaction or a series of transactions) of any securities of the Company or any Subsidiary to, or proposed by or on behalf of, an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder in exchange for cash, securities or other property (or a combination thereof) constituting not less than 5% of the total assets of the Company as reported in the consolidated balance sheet of the Company as of the end of the most recent quarter with respect to which such balance sheet has been prepared; or



(iv)

The adoption of any plan or proposal for the liquidation or dissolution of the Company, or any spin-off or split-up of any kind of the Company or any Subsidiary, proposed by or on behalf of an Interested Stockholder or an Affiliate or Associate of an Interested Stockholder; or



(v)

Any reclassification of securities (including any reverse stock split), or recapitalization of the Company, or any merger or consolidation of the Company with any Subsidiary or any other transaction (whether or not with or into or otherwise involving an Interested Stockholder) which has the effect, directly or indirectly, of increasing the percentage of the outstanding shares of (A) any class of equity securities of the Company or any Subsidiary or (B) any class of securities of the Company or any Subsidiary convertible into equity securities of the Company or any Subsidiary, represented by securities of such class which are directly or indirectly owned by an Interested Stockholder and all of its Affiliates and Associates.



(d)

"Continuing Director" means (i) any member of the Board of Directors of the Company who (A) is neither the Interested Stockholder involved in the Business Combination Transaction as to which a vote of Continuing Directors is provided hereunder, nor an Affiliate, Associate, employee, agent, or nominee of such Interested Stockholder, or the relative of any of the foregoing, and (B) was a member of the Board of Directors of the Company prior to the time that such Interested Stockholder became an Interested Stockholder, and (ii) any successor of a Continuing Director described in clause (i) who is recommended or elected to succeed a Continuing Director by the affirmative vote of a majority of Continuing Directors then on the Board of Directors of the Company.



(e)

"Fair Market Value" means: (i) in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the Composite Tape for New York Stock Exchange-Listed Stocks, or, if such stock is not reported on the Composite Tape, on the New York Stock Exchange, or, if such stock is not listed on such Exchange, on the principal United States securities exchange registered under the Exchange Act on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any similar interdealer quotation system then in use, or, if no such quotation is available, the fair market value on the date in question of a share of such stock as determined by a majority of the Continuing Directors in good faith; and (ii) in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the Continuing Directors in good faith.



(f)

"Interested Stockholder" shall mean any Person (other than the Company or any Subsidiary, any employee benefit plan maintained by the Company or any Subsidiary or any trustee or fiduciary with respect to any such plan when acting in such capacity) who or which:



(i)

Is, or was at any time within the two-year period immediately prior to the date in question, the Beneficial Owner, directly or indirectly, of 10% or more of the voting power of the then outstanding Voting Stock of the Company; or

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(ii)

Is an Affiliate of the Company and at any time within the two-year period immediately prior to the date in question was the Beneficial Owner, directly or indirectly, of 10% or more of the voting power of the outstanding Voting Stock of the Company; or



(iii)

Is an assignee of, or has otherwise succeeded to, any shares of Voting Stock of the Company of which an Interested Stockholder was the Beneficial Owner, directly or indirectly, at any time within the two-year period immediately prior to the date in question, if such assignment or succession shall have occurred in the course of a transaction, or series of transactions, not involving a public offering within the meaning of the Securities Act of 1933, as amended.

For the purpose of determining whether a Person is an Interested Stockholder, the outstanding Voting Stock of the Company shall include unissued shares of Voting Stock of the Company of which the Interested Stockholder is the Beneficial Owner but shall not include any other shares of Voting Stock of the Company which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise, to any Person who is not the Interested Stockholder.

(g)

A "Person" means any individual, partnership, firm, corporation, association, trust, unincorporated organization or other entity, as well as any syndicate or group deemed to be a person pursuant to Section 14(d)(2) of the Exchange Act.



(h)

"Subsidiary" means any corporation of which the Company owns, directly or indirectly, (i) a majority of the outstanding shares of equity securities of such corporation, or (ii) shares having a majority of the voting power represented by all of the outstanding Voting Stock of such corporation. For the purpose of determining whether a corporation is a Subsidiary, the outstanding Voting Stock and shares of equity securities thereof shall include unissued shares of which the Company is the Beneficial Owner but, except for the purposes of Section 7.2(f), shall not include any other shares which may be issuable pursuant to any agreement, arrangement or understanding, or upon the exercise of conversion rights, warrants or options, or otherwise, to any Person who is not the Company.



(i)

"Voting Stock" shall mean outstanding shares of capital stock of the relevant corporation entitled to vote generally in the election of directors.

        Section 7.3    When Higher Vote Is Not Required.    The provisions of Section 7.1 of this Article VII shall not be applicable to any particular Business Combination Transaction, and such Business Combination Transaction shall require only such affirmative vote of the stockholders, if any, as is required by the General Corporation Law of Delaware, if the conditions specified in either of the following paragraphs (a) and (b) are met:

(a)

Approval by Continuing Directors. The Business Combination Transaction shall have been approved by the affirmative vote of a majority of the Continuing Directors, even if the Continuing Directors do not constitute a quorum of the entire Board of Directors.



(b)

Form of Consideration, Price and Procedure Requirements. All of the following conditions shall have been met:



(i)

With respect to each share of each class of outstanding Voting Stock of the Company (including Common Stock), the holder thereof shall be entitled to receive on or before the date of the consummation of the Business Combination Transaction (the "Consummation Date"), cash and consideration, in the form specified in Section 7.3 (b) (ii) hereof, with an aggregate Fair Market Value as of the Consummation Date at least equal to the highest of the following:



(A)

The highest per share price (including brokerage commissions, transfer taxes and soliciting dealer's fees) paid by the Interested Stockholder to which the Business Combination Transaction relates, or by any Affiliate or Associate of such Interested Stockholder, for any shares of such class of Voting Stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination Transaction (the "Announcement Date") or (2) in the transaction in which it became an Interested Stockholder, whichever is higher;

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(B)

The Fair Market Value per share of such class of Voting Stock of the Company on the Announcement Date; and



(C)

The highest preferential amount per share, if any, to which the holders of shares of such class of Voting Stock of the Company are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company.



(ii)

The consideration to be received by holders of a particular class of outstanding Voting Stock of the Company (including Common Stock) as described in Section 7.3(b)(i) hereof shall be in cash or, if the consideration previously paid by or on behalf of the Interested Stockholder in connection with its acquisition of beneficial ownership of shares of such class of Voting Stock consisted, in whole or in part, of consideration other than cash, then in the same form as such consideration. If such payment for shares of any class of Voting Stock of the Company has been made in varying forms of consideration, the form of consideration for such class of Voting Stock shall be either cash or the form used to acquire the beneficial ownership of the largest number of shares of such class of Voting Stock previously acquired by the Interested Stockholder.



(iii)

After such Interested Stockholder has become an Interested Stockholder and prior to the Consummation Date: (A) there shall have been no failure to declare and pay at the regular date therefor any full dividends (whether or not cumulative) on the outstanding Preferred Stock of the Company, if any, except as approved by the affirmative vote of a majority of the Continuing Directors; (B) there shall have been (1) no reduction in the annual rate of dividends paid on the Common Stock of the Company (except as necessary to reflect any subdivision of the Common Stock), except as approved by the affirmative vote of a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of the Common Stock, unless the failure so to increase such annual rate is approved by the affirmative vote of a majority of the Continuing Directors; and (C) such Interested Stockholder shall not have become the Beneficial Owner of any additional shares of Voting Stock of the Company except as part of the transaction which results in such Interested Stockholder becoming an Interested Stockholder.



(iv)

After such Interested Stockholder has become an Interested Stockholder, neither such Interested Stockholder nor any Affiliate or Associate thereof shall have received the benefit, directly or indirectly (except proportionately as a stockholder of the Company), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Company.



(v)

A proxy or information statement describing the proposed Business Combination Transaction and complying with the requirements of the Exchange Act and the General Rules and Regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to the stockholders of the Company at least 30 days prior to the Consummation Date (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions thereof).

        Section 7.4    Powers of Continuing Directors.    A majority of the Continuing Directors shall have the power and duty to determine, on the basis of information known to them after reasonable inquiry, all facts necessary to determine compliance with this Article VII, including, without limitation, (a) whether a Person is an Interested Stockholder, (b) the number of shares of Voting Stock of the Company beneficially owned by any Person, (c) whether a Person is an Affiliate or Associate of another, (d) whether the requirements of Section 7.3 (b) have been met with respect to any Business Combination Transaction, and (e) whether the assets which are the subject of any Business Combination Transaction have, or the consideration to be received for the issuance or transfer of securities by the Company or any Subsidiary in any Business Combination Transaction constitutes not less than 5% of the total assets of the Company as reported in the consolidated balance sheet of the Company as of the end of the most recent quarter with respect to which such balance sheet has been prepared. The good faith determination of a majority of the Continuing Directors on such matters shall be conclusive and binding for all the purposes of this Article VII.

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        Section 7.5    No Effect on Fiduciary Obligations.

(a)

Nothing contained in this Article VII shall be construed to relieve the members of the Board of Directors or an Interested Stockholder from any fiduciary obligation imposed by law.



(b)

The fact that any Business Combination Transaction complies with the provisions of Section 7.3 of this Article VII shall not be construed to impose any fiduciary duty, obligation or responsibility on the Board of Directors, or any member thereof, to approve such Business Combination Transaction or recommend its adoption or approval to the stockholders of the Company, nor shall such compliance limit, prohibit or otherwise restrict in any manner the Board of Directors, or any member thereof, with respect to evaluations of or actions and responses taken with respect to such Business Combination Transactions.

ARTICLE VIII
MEETINGS OF STOCKHOLDERS

        Any action required or permitted to be taken by the stockholders of the Company must be effected at a duly called annual or special meeting of stockholders of the Company and may not be effected by any consent in writing by such stockholders. Except as otherwise provided for in the Bylaws, special meetings of stockholders of the Company may be called only by the Board of Directors pursuant to a resolution adopted by a majority of the entire Board of Directors, either upon motion of a director or upon written request by the holders of at least 50% of the voting power of all the shares of capital stock of the Company then entitled to vote generally in the election of directors, voting together as a single class.

ARTICLE IX
AMENDMENT OF BYLAWS

        In addition to any requirements of the General Corporation Law of Delaware (and notwithstanding the fact that a lesser percentage may be specified by the General Corporation Law of Delaware), the affirmative vote of the holders of at least 80% of the voting power of all of the shares of capital stock of the Company then entitled to vote generally in the election of directors, voting together as a single class, shall be required for the stockholders of the Company to amend, alter, change, adopt or repeal any Bylaws of the Company, unless such amendment, alteration, change, adoption or repeal of the Bylaws is determined to be advisable by the Board of Directors by the affirmative vote of (a) two-thirds of the entire Board of Directors and (b) a majority of the Continuing Directors (as defined in Article VII).

ARTICLE X
AMENDMENT OF CERTIFICATE OF INCORPORATION

        The Company hereby reserves the right to amend, alter, change or repeal any provision contained in this Certificate of incorporation in the manner now or hereafter prescribed by the General Corporation Law of Delaware and all rights conferred on stockholders therein granted are subject to this reservation; provided, however, that, notwithstanding the fact that a lesser percentage may be specified by the General Corporation Law of Delaware, the affirmative vote of the holders of at least 80% of the voting power of all of the shares of capital stock of the Company then entitled to vote generally in the election of directors, voting together as a single class, shall be required to amend, alter, change or repeal, or adopt any provision or provisions inconsistent with, any provision of Article IV, V, VI, VII, VIII, IX or X hereof, unless such amendment, alteration, change, repeal or adoption of any inconsistent provision or provisions is declared advisable by the Board of Directors by the affirmative vote of (a) two-thirds of the entire Board of Directors and (b) a majority of the Continuing Directors (as defined in Article VII).

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EXHIBIT 3(i)

The Dow Chemical Company and Subsidiaries Restated Certificate of Incorporation

EX-23

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EXHIBIT 23

Analysis, Research & Planning Corporation's Consent

The Dow Chemical Company:

        Analysis, Research & Planning Corporation ("ARPC") hereby consents to the use of ARPC's name and the reference to ARPC's reports dated January 9, 2003, and January 26, 2004, in this Quarterly Report on Form 10-Q of The Dow Chemical Company for the quarter ended June 30, 2004, and the incorporation by reference thereof in the following Registration Statements of The Dow Chemical Company:

Form S-3:

Nos.

33-37052
33-52980
333-101647
333-106533

Form S-4:

No.

333-88443

Form S-8:

Nos.

2-64560
33-21748
33-51453
33-52841
33-58205
33-61795
333-27379
333-27381
333-40271
333-43730
333-49183
333-67414
333-88443
333-91027
333-103518
333-103519
333-105080
333-115184
333-115185

/s/ B. THOMAS FLORENCE B. Thomas Florence
President
Analysis, Research & Planning Corporation
July 29, 2004

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EXHIBIT 23

Analysis, Research & Planning Corporation's Consent

EX-31.(A)

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EXHIBIT 31(a)

The Dow Chemical Company and Subsidiaries

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, William S. Stavropoulos, Chairman of the Board and Chief Executive Officer of The Dow Chemical Company, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of The Dow Chemical Company;



2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:



a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



b)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



c)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and



5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):



a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and



b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 3, 2004
	/s/  WILLIAM S. STAVROPOULOS William S. Stavropoulos Chairman of the Board and Chief Executive Officer

56

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EXHIBIT 31(a)

EX-31.(B)

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EXHIBIT 31(b)

The Dow Chemical Company and Subsidiaries

Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, J. Pedro Reinhard, Executive Vice President and Chief Financial Officer of The Dow Chemical Company, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of The Dow Chemical Company;



2.

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;



3.

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;



4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:



a)

designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;



b)

evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and



c)

disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and



5.

The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function):



a)

all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and



b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: August 3, 2004
	/s/  J. PEDRO REINHARD J. Pedro Reinhard Executive Vice President and Chief Financial Officer

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EXHIBIT 31(b)

EX-32.(A)

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EXHIBIT 32(a)

The Dow Chemical Company and Subsidiaries

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, William S. Stavropoulos, Chairman of the Board and Chief Executive Officer of The Dow Chemical Company (the "Company"), certify that:

1.

the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  WILLIAM S. STAVROPOULOS William S. Stavropoulos
Chairman of the Board and Chief Executive Officer
August 3, 2004

58

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EXHIBIT 32(a)

EX-32.(B)

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EXHIBIT 32(b)

The Dow Chemical Company and Subsidiaries

Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

I, J. Pedro Reinhard, Executive Vice President and Chief Financial Officer of The Dow Chemical Company (the "Company"), certify that:

1.

the Quarterly Report on Form 10-Q of the Company for the quarterly period ended June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and



2.

the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

/s/  J. PEDRO REINHARD J. Pedro Reinhard
Executive Vice President and Chief Financial Officer
August 3, 2004

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EXHIBIT 32(b)