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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

~~Quarterly Report Pursuant to Section~~QUARTERLY REPORT PURSUANT TO SECTION 13 ~~or 15(d) of~~
OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the ~~Securities Exchange Act of 1934~~quarterly period ended SEPTEMBER

~~FOR THE QUARTERLY PERIOD ENDED June~~ 30, 2005

Commission ~~file number~~File Number: 1-3433

THE DOW CHEMICAL COMPANY

(Exact name of registrant as specified in its charter)

Delaware		38-1285128
(State or other jurisdiction of		(I.R.S. Employer Identification No.)
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~~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 NoYes o No

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
o Yes ý Noo

Class

Outstanding at ~~June~~September 30, 2005

Common Stock, par value $2.50 per share

965,122,285 shares

~~964,587,326 shares~~

The Dow Chemical Company
Table of Contents

PAGE
~~PART I—FINANCIAL INFORMATION~~
PART I - FINANCIAL INFORMATION

~~Item 1. Financial Statements.~~

3

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

6

Notes to the Consolidated Financial Statements

7

Item 2. ~~Management's~~
Management’s Discussion and Analysis of Financial Condition and Results of Operations.

21

Disclosure Regarding Forward-Looking Information

21

Results of Operations

21
22

Changes in Financial Condition

29
30

~~Other Matters~~

31

Other Matters
32
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.

35

Item 4.
Controls and Procedures.

36

~~PART II—OTHER INFORMATION~~

PART II – OTHER INFORMATION

~~Item 1. Legal Proceedings.~~

37

Item 1.
Legal Proceedings.
37
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.

37

~~Item 4. Submission of Matters to a Vote of Security Holders.~~

37

Item 6. ~~Exhibits.~~

Exhibits.

37

~~SIGNATURE~~

39

SIGNATURE
39
EXHIBIT INDEX

40
2

PART I—I - - FINANCIAL INFORMATION
Item 1. Financial Statements.
The Dow Chemical Company and Subsidiaries
Consolidated Statements of Income

Three Months Ended

Nine Months Ended

Three Months Ended
Six Months Ended

Sept. 30,

Sept. 30,

Sept. 30,

Sept. 30,

In millions, except per share amounts (Unaudited)
In millions, except per share amounts (Unaudited)
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004

2005

2004

2005

2004

Net Sales Net Sales $ 11,450 $ 9,844 $ 23,129 $ 19,153

$
11,261

$
10,072

$
34,390

$
29,225

Cost of sales 9,300 8,345 18,637 16,252
Research and development expenses 271 262 526 513
Selling, general and administrative expenses 383 347 774 710
Amortization of intangibles 13 16 27 45
Restructuring net gain — 20 — 20
Equity in earnings of nonconsolidated affiliates 224 254 499 394
Sundry income (expense) — net 57 13 139 (15 )
Interest income 27 21 56 39
Interest expense and amortization of debt discount 188 182 375 368

Cost of sales

9,610

8,697

28,247

24,949

Research and development expenses

264

248

790

761

Selling, general and administrative expenses

379

341

1,153

1,051

Amortization of intangibles

13

19

40

64

Restructuring net gain

—

—

—

20

Equity in earnings of nonconsolidated affiliates

240

232

739

626

Sundry income - net

39

35

178

20

Interest income

42

19

98

58

Interest expense and amortization of debt discount

168

193

543

561

Income before Income Taxes and Minority Interests Income before Income Taxes and Minority Interests 1,603 1,000 3,484 1,703

1,148

860

4,632

2,563

Provision for income taxes 317 284 825 488
Minority interests' share in income 21 31 41 61

Provision for income taxes

328

214

1,153

702

Minority interests’ share in income

19

29

60

90

Net Income Available for Common Stockholders Net Income Available for Common Stockholders $ 1,265 $ 685 $ 2,618 $ 1,154

$
801

$
617

$
3,419

$
1,771

Share Data Share Data

Earnings per common share—basic $ 1.31 $ 0.73 $ 2.73 $ 1.23
Earnings per common share—diluted $ 1.30 $ 0.72 $ 2.69 $ 1.22
Common stock dividends declared per share of common stock $ 0.335 $ 0.335 $ 0.67 $ 0.67
Weighted-average common shares outstanding—basic 964.1 938.0 960.5 934.9
Weighted-average common shares outstanding—diluted 976.2 947.9 974.7 945.8

Earnings per common share - basic

$
0.83

$
0.66

$
3.55

$
1.89

Earnings per common share - diluted

$
0.82

$
0.65

$
3.51

$
1.87

Common stock dividends declared per share of common stock

$
0.335

$
0.335

$
1.005

$
1.005

Weighted-average common shares outstanding - basic

965.2

940.9

962.1

937.0

Weighted-average common shares outstanding - diluted

978.4

951.4

974.2

948.8

Depreciation Depreciation $ 451 $ 458 $ 924 $ 920

$
454

$
515

$
1,378

$
1,435

Capital Expenditures Capital Expenditures $ 364 $ 329 $ 650 $ 530

$
400

$
321

$
1,050

$
851

See Notes to the Consolidated Financial Statements.
3

The Dow Chemical Company and Subsidiaries
Consolidated Balance Sheets

Sept. 30,

Dec. 31,

In millions (Unaudited)
In millions (Unaudited)
June 30,
2005
Dec. 31,
2004

2005

2004

Assets Assets

Current Assets Current Assets

Cash and cash equivalents $ 3,162 $ 3,108
Marketable securities and interest-bearing deposits 39 84
Accounts and notes receivable:
Trade (net of allowance for doubtful receivables—2005: $167; 2004: $136) 4,758 4,753
Other 2,526 2,604
Inventories 5,203 4,957
Deferred income tax assets—current 385 384

Total current assets 16,073 15,890

Cash and cash equivalents

$
3,179

$
3,108

Marketable securities and interest-bearing deposits

31

84

Accounts and notes receivable:

Trade (net of allowance for doubtful receivables - 2005: $188; 2004: $136)

4,927

4,753

Other

2,870

2,604

Inventories

5,450

4,957

Deferred income tax assets - current

393

384

Total current assets

16,850

15,890

Investments Investments

Investment in nonconsolidated affiliates 2,166 2,698
Other investments 2,201 2,141
Noncurrent receivables 169 189

Total investments 4,536 5,028

Investment in nonconsolidated affiliates

2,311

2,698

Other investments

2,185

2,141

Noncurrent receivables

141

189

Total investments

4,637

5,028

Property Property

Property 41,177 41,898
Less accumulated depreciation 27,769 28,070

Net property 13,408 13,828

Property

41,415

41,898

Less accumulated depreciation

28,085

28,070

Net property

13,330

13,828

Other Assets Other Assets

Goodwill 3,140 3,152
Other intangible assets (net of accumulated amortization—2005: $533; 2004: $507) 493 535
Deferred income tax assets—noncurrent 4,043 4,369
Asbestos-related insurance receivables—noncurrent 901 1,028
Deferred charges and other assets 2,293 2,055

Total other assets 10,870 11,139

Goodwill

3,140

3,152

Other intangible assets (net of accumulated amortization - 2005: $534; 2004: $507)

475

535

Deferred income tax assets - noncurrent

4,032

4,369

Asbestos-related insurance receivables - noncurrent

854

1,028

Deferred charges and other assets

2,419

2,055

Total other assets

10,920

11,139

Total Assets Total Assets $ 44,887 $ 45,885

$
45,737

$
45,885

Liabilities and Stockholders' Equity
Liabilities and Stockholders’ Equity

Current Liabilities Current Liabilities

Notes payable $ 133 $ 104
Long-term debt due within one year 1,235 861
Accounts payable:
Trade 3,409 3,701
Other 1,551 2,194
Income taxes payable 358 419
Deferred income tax liabilities—current 390 205
Dividends payable 346 342
Accrued and other current liabilities 2,144 2,680

Total current liabilities 9,566 10,506

Notes payable

$
203

$
104

Long-term debt due within one year

719

861

Accounts payable:

Trade

3,478

3,701

Other

1,531

2,194

Income taxes payable

432

419

Deferred income tax liabilities - current

465

205

Dividends payable

327

342

Accrued and other current liabilities

2,573

2,680

Total current liabilities

9,728

10,506

Long-Term Debt Long-Term Debt 10,023 11,629

9,969

11,629

Other Noncurrent Liabilities Other Noncurrent Liabilities

Deferred income tax liabilities—noncurrent 1,318 1,301
Pension and other postretirement benefits—noncurrent 3,908 3,979
Asbestos-related liabilities—noncurrent 1,452 1,549
Other noncurrent obligations 3,243 3,202

Total other noncurrent liabilities 9,921 10,031

Deferred income tax liabilities - noncurrent

1,467

1,301

Pension and other postretirement benefits - noncurrent

3,898

3,979

Asbestos-related liabilities - noncurrent

1,426

1,549

Other noncurrent obligations

3,253

3,202

Total other noncurrent liabilities

10,044

10,031

Minority Interest in Subsidiaries Minority Interest in Subsidiaries 334 449

333

449

Preferred Securities of Subsidiaries Preferred Securities of Subsidiaries 1,000 1,000

1,000

1,000

Stockholders' Equity
Common stock 2,453 2,453
Additional paid-in capital 507 274
Unearned ESOP shares (4 ) (12 )
Retained earnings 13,479 11,527
Accumulated other comprehensive loss (1,757 ) (977 )
Treasury stock at cost (635 ) (995 )

Net stockholders' equity 14,043 12,270

Total Liabilities and Stockholders' Equity $ 44,887 $ 45,885

Stockholders’ Equity

Common stock

2,453

2,453

Additional paid-in capital

572

274

Unearned ESOP shares

(4
)
(12
)
Retained earnings

13,952

11,527

Accumulated other comprehensive loss

(1,689
)
(977
)
Treasury stock at cost

(621
)
(995
)
Net stockholders’ equity

14,663

12,270

Total Liabilities and Stockholders’ Equity

$
45,737

$
45,885

See Notes to the Consolidated Financial Statements.
4

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Cash Flows

Nine Months Ended

Six Months Ended

Sept 30,

Sept 30,

In millions (Unaudited)
In millions (Unaudited)
June 30,
2005
June 30,
2004

2005

2004

Operating Activities Net Income Available for Common Stockholders $ 2,618 $ 1,154

Net Income Available for Common Stockholders

$
3,419

$
1,771

Adjustments to reconcile net income to net cash provided by operating
    activities:
    Depreciation and amortization 1,010 1,016

Adjustments to reconcile net income to net cash provided by operating activities:

    Provision for deferred income tax 292 219

Depreciation and amortization

1,507

1,575

    Earnings/losses of nonconsolidated affiliates in excess of dividends
        received (147 ) (236 )

Provision for deferred income tax

440

208

    Minority interests' share in income 41 61

Earnings/losses of nonconsolidated affiliates in excess of dividends received

(294
)
(442
)
    (Gain) loss on sales of investments, net 3 (13 )

Minority interests’ share in income

60

90

    Gain on sales of property and businesses, net (46 ) (11 )

Gain on sales of ownership interest in consolidated companies, net

—

(1
)
    Other (gain) loss, net (8 ) 62

Gain on sales of investments, net

(15
)
(18
)
    Gain on sales of ownership interest in nonconsolidated affiliates (101 ) (17 )

Gain on sales of property and businesses, net

(54
)
(13
)
    Net gain on asset divestitures related to formation of
        nonconsolidated affiliates — (563 )

Other loss, net

37

65

    Restructuring charges — 496

Gain on sales of ownership interest in nonconsolidated affiliates, net

(98
)
(42
)
    Tax benefit—nonqualified stock option exercises 64 41

Net gain on asset divestitures related to formation of nonconsolidated affiliates

—

(563
)
Changes in assets and liabilities that provided (used) cash:

Restructuring charges

—

421

    Accounts and notes receivable 137 (893 )

Tax benefit - nonqualified stock option exercises

66

52

    Inventories (369 ) (336 )

Changes in assets and liabilities that provided (used) cash:

    Accounts payable (711 ) 584

Accounts and notes receivable

(29
)
(1,078
)
    Other assets and liabilities (341 ) (845 )

Inventories

(371
)
(676
)

Accounts payable

(604
)
1,012

Cash provided by operating activities 2,442 719

Other assets and liabilities

(530
)
(813
)

Cash provided by operating activities

3,534

1,548

Investing Activities Capital expenditures (650 ) (530 )

Capital expenditures

(1,050
)
(851
)
Proceeds from sales of property and businesses 55 27

Proceeds from sales of property and businesses

82

37

Acquisition of business — (149 )

Acquisition of business

—

(149
)
Investments in consolidated companies (105 ) —

Investments in consolidated companies

(105
)
(6
)
Investments in nonconsolidated affiliates (208 ) (56 )

Proceeds from sales of ownership interest in consolidated companies

—

7

Distributions from nonconsolidated affiliates 41 3

Investments in nonconsolidated affiliates

(208
)
(81
)
Proceeds from sales of nonconsolidated affiliates 87 33

Distributions from nonconsolidated affiliates

41

3

Proceeds from asset divestitures related to formation of
    nonconsolidated affiliates — 845

Proceeds from sales of ownership interest in nonconsolidated affiliates

89

70

Purchases of investments (475 ) (898 )

Proceeds from asset divestitures related to formation of nonconsolidated affiliates

—

845

Proceeds from sales and maturities of investments 400 806

Purchases of investments

(725
)
(1,297
)

Proceeds from sales and maturities of investments

687

1,197

Cash provided by (used in) investing activities (855 ) 81

Cash used in investing activities

(1,189
)
(225
)

Financing Activities Changes in short-term notes payable 20 (100 )

Changes in short-term notes payable

81

(123
)
Payments on long-term debt (913 ) (1,075 )

Payments on long-term debt

(1,422
)
(1,198
)
Proceeds from issuance of long-term debt 4 618

Proceeds from issuance of long-term debt

4

621

Purchases of treasury stock (33 ) (7 )

Purchases of treasury stock

(48
)
(8
)
Proceeds from sales of common stock 295 325

Proceeds from sales of common stock

323

393

Distributions to minority interests (36 ) (32 )

Distributions to minority interests

(66
)
(55
)
Dividends paid to stockholders (641 ) (623 )

Dividends paid to stockholders

(964
)
(938
)

Cash used in financing activities

(2,092
)
(1,308
)
Cash used in financing activities (1,304 ) (894 )

Effect of Exchange Rate Changes on Cash Effect of Exchange Rate Changes on Cash (229 ) (4 )
Effect of Exchange Rate Changes on Cash

(182
)
(5
)

Summary Increase (Decrease) in cash and cash equivalents 54 (98 )

Increase in cash and cash equivalents

71

10

Cash and cash equivalents at beginning of year 3,108 2,392

Cash and cash equivalents at beginning of year

3,108

2,392

Cash and cash equivalents at end of period

$
3,179

$
2,402

Cash and cash equivalents at end of period $ 3,162 $ 2,294

See Notes to the Consolidated Financial Statements.
5

The Dow Chemical Company and Subsidiaries
Consolidated Statements of Comprehensive Income

Three Months Ended

Nine Months Ended

Three Months Ended
Six Months Ended

Sept. 30,

Sept. 30,

Sept. 30,

Sept. 30,

In millions (Unaudited)
In millions (Unaudited)
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004

2005

2004

2005

2004

Net Income Available for Common Stockholders Net Income Available for Common Stockholders $ 1,265 $ 685 $ 2,618 $ 1,154

$
801

$
617

$
3,419

$
1,771

Other Comprehensive Income (Loss), Net of Tax Other Comprehensive Income (Loss), Net of Tax

Net unrealized gains (losses) on investments 12 (34 ) (14 ) (24 )
Translation adjustments (418 ) (81 ) (809 ) (223 )
Minimum pension liability adjustments 4 (17 ) 11 (16 )
Net gains (losses) on cash flow hedging derivative instruments (10 ) 35 32 28

Total other comprehensive loss (412 ) (97 ) (780 ) (235 )

Net unrealized gains (losses) on investments

(1
)
11

(15
)
(13
)
Translation adjustments

(51
)
69

(860
)
(154
)
Minimum pension liability adjustments

—

—

11

(16
)
Net gains on cash flow hedging derivative instruments

120

104

152

132

Total other comprehensive income (loss)

68

184

(712
)
(51
)
Comprehensive Income Comprehensive Income $ 853 $ 588 $ 1,838 $ 919

$
869

$
801

$
2,707

$
1,720

See Notes to the Consolidated Financial Statements.
6

The Dow Chemical Company and Subsidiaries
PART I—I – FINANCIAL INFORMATION, Item 1. Financial Statements.
Notes to the Consolidated Financial Statements
~~(Unaudited)~~
(Unaudited)
NOTE A—A – CONSOLIDATED FINANCIAL STATEMENTS

The unaudited interim consolidated financial statements of The Dow Chemical Company and its subsidiaries ~~("Dow"~~(“Dow” or the ~~"Company"~~“Company”) were prepared in accordance with accounting principles generally accepted in the United States of America ~~("GAAP"~~(“GAAP”) and reflect all adjustments (including normal recurring accruals) which, in the opinion of management, are considered necessary for the fair presentation of the results for the periods presented. ~~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~~Company’s Annual Report on Form 10-K for the year ended December 31, 2004. Certain reclassifications of prior year amounts have been made to conform to current year presentation.
NOTE B—B – ACCOUNTING CHANGES
Accounting for Stock-Based Compensation

In the first quarter of 2003, Dow began expensing stock options by adopting the fair value provisions of the Financial Accounting Standards ~~Board's ("FASB"~~Board’s (“FASB”) Statement of Financial Accounting Standards ~~("SFAS"~~(“SFAS”) No. 123, ~~"Accounting~~“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'~~Company’s Employees’ Stock Purchase Plan) to employees. As required by SFAS No. 148, ~~"Accounting~~“Accounting for Stock-Based ~~Compensation—~~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, including stock options, deferred stock grants, and subscriptions to purchase shares under the ~~Company's Employees'~~Company’s Employees’ Stock Purchase Plan, in each period presented:

Three Months Ended
Six Months Ended

In millions
June 30, 2005
June 30, 2004
June 30, 2005
June 30, 2004

Net income, as reported $ 1,265 $ 685 $ 2,618 $ 1,154
Add: Stock-based compensation expense included in reported net income,
    net of tax 49 29 174 52
Deduct: Total stock-based compensation expense determined using fair value
    based method for all awards, net of tax (33 ) (34 ) (143 ) (61 )

Pro forma net income $ 1,281 $ 680 $ 2,649 $ 1,145

Earnings per share (in dollars):
Basic—as reported $ 1.31 $ 0.73 $ 2.73 $ 1.23
Basic—pro forma 1.33 0.72 2.76 1.22
Diluted—as reported 1.30 0.72 2.69 1.22
Diluted—pro forma 1.31 0.72 2.72 1.21

Three Months Ended

Nine Months Ended

In millions

Sept. 30,
2005

Sept. 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Net income, as reported

$
801

$
617

$
3,419

$
1,771

Add: Stock-based compensation expense included in reported net income, net of tax

44

35

218

87

Deduct: Total stock-based compensation expense determined using fair value based method for all awards, net of tax

(43
)
(40
)
(186
)
(101
)
Pro forma net income

$
802

$
612

$
3,451

$
1,757

Earnings per share (in dollars):

Basic – as reported

$
0.83

$
0.66

$
3.55

$
1.89

Basic – pro forma

0.83

0.65

3.59

1.87

Diluted – as reported

0.82

0.65

3.51

1.87

Diluted – pro forma

0.82

0.64

3.54

1.85

In December 2004, the FASB issued revised SFAS No. 123 ("(“SFAS No. ~~123R"~~123R”), ~~"Share-Based~~“Share-Based Payment,"” which replaces SFAS No. 123 and supersedes Accounting Principles Board ~~("APB"~~(“APB”) Opinion No. 25, ~~"Accounting~~“Accounting for Stock Issued to Employees."” This statement, which requires that the cost of all share-based payment transactions be recognized in the financial statements, establishes fair value as the measurement objective and requires entities to apply a fair-value-based measurement method in accounting for share-based payment transactions. As issued, the statement applies to all awards granted, modified, repurchased or cancelled after July 1, 2005, and unvested portions of previously issued and outstanding awards. On April 14, 2005, the U.S. Securities and Exchange Commission (the ~~"SEC"~~“SEC”) announced the adoption of a new rule that amends the compliance date for SFAS No. 123R, allowing companies to implement the statement at the beginning of their next fiscal year that begins after June 15, 2005, which is January 1, 2006 for the Company. ~~Dow is currently evaluating the impact of adopting this statement.~~

In March 2005, the SEC issued Staff Accounting Bulletin ~~("SAB"~~(“SAB”) No. 107, which expresses views of the SEC staff regarding the interaction between SFAS No. 123R and certain SEC rules and regulations, and provides the ~~staff's~~staff’s views regarding the valuation of share-based payment arrangements for public companies. The Company will consider the guidance of this SAB as it adopts SFAS No. 123R.

~~In May~~
7

The Company grants stock-based compensation awards which vest over a specified period or upon employees meeting certain performance and retirement eligibility criteria. The Company amortizes these awards over the specified vesting period and recognizes any unrecognized compensation cost at the date of retirement (the “nominal vesting period approach”). The Company will continue applying the nominal vesting period approach for the remaining portion of unvested outstanding awards as of December 31, 2005. SFAS No. 123R specifies that an award is vested when the employee’s rights to the award are no longer contingent upon providing additional service (the “non-substantive vesting period approach”). Upon adoption of SFAS No. 123R on January 1, 2006, the Company will apply this approach to all stock-based compensation awarded after December 31, 2005. Compensation cost will be recognized over the vesting period or from the grant date to the date on which retirement eligibility provisions have been met and additional service is no longer required. The Company has determined that application of the non-substantive vesting period approach will not have a material impact on the Company’s consolidated financial statements.
During the third quarter of 2005, the FASB ~~issued FASB Staff Position ("FSP") Emerging Issues Task Force ("EITF") Issue~~continued to issue new and proposed (not yet final) guidance related to SFAS No. ~~00-19-1, "Application~~123R. Since guidance related to this statement is not complete, Dow is continuing to evaluate the impact of EITF Issue No. 00-19 to Freestanding Financial Instruments Originally Issued as Employee Compensation." The FSP clarifies that, for freestanding financial instruments originally issued as employee compensation, a requirement to deliver registered shares, in and of itself, willadoption, but does not ~~result in liability classification. The guidance in this FSP will be applied in accordance with~~expect the ~~effective date and transition provisions~~adoption of SFAS No. ~~123R.~~123R to have a material impact on the Company’s consolidated financial statements.
Other Accounting Changes

In November 2004, the FASB issued SFAS No. 151, ~~"Inventory Costs—~~“Inventory Costs – an amendment of ARB No. 43, Chapter 4,"” which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage) and also requires that the allocation of fixed production overhead be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. ~~The~~Because the Company ~~is currently evaluating~~uses nameplate capacity to calculate product costs, Dow expects to record an immaterial favorable impact on the ~~impact~~Company’s consolidated financial statements in the period of ~~adopting this statement.~~adoption.

In December 2004, the FASB issued SFAS No. 153, ~~"Exchanges~~“Exchanges of Nonmonetary ~~Assets—~~Assets – an amendment of APB Opinion No. 29."” The statement addresses the measurement of exchanges of nonmonetary assets and eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 is effective for nonmonetary asset exchanges occurring in fiscal periods beginning after June 15, 2005. The Company has determined that its practices are consistent with the guidance of this statement; therefore, the adoption of SFAS No. 153 on July 1, 2005, ~~will have~~had no impact on the ~~Company's~~Company’s consolidated financial statements.

In December 2004, the FASB issued FSP No. FAS 109-1, ~~"Application~~“Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004,"” indicating that this deduction should be accounted for as a special deduction in accordance with the provisions of SFAS No. 109. Beginning in 2005, the Company recognizes the allowable deductions as qualifying activity occurs.

In December 2004, the FASB issued FSP No. FAS 109-2, ~~"Accounting~~“Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004,"” which provides a practical exception to the SFAS No. 109 requirement to reflect the effect of a new tax law in the period of enactment by allowing additional time beyond the financial reporting period to evaluate the effects on plans for reinvestment or repatriation of unremitted foreign earnings. The American Jobs Creation Act of 2004 (the ~~"Act"~~“Act”) introduced a special one-time dividends received deduction on the repatriation of certain foreign earnings to a U.S. taxpayer, provided certain criteria are met. In May 2005, tax authorities released the clarifying language necessary to enable the Company to finalize its plan for the repatriation and reinvestment of foreign earnings subject to the requirements of the Act, resulting in a credit of $113 million to ~~"Provision~~“Provision for income ~~taxes"~~taxes” in the second quarter of 2005.
In March 2005, the FASB issued FASB Interpretation ~~("FIN"~~(“FIN”) No. 47, ~~"Accounting~~“Accounting for Conditional Asset Retirement Obligations,"” which clarifies the termconditional asset retirement obligation as used in SFAS No. 143, ~~"Accounting~~“Accounting for Asset Retirement Obligations,"” as a legal obligation to perform an asset retirement activity in which the timing and/or method of settlement are conditional on a future event that may or may not be within the control of the Company. FIN No. 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company ~~is currently evaluating~~expects the adoption of FIN No. 47 on December 31, 2005 to have an immaterial impact ~~of adopting this interpretation.~~on the Company’s consolidated financial statements.
8

In May 2005, the FASB issued SFAS No. 154, ~~"Accounting~~“Accounting Changes and Error Corrections,"” which replaces APB Opinion No. 20, ~~"Accounting~~“Accounting Changes,"” and SFAS No. 3, ~~"Reporting~~“Reporting Accounting Changes in Interim Financial Statements,"” and provides guidance on the accounting for and reporting of accounting changes and error corrections. SFAS No. 154 applies to all voluntary changes in accounting principle and requiresretrospective application (a term defined by the statement) to prior ~~periods'~~periods’ financial statements, unless it is impracticable to determine the effect of a change. It also applies to changes required by an accounting pronouncement that does not include specific transition provisions. In addition, SFAS No. 154 redefinesrestatement~~restatement~~ as the revising of previously issued financial statements to reflect the correction of an error. The statement is effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The Company will adopt SFAS No. 154 beginning January 1, 2006.

NOTE C—C – RESTRUCTURING
2004 Restructuring

In the second quarter of 2004, the Company recorded a pretax net 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 (see Note D for information regarding the divestitures); asset impairments of $99 million related to the future sale or shutdown of facilities (see Note F for disclosures related to asset impairments); the recognition of a liability of $148 million associated with a loan guarantee for Cargill Dow LLC ("(“Cargill ~~Dow"~~Dow”); and employee-related restructuring charges of $296 million. The net impact of the transactions is shown as ~~"Restructuring~~“Restructuring net ~~gain"~~gain” in the consolidated statements of income. Additional information regarding these activities is included below.
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 ~~("Cargill"~~(“Cargill”). 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.

In January 2005, the Company contributed $170 million to Cargill Dow and obtained a release from its commitments with respect to Cargill ~~Dow's~~Dow’s debt obligations. On January 31, 2005, Dow transferred its 50 percent interest in Cargill Dow to Cargill.
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 ended their employment with Dow by the end of the third quarter of 2004, and curtailment costs of $71 million associated with ~~Dow's~~Dow’s defined benefit plans. The charges were included in the results of Unallocated and Other.
~~As of June 30, 2005, severance of $211 million related to this restructuring had been paid to 2,439 former employees.~~
In the second quarter of 2005, the severance accrual was reduced by $9 million (reflected in ~~"Cost~~“Cost of ~~sales"~~sales”) due to the redeployment of approximately 65 employees, leaving an accrual of $5 million at June 30, 2005 for employees who will end their employment with Dow in the second half of 2005, and bringing the 2004 employee-related restructuring program to a close. As of September 30, 2005, severance of $212 million related to this restructuring had been paid to 2,446 former employees.
NOTE D—D – DIVESTITURES

On June 30, 2004, Dow and Petrochemical Industries Company ~~("PIC"~~(“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"~~(“EG”).

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

9

The joint ventures combine ~~Dow's~~Dow’s strong existing asset base, technology position and market presence with ~~PIC's~~PIC’s commitment to increasing its investment in downstream petrochemical markets. The formation of the joint ventures is an important step in ~~Dow's~~Dow’s strategy of pursuing cost advantaged feedstock positions to supply growing markets, and in reducing ~~Dow's~~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~~produces 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 based on units of production. MEGlobal ~~will~~ also ~~market~~markets excess EG produced in ~~Dow's~~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.

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.

On July 1, 2004, Dow began accounting for the joint ventures using the equity method of accounting. ~~Dow's~~Dow’s share of the earnings/losses of MEGlobal are reflected in the results for the Chemicals segment; ~~Dow's~~Dow’s share of the earnings/losses of Equipolymers are reflected in the results for the Plastics segment.
NOTE E—E – INVENTORIES

The following table provides a breakdown of inventories at ~~June~~September 30, 2005 and December 31, 2004:
Inventories
In millions
June 30,
2005
Dec. 31,
2004
Finished goods $ 2,964 $ 2,989
Work in process 1,203 889
Raw materials 562 605
Supplies 474 474

Total inventories $ 5,203 $ 4,957

Inventories
In millions

Sept. 30,
2005

Dec. 31,
2004

Finished goods

$
2,969

$
2,989

Work in process

1,176

889

Raw materials

825

605

Supplies

480

474

Total inventories

$
5,450

$
4,957

The reserves reducing inventories from the first-in, first-out ~~("FIFO"~~(“FIFO”) basis to the last-in, first-out ~~("LIFO"~~(“LIFO”) basis amounted to ~~$903~~$1,242 million at ~~June~~September 30, 2005 and $807 million at December 31, 2004.
NOTE F—F – IMPAIRMENT OF LONG-LIVED ASSETS

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~~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™~~HAMPOSYL^TM 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~~“Cost of ~~sales"~~sales” in the Performance Plastics segment.
10

•
In the first quarter of 2004, the Company made the decision to discontinue production of ~~HAMPOSYL™~~HAMPOSYL^TM surfactants (manufactured by Hampshire Chemical Corp. ["[“Hampshire ~~Chemical"~~Chemical”], a wholly owned subsidiary of the Company) and, as a result, wrote down the net book value of the assets of $9 million against ~~"Cost~~“Cost of ~~sales"~~sales” in the Performance Chemicals segment. The manufacturing facility for this line of business was shut down in the third quarter of 2004; demolition is underway and is expected to be completed in the fourth quarter of 2005. See Note G regarding a related write-off of goodwill.

In the second quarter of 2004, the Company recorded asset impairments totaling $99 million, included in ~~"Restructuring~~“Restructuring net ~~gain"~~gain” in the consolidated statements of income, related to the future sale or shutdown of facilities as follows (see Note C):
•
In the fourth quarter of 2003, Biopharmaceutical Contract Manufacturing Services ~~("BCMS"~~(“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 to their fair value in the second quarter, with a $60 million charge against the Performance Chemicals segment. In the third quarter of 2004, the business ceased production at the facility.

•
In the second quarter of 2004, the Company recorded asset impairments totaling $39 million for the second quarter 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. The sale of the marine terminal was completed in the third quarter of 2004. The Company expects to sell the line of business in Specialty Polymers in the ~~third~~fourth quarter of 2005. See Note G regarding a goodwill write-off associated with the Specialty Polymers line of business.
NOTE G—G – GOODWILL AND OTHER INTANGIBLE ASSETS

The following table shows changes in the carrying amount of goodwill for the ~~six~~nine months ended ~~June~~September 30, 2005, by operating segment:
Goodwill
In millions
Performance
Plastics
Performance
Chemicals
Agricultural
Sciences
Plastics
Hydrocarbons
and Energy
Total

Goodwill at December 31, 2004 $ 913 $ 750 $ 1,320 $ 106 $ 63 $ 3,152

Negative goodwill related to acquisition of
    remaining 28% interest in
    PBBPolisur S.A. — — — (12 ) — (12 )

Goodwill at June 30, 2005 $ 913 $ 750 $ 1,320 $ 94 $ 63 $ 3,140

Goodwill
In millions

Performance
Plastics

Performance
Chemicals

Agricultural
Sciences

Plastics

Hydrocarbons
and Energy

Total

Goodwill at December 31, 2004

$
913

$
750

$
1,320

$
106

$
63

$
3,152

Negative goodwill related to acquisition of remaining 28% interest in PBBPolisur S.A.

—

—

—

(12
)
—

(12
)
Goodwill at September 30, 2005

$
913

$
750

$
1,320

$
94

$
63

$
3,140

In the first quarter of 2004, the Company made the decision to discontinue production of ~~HAMPOSYL™~~HAMPOSYL^TM surfactants manufactured by Hampshire Chemical, following a period of time during which the Specialty Chemicals business had experienced a significant decline in sales of these surfactants. The ~~Company's~~Company’s efforts to reach an acceptable agreement to sell this line of business were unsuccessful. As a result of the decision to discontinue production, the Company wrote off goodwill of $13 million (included in ~~"Amortization~~“Amortization of ~~intangibles"~~intangibles”) associated with this line of business in the Performance Chemicals segment. See Note F regarding a related write-down of assets. The manufacturing facility was shut down in the third quarter of 2004; demolition is underway and is expected to be completed in the fourth quarter of 2005.

In the second quarter of 2004, the Company wrote off goodwill of $18 million (included in ~~"Restructuring~~“Restructuring net ~~gain"~~gain”) associated with the Specialty Polymers business (Performance Chemicals segment), following the completion of an impairment calculation related to a continued decline in the sales of a line of products manufactured by Hampshire Chemical. See Notes C and F for additional information.

11

The following table provides information regarding the ~~Company's~~Company’s other intangible assets:
Other Intangible Assets
At June 30, 2005
At December 31, 2004
In millions
Gross
Carrying
Amount
Accumulated
Amortization
Net
Gross
Carrying
Amount
Accumulated
Amortization
Net
Intangible assets with finite lives:
Licenses and intellectual property $ 281 $ (143 ) $ 138 $ 289 $ (138 ) $ 151
Patents 153 (100 ) 53 154 (95 ) 59
Software 350 (203 ) 147 352 (193 ) 159
Trademarks 138 (34 ) 104 139 (31 ) 108
Other 104 (53 ) 51 108 (50 ) 58

Total $ 1,026 $ (533 ) $ 493 $ 1,042 $ (507 ) $ 535

Other Intangible Assets

At September 30, 2005

At December 31, 2004

In millions

Gross
Carrying
Amount

Accumulated
Amortization

Net

Gross
Carrying
Amount

Accumulated
Amortization

Net

Intangible assets with finite lives:

Licenses and intellectual property

$
265

$
(132
)
$
133

$
289

$
(138
)
$
151

Patents

150

(101
)
49

154

(95
)
59

Software

356

(213
)
143

352

(193
)
159

Trademarks

136

(35
)
101

139

(31
)
108

Other

102

(53
)
49

108

(50
)
58

Total

$
1,009

$
(534
)
$
475

$
1,042

$
(507
)
$
535

Amortization expense for other intangible assets (not including software) was $13 million in the ~~second~~third quarter of 2005, compared with ~~$16~~$19 million in the same period last year. Year to date, amortization expense for other intangible assets (not including software) was ~~$27~~$40 million, compared with ~~$32~~$51 million for the first ~~six~~nine months of 2004. Amortization expense for software, which is included in ~~"Cost~~“Cost of sales,"” totaled ~~$11~~$10 million in both the ~~second~~third quarter of 2005 and ~~$9 million in the second quarter of~~ 2004. Year to date, amortization expense for software was ~~$22~~$32 million, compared with ~~$17~~$27 million for the first ~~six~~nine months of 2004. Total estimated amortization expense for 2005 and the five succeeding fiscal years is as follows:

In millions
Estimated
Amortization
Expense
2005 $ 96
2006 89
2007 79
2008 75
2009 30
2010 22

In millions

Estimated
Amortization
Expense

2005

$
96

2006

89

2007

80

2008

75

2009

36

2010

22

NOTE H—H – COMMITMENTS AND CONTINGENT LIABILITIES
Litigation
Breast Implant Matters

On May 15, 1995, Dow Corning Corporation ("(“Dow ~~Corning"~~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~~Corning’s breast implant and other silicone medical products. On June 1, 2004, Dow ~~Corning's~~Corning’s Joint Plan of Reorganization (the ~~"Joint Plan"~~“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~~Corning’s breast implant and other silicone medical products.

To the extent not previously resolved in state court actions, cases involving Dow ~~Corning's~~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 (the “District Court”) as a result of being transferred to that court for resolution in the context of the Joint Plan. Should cases involving Dow ~~Corning's~~Corning’s breast implant and other silicone medical products be filed against the Company in the future, they will be accorded similar treatment. On October 6, 2005, all such cases then pending in the District Court against the Company were dismissed. It is the opinion of the ~~Company's~~Company’s management that the possibility is remote that a resolution of all such cases will have a material adverse impact on the ~~Company's~~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~~Company’s share of the credit facility is $150 million and is subject to the terms and conditions stated in the Joint Plan. At ~~June~~September 30, 2005, no draws had been taken against the credit facility.
12

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"~~(“DBCP”) has caused personal injury and property damage, including contamination of groundwater. It is the opinion of the ~~Company's~~Company’s management that the possibility is remote that the resolution of such lawsuits will have a material adverse impact on the ~~Company's~~Company’s consolidated financial statements.
Environmental ~~Matters~~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 $380 million at December 31, 2004, for environmental remediation and restoration costs, including $45 million for the remediation of Superfund sites. At ~~June~~September 30, 2005, the Company had accrued obligations of ~~$373~~$361 million for environmental remediation and restoration costs, including ~~$44~~$43 million for the remediation of Superfund sites. This is ~~management's~~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.

On June 12, 2003, the Michigan Department of Environmental Quality ~~("MDEQ"~~(“MDEQ”) issued a Hazardous Waste Operating License (the ~~"License"~~“License”) to the ~~Company's~~Company’s Midland, Michigan manufacturing site (the ~~"Midland site"~~“Midland 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 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, the MDEQ provided its formal response to the ~~Company's~~Company’s August 11, 2003 Scope of Work documents in the form of a Notice of Deficiency (the ~~"Notice"~~“Notice”) that required the Company to respond to the Notice by February 17, 2004. The Company submitted revised Scope of Work documents on February 17, 2004. Continuing discussions between the Company and the MDEQ regarding how to proceed with off-site corrective action under the License resulted in the execution of the Framework for an Agreement Between the State of Michigan and The Dow Chemical Company (the ~~"Framework"~~“Framework”) on January 20, 2005. The Framework commits the Company to take certain immediate interim remedial actions in the City of Midland and along the Tittabawassee River, conduct certain studies, and propose a remedial investigation work plan by the end of 2005. The interim remedial actions required by the Framework are currently underway. The Framework also contemplates that the Company, the State of Michigan and other federal and tribal governmental entities will negotiate the terms of an agreement or agreements to resolve potential governmental claims against the Company related to historical off-site contamination associated with the Midland site. At the end of 2004, the Company had an accrual for off-site corrective action of $12 million (included in the total accrued obligation of $380 million at December 31, 2004) based on the range of activities that the Company proposed and discussed implementing with the MDEQ and which is set forth in the Framework. At ~~June~~September 30, 2005, the accrual for off-site corrective action was ~~$12~~$9 million (included in the total accrued obligation of ~~$373~~$361 million at ~~June~~September 30, 2005).

It is the opinion of the ~~Company's~~Company’s management that the possibility is remote that costs in excess of those disclosed will have a material adverse impact on the ~~Company's~~Company’s consolidated financial statements.
Asbestos-Related Matters of Union Carbide Corporation

The following disclosure should be read in conjunction with the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, 2004.

Union Carbide Corporation ("(“Union ~~Carbide"~~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~~Carbide’s premises, and Union ~~Carbide's~~Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. ~~("Amchem"~~(“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~~Carbide’s products.

13

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. Since then, the rate of filing has significantly abated. 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.

Based on a study completed by Analysis, Research & Planning Corporation ~~("ARPC"~~(“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. 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 November 2004, Union Carbide requested ARPC to review Union ~~Carbide's~~Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its January 2003 study. In response to this request, ARPC reviewed and analyzed data through November 14, 2004, and again 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. ARPC did advise Union Carbide, however, that it was reasonable and feasible to construct a new estimate of the cost to Union Carbide of resolving current and future asbestos-related claims using the same two widely used forecasting methodologies used by ARPC in its January 2003 study, if certain assumptions were made. As a result, the following assumptions were made and then used by ARPC:
•
The number of future claims to be filed annually against Union Carbide and Amchem is unlikely to exceed the level of claims experienced during 2004.

•
The number of claims filed against Union Carbide and Amchem annually from 2001 to 2003 is considered anomalous for the purpose of estimating future filings.

•
The number of future claims to be filed against Union Carbide and Amchem will decline at a fairly constant rate each year from 2005.

•
The average resolution value for pending and future claims will be equivalent to those experienced during 2003 and 2004 (excluding settlements from closed claims filed in Madison County, Illinois with respect to future claims, as changes in the judicial environment in Madison County caused the historical experience of claims in that jurisdiction to not be predictive of results for future claims).

The resulting study completed by ARPC in January 2005 stated that the undiscounted cost to Union Carbide of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, through 2017 was estimated to be between approximately $1.5 billion and $2.0 billion, depending on which of two accepted methodologies was used. At December 31, 2004, Union ~~Carbide's~~Carbide’s recorded asbestos-related liability for pending and future claims was $1.6 billion. Based on the low end of the range in the January 2005 study, Union ~~Carbide's~~Carbide’s recorded asbestos-related liability for pending and future claims at December 31, 2004 would be sufficient to resolve asbestos-related claims against Union Carbide and Amchem into 2019. As in its January 2003 study, ARPC did provide estimates for a longer period of time in its January 2005 study, but also reaffirmed its prior advice that forecasts for shorter periods of time are more accurate than those for longer periods of time. Based on ~~ARPC's~~ARPC’s studies, Union ~~Carbide's~~Carbide’s recent asbestos litigation experience, and the uncertainties surrounding asbestos litigation and legislative reform efforts, Union ~~Carbide's~~Carbide’s management determined that no change to the accrual was required at December 31, 2004.

Based on Union ~~Carbide's~~Carbide’s review of 2005 activity, Union Carbide determined that no change to the accrual was required at ~~June~~September 30, 2005.

Union ~~Carbide's~~Carbide’s asbestos-related liability for pending and future claims was $1.5 billion at ~~June~~September 30, 2005 and $1.6 billion at December 31, 2004. At ~~June~~September 30, 2005, approximately 3936 percent of the recorded liability related to pending claims and approximately 6164 percent related to future claims. At December 31, 2004, approximately 37 percent of the recorded liability related to pending claims and approximately 63 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. 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. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of Union ~~Carbide's~~Carbide’s insurance policies and to resolve issues that the insurance carriers may raise.

14

Union ~~Carbide's~~Carbide’s receivable for insurance recoveries related to its asbestos liability was ~~$590~~$550 million at ~~June~~September 30, 2005 and $712 million at December 31, 2004. At ~~June~~September 30, 2005, ~~$453~~$443 million ($543 million at December 31, 2004) of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.

In addition, 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,
2005
Dec. 31,
2004
Receivables for defense costs $ 91 $ 85
Receivables for resolution costs 368 406

Total $ 459 $ 491

Receivables for Costs Submitted to Insurance Carriers
In millions

Sept. 30,
2005

Dec. 31,
2004

Receivables for defense costs

$
86

$
85

Receivables for resolution costs

333

406

Total

$
419

$
491

Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was ~~$14~~$24 million in the ~~second~~third quarter of 2005 ($4819 million in the ~~second~~third quarter of 2004) and ~~$32~~$56 million in the first ~~six~~nine months of 2005 ($7392 million in the first ~~six~~nine months of 2004), and was reflected in ~~"Cost~~“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 (the ~~"West~~“West Virginia ~~action"~~action”) and to facilitate an orderly and timely collection of insurance proceeds. 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, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. In early 2004, several of the defendant insurers in the West Virginia action filed a competing action in the Supreme Court of the State of New York, County of New York. As a result of motion practice, the West Virginia action was dismissed in August 2004 on the basis offorum non conveniens ~~(i.e.~~(i.e., West Virginia is an inconvenient location for the parties). The comprehensive insurance coverage litigation is now proceeding in the New York courts (the ~~"New~~“New York ~~action"~~action”). Through the ~~second~~third quarter of 2005, Union Carbide reached settlements with several of the carriers involved in the New York action. 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, Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.

The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon current, 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~~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~~Carbide’s management believes that it is reasonably possible that the cost of disposing of Union ~~Carbide's~~Carbide’s asbestos-related claims, including future defense costs, could have a material adverse impact on Union ~~Carbide's~~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~~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~~Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.
15

Synthetic Rubber Industry Matters

In 2003, the U.S., Canadian and European competition authorities initiated separate investigations into alleged anticompetitive behavior by certain participants in the synthetic rubber industry. DuPont Dow Elastomers L.L.C. ~~("DDE"~~(“DDE”), a 50:50 joint venture with E.I. du Pont de Nemours and Company ~~("DuPont"~~(“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.

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: enabled DuPont to direct ~~DDE's~~DDE’s response to these investigations and related litigation; resulted 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 granted the Company the option to acquire certain DDE assets in a cashless transaction which, if exercised, would obligate DuPont to acquire the ~~Company's~~Company’s remaining equity interest in DDE. DuPont concurrently announced on April 8, 2004, that it was taking a charge of $150 million related to anticipated expenses. On January 19, 2005, the U.S. Department of Justice announced that DDE had agreed to plead guilty to one count of price fixing in the polychloroprene industry and accept a fine of $84 million. Also on January 19, 2005, DuPont announced that it was taking an additional charge of $118 ~~million.~~million related to DDE. On March 31, 2005, the U.S. Federal District Court (N.D. California) accepted the proposed plea arrangement. Based on the ~~Company's~~Company’s agreement with DuPont, the Company expects that its responsibility with respect to these DDE liabilities will not be material.

Additionally, on January 3, 2005, the Company and DuPont announced that the Company had exercised its option to acquire certain assets relating to ethylene elastomers and chlorinated elastomers from DDE, including ~~ENGAGE™~~ENGAGE^TM, ~~NORDEL™~~NORDEL^TM and ~~TYRIN™~~TYRIN^TM elastomers, through an equity redemption transaction involving the ~~Company's~~Company’s equity interest in DDE. As a result of this option exercise, DuPont purchased the ~~Company's~~Company’s remaining equity interest in DDE for $87 million; the dissolution of the joint venture was completed on June 30, 2005. As a result of this transaction, the Company decreased its investment in nonconsolidated affiliates and recorded $324 million in net property, $122 million in inventories, and $48 million in other net assets.

On June 10, 2005, the Company received a Statement of Objections from the European Commission stating that it believed that the Company and certain subsidiaries of the Company, together with other participants in the synthetic rubber industry, engaged in conduct in violation of European competition laws. It is expected that the European Commission will seek to impose a fine on the Company, the amount of which will be calculated taking into account the gravity of the violation, the role played by the participants, the duration of their participation and their importance in the synthetic rubber industry.
Other Litigation Matters

In addition to the breast implant, DBCP, environmental and synthetic rubber industry 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~~Carbide’s asbestos-related liability described above, it is the opinion of the ~~Company's~~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~~Company’s consolidated financial statements.
Purchase Commitments

At December 31, 2004, the Company had several agreements for the purchase of ethylene-related products globally. 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 $622 million in 2004. Another agreement for the purchase of ethylene-related products in North America became effective on January 1, 2005. The ~~Company's~~Company’s commitments associated with all of these agreements are included in the table below.

16

At December 31, 2004, 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 40 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, 2004 is presented in the following table:
Fixed and Determinable Portion of Take or Pay and Throughput Obligations at December 31, 2004
In millions

2005 $ 2,120
2006 1,966
2007 1,695
2008 1,482
2009 1,288
2010 through expiration of contracts 5,781

Total $ 14,332

Fixed and Determinable Portion of Take or Pay and
Throughput Obligations at December 31, 2004
In millions

2005

$
2,120

2006

1,966

2007

1,695

2008

1,482

2009

1,288

2010 through expiration of contracts

5,781

Total

$
14,332

In addition to the take or pay obligations at December 31, 2004, the Company had outstanding 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 $445 million. Such commitments were at prices not in excess of current market prices.

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. With guarantees, such as commercial or financial contracts, non-performance by the guaranteed party triggers the obligation of the Company to make payments to the beneficiary of the guarantee. The majority of the ~~Company's~~Company’s guarantees relate to debt of nonconsolidated affiliates, which have expiration dates ranging from less than one year to 14 years, and trade financing transactions in Latin America, which typically expire within one year of inception.
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.

The following table provides a summary of the final expiration, maximum future payments and recorded liability reflected in the consolidated balance sheets for each type of guarantee:
Guarantees at June 30, 2005
In millions
Final
Expiration
Maximum Future
Payments
Recorded
Liability
Guarantees 2014 $ 333 $ 55
Residual value guarantees 2015 1,336 6

Total guarantees $ 1,669 $ 61

Guarantees at December 31, 2004
In millions
Final
Expiration
Maximum Future
Payments
Recorded
Liability
Guarantees 2018 $ 729 $ 202
Residual value guarantees 2015 1,342 4

Total guarantees $ 2,071 $ 206

Guarantees at September 30, 2005
In millions

Final
Expiration

Maximum Future
Payments

Recorded
Liability

Guarantees

2014

$
338

$
42

Residual value guarantees

2015

1,339

6

Total guarantees

$
1,677

$
48

Guarantees at December 31, 2004
In millions

Final
Expiration

Maximum Future
Payments

Recorded
Liability

Guarantees

2018

$
729

$
202

Residual value guarantees

2015

1,342

4

Total guarantees

$
2,071

$
206

In January 2005, the Company contributed $170 million to Cargill Dow, a 50:50 joint venture, and obtained a release from its commitments with respect to Cargill ~~Dow's~~Dow’s debt obligations. On January 31, 2005, Dow transferred its 50 percent interest in Cargill Dow to Cargill. See Note C for additional information.
17

NOTE I—I – PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS
Net Periodic Benefit Cost for All Significant Plans

Three Months Ended
Six Months Ended

Three Months Ended

Nine Months Ended

In millions
In millions
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Defined Benefit Pension Plans: Defined Benefit Pension Plans:

Service cost $ 72 $ 66 $ 144 $ 132
Interest cost 204 199 409 399
Expected return on plan assets (265 ) (268 ) (531 ) (537 )
Amortization of prior service cost 6 5 12 11
Amortization of net loss 28 6 57 13
Special termination/curtailment cost — 40 — 40

Net periodic benefit cost $ 45 $ 48 $ 91 $ 58
Service cost

$
71

$
64

$
215

$
196

Interest cost

202

201

611

600

Expected return on plan assets

(263
)
(271
)
(794
)
(808
)
Amortization of prior service cost

6

5

18

16

Amortization of net loss

28

7

85

20

Special termination/curtailment cost (1)

—

—

—

40

Net periodic benefit cost

$
44

$
6

$
135

$
64

Other Postretirement Benefits: Other Postretirement Benefits:

Service cost $ 6 $ 6 $ 12 $ 12
Interest cost 31 33 62 66
Expected return on plan assets (7 ) (6 ) (14 ) (12 )
Amortization of prior service credit (2 ) (3 ) (4 ) (6 )
Amortization of net loss 3 2 6 4
Special termination/curtailment cost — 31 — 31

Net periodic benefit cost $ 31 $ 63 $ 62 $ 95

Service cost

$
6

$
6

$
18

$
18

Interest cost

31

31

93

97

Expected return on plan assets

(7
)
(6
)
(21
)
(18
)
Amortization of prior service credit

(2
)
(2
)
(6
)
(8
)
Amortization of net loss

3

2

9

6

Special termination/curtailment cost (1)

—

—

—

31

Net periodic benefit cost

$
31

$
31

$
93

$
126

(1) See Note C for information regarding curtailment costs recorded in the second quarter of 2004.
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~~employee’s three highest consecutive years of compensation.

The ~~Company's~~Company’s funding policy is to contribute to those plans when pension laws and economics either require or encourage funding. ~~In the second quarter of 2005,~~ Dow ~~revised its estimate regarding the amount that the Company~~ expects to contribute $700 million to its pension plans in 2005. ~~Dow now expects to contribute $700 million in 2005.~~ Contributions of ~~$436~~$634 million were made in the first ~~six~~nine months of 2005.
Other Postretirement Benefits

The Company provides certain health care and life insurance benefits to retired employees. The Company has one non-U.S. plan, which is insignificant; therefore, this discussion relates to the U.S. plans only. The plans provide health care benefits, including hospital, ~~physicians'~~physicians’ services, drug and major medical expense coverage, and life insurance benefits. For employees hired before January 1, 1993, the plans provide 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. The Company has the ability to change these benefits at any time.

The Company funds most of the cost of these health care and life insurance benefits as incurred. As disclosed in the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, 2004, Dow does not expect to contribute assets to its other postretirement benefits plan trusts in 2005. Consistent with that expectation, no contributions were made in the first ~~half~~nine months of 2005. Benefit payments to retirees under these plans are expected to be $205 million in 2005. Payments of ~~$77~~$106 million were made in the first ~~six~~nine months of 2005.
18

NOTE J—J – EARNINGS PER SHARE CALCULATIONS
~~Earnings Per Share Calculations~~

Three Months Ended
June 30, 2005
Three Months Ended
June 30, 2004
In millions, except per share amounts

Three Months Ended
Sept. 30, 2005

Nine Months Ended
Sept. 30, 2005

In millions, except per share amounts
Basic
Diluted
Basic
Diluted

Basic

Diluted

Basic

Diluted

$ 1,265 $ 1,265 $ 685 $ 685

$
801

$
801

$
3,419

$
3,419

Weighted-average common shares outstanding 964.1 964.1 938.0 938.0

965.2

965.2

962.1

962.1

Add dilutive effect of stock options and awards — 12.1 — 9.9

—

13.2

—

12.1

Weighted-average common shares for EPS calculations 964.1 976.2 938.0 947.9

965.2

978.4

962.1

974.2

Earnings per common share $ 1.31 $ 1.30 $ 0.73 $ 0.72

$
0.83

$
0.82

$
3.55

$
3.51

Stock options excluded from EPS calculations(1) 5.8 5.4

Stock options and deferred stock awards excluded from EPS calculations (1)

12.4

4.9

~~Earnings Per Share Calculations~~(1)

Six Months Ended
June 30, 2005
Six Months Ended
June 30, 2004
In millions, except per share amounts
Basic
Diluted
Basic
Diluted
Net income available for common stockholders $ 2,618 $ 2,618 $ 1,154 $ 1,154

Weighted-average common shares outstanding 960.5 960.5 934.9 934.9
Add dilutive effect of stock options and awards — 14.2 — 10.9

Weighted-average common shares for EPS calculations 960.5 974.7 934.9 945.8

Earnings per common share $ 2.73 $ 2.69 $ 1.23 $ 1.22

Stock options excluded from EPS calculations(1) 4.4 4.0

~~(1)~~
Outstanding options ~~(in millions)~~to purchase shares of common stock and deferred stock awards that were not included in the calculation of diluted earnings per share because the effect of including them would have been anti-dilutive.
Earnings Per Share Calculations

Three Months Ended
Sept. 30, 2004

Nine Months Ended
Sept. 30, 2004

In millions, except per share amounts

Basic

Diluted

Basic

Diluted

Net income available for common stockholders

$
617

$
617

$
1,771

$
1,771

Weighted-average common shares outstanding

940.9

940.9

937.0

937.0

Add dilutive effect of stock options and awards

—

10.5

—

11.8

Weighted-average common shares for EPS calculations

940.9

951.4

937.0

948.8

Earnings per common share

$
0.66

$
0.65

$
1.89

$
1.87

Stock options excluded from EPS calculations (2)

5.3

4.5

(2)   Outstanding options to purchase shares of common stock that were not included in the calculation of diluted earnings per share because the ~~options' exercise prices were greater than the average market price of the common stock for the period; the~~ effect of including them would have been anti-dilutive.
19

NOTE K—K– OPERATING SEGMENTS AND GEOGRAPHIC AREAS
Operating Segments and Geographic Areas

Three Months Ended

Nine Months Ended

In millions

Sept. 30,
2005

Sept. 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Operating segment sales

Performance Plastics

$
2,939

$
2,417

$
8,467

$
6,875

Performance Chemicals

1,906

1,694

5,816

4,894

Agricultural Sciences

615

657

2,635

2,610

Plastics

2,900

2,608

8,682

7,167

Chemicals

1,297

1,340

4,126

3,986

Hydrocarbons and Energy

1,541

1,294

4,443

3,480

Unallocated and Other

63

62

221

213

Total

$
11,261

$
10,072

$
34,390

$
29,225

Operating segment EBIT (1)

Performance Plastics

$
580

$
238

$
1,494

$
697

Performance Chemicals

298

162

1,035

417

Agricultural Sciences

(28
)
43

469

545

Plastics

420

428

1,795

1,134

Chemicals

168

292

863

1,191

Hydrocarbons and Energy

—

—

—

(1
)
Unallocated and Other

(164
)
(129
)
(579
)
(917
)
Total

$
1,274

$
1,034

$
5,077

$
3,066

Geographic area sales

United States

$
4,123

$
3,771

$
12,868

$
11,013

Europe

4,036

3,457

12,643

10,356

Rest of World

3,102

2,844

8,879

7,856

Total

$
11,261

$
10,072

$
34,390

$
29,225

~~Operating Segments and Geographic Areas~~(1)

Three Months Ended
Six Months Ended

In millions
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004

Operating segment sales
Performance Plastics $ 2,796 $ 2,294 $ 5,528 $ 4,458
Performance Chemicals 1,938 1,624 3,910 3,200
Agricultural Sciences 1,031 1,029 2,020 1,953
Plastics 2,774 2,325 5,782 4,559
Chemicals 1,355 1,370 2,829 2,646
Hydrocarbons and Energy 1,468 1,127 2,902 2,186
Unallocated and Other 88 75 158 151

Total $ 11,450 $ 9,844 $ 23,129 $ 19,153

Operating segment EBIT(1)
Performance Plastics $ 436 $ 268 $ 914 $ 459
Performance Chemicals 343 113 737 255
Agricultural Sciences 238 271 497 502
Plastics 575 399 1,375 706
Chemicals 267 726 695 899
Hydrocarbons and Energy — — — (1 )
Unallocated and Other (95 ) (616 ) (415 ) (788 )

Total $ 1,764 $ 1,161 $ 3,803 $ 2,032

Geographic area sales
United States $ 4,368 $ 3,771 $ 8,745 $ 7,242
Europe 4,166 3,451 8,607 6,899
Rest of World 2,916 2,622 5,777 5,012

Total $ 11,450 $ 9,844 $ 23,129 $ 19,153

~~(1)~~
The Company uses EBIT (which Dow defines as earnings (loss) 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~~“Net Income Available for Common ~~Stockholders"~~Stockholders” is provided below:

Three Months Ended
Six Months Ended
In millions
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004
EBIT $ 1,764 $ 1,161 $ 3,803 $ 2,032
+ Interest income 27 21 56 39
– Interest expense and amortization of debt discount 188 182 375 368
– Provision for income taxes 317 284 825 488
– Minority interests' share in income 21 31 41 61

Net Income Available for Common Stockholders $ 1,265 $ 685 $ 2,618 $ 1,154

Three Months Ended

Nine Months Ended

In millions

Sept. 30,
2005

Sept. 30,
2004

Sept. 30,
2005

Sept. 30,
2004

EBIT

$
1,274

$
1,034

$
5,077

$
3,066

+ Interest income

42

19

98

58

- Interest expense and amortization of debt discount

168

193

543

561

- Provision for income taxes

328

214

1,153

702

- Minority interests’ share in income

19

29

60

90

Net Income Available for Common Stockholders

$
801

$
617

$
3,419

$
1,771

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 in the first ~~six~~nine months of 2005 and 2004 were immaterial.

NOTE L– SUBSEQUENT EVENT
On October 3, 2005, the Company announced that Union Carbide Corporation had agreed on September 30, 2005, to the sale of its indirect 50 percent interest in UOP LLC (“UOP”) to Honeywell Specialty Materials LLC (which currently owns the remaining 50 percent interest in UOP) for a purchase price of $825 million plus or minus 50 percent of UOP’s net cash at closing. The transaction, which is subject to regulatory review, is expected to be completed in the fourth quarter of 2005 and result in the recording of a gain.
20

The Dow Chemical Company and Subsidiaries
PART I—I – FINANCIAL INFORMATION, Item 2. ~~Management's~~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"~~“safe harbor” for forward-looking statements made by or on behalf of The Dow Chemical Company and its subsidiaries ~~("Dow"~~(“Dow” or the ~~"Company"~~“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~~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"~~(“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~~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.
OVERVIEW

The ~~Company's~~third quarter of 2005 presented a number of challenges for the Company. Feedstock and energy costs continued to rise sharply, adding approximately $850 million of costs in the third quarter compared with the same period last year, bringing the year-to-date increase to $2.8 billion. In addition, two major hurricanes caused significant disruption in Dow’s operations on the U.S. Gulf Coast and logistics across the region. St. Charles Operations in Hahnville, Louisiana were shut down as a result of Hurricane Katrina, and normal operations were not restored for approximately four weeks. Then, as a precautionary measure, Texas Operations in Freeport, Texas were shut down due to the threat of Hurricane Rita. Normal operations at this facility were restored in approximately nine days. Operations were also halted or reduced at manufacturing facilities in Seadrift and Texas City, Texas and Plaquemine, Louisiana, as well as other sites in Texas and Louisiana, with disruptions ranging from three to five days. Dow’s facilities did not suffer any significant structural damage; the biggest impact of the hurricanes, although not material after insurance, was lost margin on sales due to the inability to produce and/or ship product and higher costs associated with reduced operating rates.
In the face of these challenges, the Company’s management and employees continued to focus on financial discipline, lowering the total cost to serve customers and price/volume management, in order to further improve ~~Dow's~~Dow’s financial performance. ~~This includes sustaining productivity improvements achieved in the past two years and continued discipline in capital spending.~~ Progress toward ~~these goals~~this goal continued in the ~~second~~third quarter of 2005. ~~Dow's~~Dow’s results for the quarter included a 2012 percent increase in selling prices over the ~~second~~third quarter of last year, which more than offset higher feedstock and energy costs, an increase in operating expenses and the impact of lower ~~volume and a decline in equity earnings.~~operating rates. The ~~second~~third quarter of 2005 was the ~~tenth~~eleventh consecutive quarter in which the Company achieved some degree of margin restoration (i.e., higher selling prices absorbed increases in feedstock and energy costs to partially restore margins). ~~This progress reflects Dow's continued focus on financial performance, as well as a strengthening in industry conditions.~~ Capital spending was ~~$364~~$400 million in the ~~second~~third quarter ($~~650~~1,050 million year to date), consistent with the ~~Company's~~Company’s plan to spend approximately $1.5 billion in 2005. ~~Dow's~~Dow’s results for the three-month and ~~six-month~~nine-month periods ending ~~June~~September 30, 2005 are discussed further in this section.
~~Selected Financial Data~~

Three Months Ended
Six Months Ended

Selected Financial Data

Three Months Ended

Nine Months Ended

In millions, except per share amounts
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Sales $ 11,450 $ 9,844 $ 23,129 $ 19,153

$
11,261

$
10,072

$
34,390

$
29,225

Cost of sales 9,300 8,345 18,637 16,252

9,610

8,697

28,247

24,949

Percent of sales 81.2 % 84.8 % 80.6 % 84.9 %

85.3
%
86.3
%
82.1
%
85.4
%

Research and development, and selling, general and
administrative expenses 654 609 1,300 1,223

643

589

1,943

1,812

Percent of sales 5.7 % 6.2 % 5.6 % 6.4 %

5.7
%
5.8
%
5.6
%
6.2
%

Effective tax rate 19.8 % 28.4 % 23.7 % 28.7 %

28.6
%
24.9
%
24.9
%
27.4
%

Net income available for common stockholders $ 1,265 $ 685 $ 2,618 $ 1,154

$
801

$
617

$
3,419

$
1,771

Earnings per common share—basic $ 1.31 $ 0.73 $ 2.73 $ 1.23
Earnings per common share—diluted $ 1.30 $ 0.72 $ 2.69 $ 1.22

Earnings per common share – basic

$
0.83

$
0.66

$
3.55

$
1.89

Earnings per common share – diluted

$
0.82

$
0.65

$
3.51

$
1.87

Operating rate percentage 83 % 85 % 85 % 87 %

84
%
90
%
84
%
88
%

21

RESULTS OF OPERATIONS

Net sales for the ~~second~~third quarter of 2005 were ~~$11.5~~$11.3 billion, up 1612 percent from ~~$9.8~~$10.1 billion in the ~~second~~third quarter of last year. Compared with the same quarter of last year, prices rose ~~20 percent, while~~12 percent; volume ~~declined 4 percent~~was flat versus last year’s very strong volume (see the Sales Volume and Price table at the end of the section entitled ~~"Segment Results"~~“Segment Results”). Prices were up in all operating segments and all geographic areas due to ~~improved industry fundamentals and~~ the continuing increase in feedstock and energy ~~costs. Volume was down~~costs and improved industry fundamentals. While volume improved in ~~all operating segments except~~Performance Plastics (up 5 percent, principally due to the addition of sales of ENGAGE^TM, NORDEL^TM and TYRIN^TM elastomers, acquired by the Company when it divested its interest in DuPont Dow Elastomers L.L.C. (“DDE”); see Note H to the Consolidated Financial Statements), Plastics (up 2 percent) and Hydrocarbons and Energy ~~which grew~~(up 7 percent), the improvement was offset by volume declines in Performance Chemicals (down 4 percent), Agricultural Sciences (down 8 percent) and Chemicals (down 12 percent). Sales for the first nine months of 2005 were $34.4 billion, up 18 percent from $29.2 billion in the first nine months of last year. Compared with last year, prices were up 20 percent, while volume declined 2 percent. Compared with ~~the second quarter of~~ 2004, volume declined ~~primarily~~in part due to divestitures completed by the Company in 2004. Excluding the mid-2004 divestiture of assets in conjunction with the formation of Equipolymers and MEGlobal (50:50 joint ventures with Petrochemical Industries Company ~~("PIC"~~(“PIC”) of ~~Kuwait)~~Kuwait; see Note D to the Consolidated Financial Statements), volume was ~~flat~~up 1 percent for Plastics (versus a reported decline of 31 percent) and down 35 percent for Chemicals (versus a reported decline of 1915 percent). In addition, volume in Performance Plastics was unfavorably impacted by the fourth quarter of 2004 sale of the DERAKANE™ epoxy vinyl ester resin business. Sales for the first six months of 2005 were $23.1 billion, up 21 percent from

~~$19.2 billion in the first half of last year. Compared with last year, prices were up 24 percent, while volume declined 3 percent.~~

Gross margin for the ~~second~~third quarter of 2005 was ~~$2.2~~$1.7 billion, compared with ~~$1.5~~$1.4 billion in the ~~second~~third quarter of last year. Gross margin improved as higher selling prices of approximately ~~$2.0~~$1.2 billion more than offset an increase of approximately ~~$900~~$850 million in feedstock and energy costs and the unfavorable impact of ~~the decline in volume and~~ lower operating rates. Year to date, gross margin was ~~$4.5~~$6.1 billion, compared with ~~$2.9~~$4.3 billion in the first ~~six~~nine month of 2004.

The ~~Company's~~Company’s global plant operating rate ~~for~~(for its chemicals and plastics ~~businesses~~businesses) was 8384 percent in the ~~second~~third quarter of 2005, compared with 8590 percent in the ~~second~~third quarter of 2004. ~~Approximately half of the decline in the Company's~~The Company’s operating rate was reduced by approximately 4 percentage points due to hurricane-related shutdowns on the ~~active management of inventory levels and half was due to planned maintenance turnarounds in~~U.S. Gulf Coast during the ~~second~~third quarter of ~~2005, including turnarounds in ethylene oxide/ethylene glycol, polyethylene, acrylates and the Hydrocarbons and Energy business.~~2005. For the first ~~half~~nine months of 2005, ~~Dow's~~Dow’s global plant operating rate was 8584 percent, down from 8788 percent in the same period of 2004.

Personnel count was ~~42,832~~42,821 at ~~June~~September 30, 2005, down from 43,203 at December 31, 2004 and ~~45,855~~43,630 at ~~June~~September 30, 2004. Headcount continued to decline, despite the addition of approximately 115 employees associated with the acquisition of businesses from DDE, as the Company remained focused on improving organizational efficiency and financial performance.

Operating expenses (research and development, and selling, general and administrative expenses) were ~~$654~~$643 million in the ~~second~~third quarter of 2005, up ~~$45~~$54 million or 79 percent, from ~~$609~~$589 million in the ~~second~~third quarter of last year. Selling, general and administrative ("(“SG~~&A"~~&A”) expenses were up ~~$36~~$38 million, due in part to an increase in selling expenses for agricultural products related to new product launches, and an increase in administrative ~~expenses.~~expenses largely due to an increase in the allowance for doubtful receivables (related to the impact of higher energy costs on some customers and difficult economic conditions in Brazil). Research and development ("(“R~~&D"~~&D”) expenses increased $9$16 million. Despite these increases, ~~second~~third quarter operating expenses remained low as a percent of net sales. For the first ~~half~~nine months of 2005, operating expenses totaled ~~$1,300~~$1,943 million and were up ~~$77~~$131 million or 67 percent from ~~$1,223~~$1,812 million in the first ~~half~~nine months of 2004. The increase included higher R&D expenses of ~~$13~~$29 million and higher SG&A expenses of $102 million related in part to an increase of approximately ~~$30~~$44 million in the allowance for doubtful receivables (reflecting the higher level of ~~sales)~~sales, unstable economic conditions in ~~2005.~~Brazil and increased risk in receivables due to higher energy costs).

Amortization of intangibles was $13 million in the ~~second~~third quarter of 2005, compared with ~~$16~~$19 million in the ~~second~~third quarter of last year. For the first ~~two~~three quarters of 2005, amortization of intangibles was ~~$27~~$40 million, down from ~~$45~~$64 million for the same period last year. Amortization of intangibles was higher in 2004 primarily due to the write-off of goodwill associated with Hampshire ~~Chemical's~~Chemical’s manufacturing facility in Nashua, New Hampshire, that produced ~~HAMPOSYL™~~HAMPOSYL^TM surfactants. In the first quarter of 2004, the Company made the decision to discontinue production of ~~HAMPOSYL™~~HAMPOSYL^TM surfactants and, as a result, wrote off goodwill of $13 million associated with this line of business in the Performance Chemicals segment. The manufacturing facility for this line of business was shut down in the third quarter of 2004; demolition is underway and is expected to be completed in the fourth quarter of 2005. See Notes F and G 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~~“Restructuring net ~~gain"~~gain” in the consolidated statements of income, included gains totaling $563 million related to the divestiture of assets in conjunction with the formation of two new joint ventures, MEGlobal and Equipolymers; 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"~~Dow”), reflected in Unallocated and Other; and employee-related restructuring charges of $296 million, reflected in
22

Unallocated and Other. The gain related to MEGlobal was $439 million and was reflected in the Chemicals segment. The gain related to 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 and curtailment costs of $71 million associated with ~~Dow's~~Dow’s defined benefit plans. For additional information, see Notes C, D, F and G to the Consolidated Financial Statements.
~~Dow's~~
Dow’s share of the earnings of nonconsolidated affiliates was ~~$224~~$240 million in the ~~second~~third quarter of 2005, compared with ~~$254~~$232 million in the ~~second~~third quarter of last year. ~~Despite~~For the first nine months of 2005, equity earnings were $739 million, compared with $626 million for the same period last year. Compared with last year, equity earnings improved due to stronger results from a number of the ~~Company's~~Company’s joint ventures (including Dow Corning Corporation ("(“Dow ~~Corning"~~Corning”), Siam Polyethylene Company Limited, and UOP LLC), the addition of earnings from MEGlobal, and the absence of equity losses from Cargill Dow, equity earnings for the second quarter of 2005 were down from last year due to the favorable impact of the recognition of investment tax allowances by one of the Company's joint ventures in the second quarter of 2004. Equity earnings for the second quarter of 2005 were also impacted by unplanned outages at EQUATE Petrochemical Company K.S.C. ("EQUATE") and the OPTIMAL Group ("OPTIMAL").Dow. On January 31, 2005, the Company exited Cargill Dow by transferring its 50 percent interest to the joint venture partner, Cargill, Incorporated (see Note C to the Consolidated Financial Statements). ~~For the first six months of 2005,~~In 2004, year-to-date equity earnings ~~were $499 million, compared with $394 million for~~included the ~~same period last year. In addition to~~favorable impact of the recognition of investment tax allowances by one of the Company’s joint ventures ~~previously mentioned, improved results were reported by EQUATE~~ in the ~~first half~~second quarter of ~~2005.~~2004.

Sundry income ~~(expense)—~~- net 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)—~~- net for the ~~second~~third quarter of 2005 was ~~net income of $57~~$39 million compared with ~~net income of $13~~$35 million in the ~~second~~third quarter of 2004. ~~In the second quarter of 2005,~~Year to date, net sundry income was ~~reduced by a loss of $31 million associated with the early extinguishment of $845 million of debt. Year to date, sundry income (expense) was net income of $139~~$178 million compared with ~~net expense of $15~~$20 million in the first ~~half~~nine months of 2004. Year to date, net sundry income included a $70 million pretax gain ($41 million reflected in the Chemicals segment; $29 million reflected in the Plastics segment) on the sale of a portion of Union ~~Carbide's~~Carbide’s interest in EQUATE Petrochemical Company K.S.C. (“EQUATE”) in the first quarter of 2005. In November 2004, Union Carbide sold a 2.5 percent interest in EQUATE to National Bank of Kuwait for $104 million. In March 2005, these shares were sold to private Kuwaiti investors thereby completing the restricted transfer, which resulted in the first quarter gain and reduced Union ~~Carbide's~~Carbide’s ownership interest from 45 percent to 42.5 percent. In ~~2004,~~addition, compared with last year, year-to-date net sundry ~~expense included~~income was positively impacted by a favorable change in foreign exchange hedging results and negatively impacted by a loss of $31 million associated with the early extinguishment of $845 million of debt in the second quarter of 2005. In 2004, year-to-date net sundry income was reduced by a loss of approximately $30 million on the sale of assets (reflected in Unallocated and Other).

Net interest expense (interest expense less capitalized interest and interest income) was ~~$161~~$126 million in the ~~second~~third quarter of 2005, ~~and~~compared with $174 million in the ~~second~~third quarter of last year. Year to date, net interest expense was ~~$319~~$445 million, down from ~~$329~~$503 million in the first ~~six~~nine months of 2004. Compared with last year, net interest expense ~~declined primarily~~was lower due to higher interest income, reflecting significantly higher levels of cash and cash ~~equivalents.~~equivalents, and lower interest expense, reflecting a significant reduction in total debt.
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. The effective tax rate for the ~~second~~third quarter was ~~19.8~~28.6 percent, versus ~~28.4~~24.9 percent for the ~~second~~third quarter of 2004. The effective tax rate for the first ~~six~~nine months of the year was ~~23.7~~24.9 percent, compared with ~~28.7~~27.4 percent for the same period last year. In the second quarter of 2005, the Company finalized its plan for the repatriation of foreign earnings subject to the requirements of the American Jobs Creation Act of 2004 ~~("AJCA"~~(“AJCA”), resulting in a credit to the ~~"Provision~~“Provision for income ~~taxes"~~taxes” of $113 million (see Note B to the Consolidated Financial Statements). Absent this credit, the effective tax rate for the ~~second quarter would have been 26.8 percent; and the effective tax rate for the~~ first ~~six~~nine months of 2005 would have been ~~26.9~~27.3 percent. 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. The effective tax rate for 2005 was lower than last year due to a higher percentage of foreign sourced income compared with 2004 and stronger earnings from a number of the Company's joint ventures. Since most of the earnings from nonconsolidated affiliates are taxed at the joint venture level, the impact of higher equity earnings has reduced Dow's overall effective tax rate.

Minority ~~interests'~~interests’ share of net income was ~~$21~~$19 million in the ~~second~~third quarter of 2005, down from ~~$31~~$29 million in the ~~second~~third quarter of last year. Year to date, minority ~~interests'~~interests’ share of net income was ~~$41~~$60 million, compared with ~~$61~~$90 million in the first ~~half~~nine months of last year. During the first quarter of 2005, the Company purchased the remaining 28 percent of PBBPolisur S.A. for $98 million, resulting in the decline in minority ~~interests'~~interests’ share of net income compared with 2004.

Net income available for common stockholders was ~~$1.3 billion~~$801 million or ~~$1.30~~$0.82 per share for the ~~second~~third quarter of 2005, compared with ~~$685~~$617 million or ~~$0.72~~$0.65 per share for the ~~second~~third quarter of 2004. Net income for the first ~~six~~nine months of 2005 was ~~$2.6~~$3.4 billion or ~~$2.69~~$3.51 per share, compared with ~~$1.2~~$1.8 billion or ~~$1.22~~$1.87 per share for the same period of 2004.
23

The following tables summarize the impact of certain items (described previously in this section) recorded in the ~~three-month and six-month~~nine-month periods ended ~~June~~September 30, 2005 and 2004:

Pretax
Impact(1)
Impact on
Net Income(2)
Impact on
EPS(3)

Pretax
Impact (1)

Impact on
Net Income (2)

Impact on
EPS (3)

Three Months Ended
Three Months Ended
Three Months Ended

Nine Months Ended

Nine Months Ended

Nine Months Ended

In millions, except per share amounts
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Gain on sale of EQUATE shares

$
70

—

$
46

—

$
0.05

—

Loss on early extinguishment of debt $ (31 ) — $ (20 ) — $ (0.02 ) —

(31
)
—

(20
)
—

(0.02
)
—

AJCA repatriation of foreign earnings — — 113 — 0.12 —

—

—

113

—

0.12

—

Employee-related restructuring charges — $ (296 ) — $ (200 ) — $ (0.21 )

—

$
(296
)
—

$
(200
)
—

$
(0.21
)
Gains on divestitures of assets related to formation of
MEGlobal and Equipolymers joint ventures — 563 — 379 — 0.40

—

563

—

379

—

0.40

Asset impairments — (99 ) — (69 ) — (0.08 )

—

(99
)
—

(69
)
—

(0.08
)
Recognition of liability related to Cargill Dow
loan guarantee — (148 ) — (93 ) — (0.10 )

—

(148
)
—

(93
)
—

(0.10
)

Total $ (31 ) $ 20 $ 93 $ 17 $ 0.10 $ 0.01

$
39

$
20

$
139

$
17

$
0.15

$
0.01

Pretax
Impact(1)
Impact on
Net Income(2)
Impact on
EPS(3)

Six Months Ended
Six Months Ended
Six Months Ended

In millions, except per share amounts
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004
June 30,
2005
June 30,
2004

Gain on sale of EQUATE shares $ 70 — $ 46 — $ 0.05 —
Loss on early extinguishment of debt (31 ) — (20 ) — (0.02 ) —
AJCA repatriation of foreign earnings — — 113 — 0.12 —
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 $ 39 $ 20 $ 139 $ 17 $ 0.15 $ 0.01

(1)
Impact on ~~"Income~~“Income before Income Taxes and Minority ~~Interests"~~
Interests”
(2)
Impact on ~~"Net~~“Net Income Available for Common ~~Stockholders"~~
Stockholders”
(3)
Impact on ~~"Earnings~~“Earnings per common ~~share—diluted"~~
share – diluted”
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 K to the Consolidated Financial Statements for a reconciliation of EBIT to ~~"Net~~“Net Income Available for Common Stockholders."”
PERFORMANCE PLASTICS

Performance Plastics sales were ~~$2,796~~$2,939 million for the ~~second~~third quarter of 2005, up 22 percent from ~~$2,294~~$2,417 million in the ~~second~~third quarter of 2004. Compared with last year, prices rose 2417 percent ~~while~~and volume ~~fell 2 percent, negatively impacted~~grew 5 percent. Beginning July 1, 2005, sales of ENGAGE^TM, NORDEL^TM and TYRIN^TM elastomers – acquired by the Company when it divested its interest in DDE on June 30, 2005 (see Note H to the Consolidated Financial Statements) – are now being reported as part of the Performance Plastics segment. Excluding the acquisition of these products and the divestiture of the ~~DERAKANE™~~DERAKANE^TM business in the fourth quarter of ~~2004.~~2004, volume decreased 1 percent. In the third quarter of 2005, EBIT for the segment ~~was $436~~increased significantly to $580 million, from $238 million in ~~the second~~third quarter ~~up from $268 million in the same period last year,~~2004, as the impact of higher selling prices more than offset the higher cost of raw materials.

Building and Construction sales for the ~~second~~third quarter of 2005 were up 137 percent from a year ago, due to a 96 percent increase in prices and 4a 1 percent ~~higher~~increase in volume. Compared with last year, the increase in sales was led by STYROFOAM^TM insulation sold into the building industry, with increases in both price and volume. Sales ~~of new homes~~were strong in North America ~~continued at a high level, supporting strong demand for building~~ and ~~construction products. Volume~~Europe, but down in ~~Europe improved significantly due to strong growth in residential housing in Southern~~Latin America and ~~Eastern Europe. Despite higher sales,~~Asia Pacific. EBIT ~~was relatively flat versus~~increased compared with the ~~same~~third quarter of 2004 due to higher ~~raw material costs~~selling prices and ~~higher research and selling expenses.~~lower styrene costs.

Dow Automotive sales ~~for the second quarter of 2005~~ were up 1715 percent from a year ago, ~~establishing~~setting a ~~new quarterly sales~~ record for ~~the business.~~third quarter sales. Compared with the ~~second~~third quarter of last year, prices rose 1211 percent, with increases in all geographic areas, while volume grew 54 percent. Volume grew more than the ~~industry's~~industry’s increase in automotive production, ~~driven by new applications~~due to successful differentiation of ~~existing products~~Dow products. Demand was especially strong in Latin America and ~~the introduction of new products. An increase in the production of cars for which Dow products are specified also influenced the increase in volume.~~Europe. EBIT for the business improved versus the ~~second~~third quarter of last year, ~~as the impact of~~principally due to higher selling prices, higher volume and ~~volume more than offset an increase in raw material costs.~~lower operating expenses.

Engineering Plastics sales for the quarter were up 3120 percent ~~versus~~from the ~~second~~third quarter of ~~2004,~~last year, reflecting a 3019 percent increase in prices, driven by higher feedstock costs and tight industry supply/demand balances for polycarbonate, and a 1 percent ~~growth~~increase in volume. ~~Polycarbonate continued to improve significantly in both price~~While volume was up for polycarbonate products, volume declined versus last year for copolymers, and ~~volume as demand was strong in the optical media, sheet~~compounds and ~~security applications.~~blends. EBIT for the ~~second~~third quarter of 2005 improved significantly, primarily due to higher selling prices, as the business focused on enhancing profitability through price/volume management. Higher equity earnings also contributed to the increase in EBIT.

24

Sales of Epoxy Products and Intermediates for the ~~second~~third quarter of 2005 ~~were up 25~~increased 9 percent ~~from last year, as price increases of 34~~due to a 21 percent ~~were~~increase in prices, partially offset by a ~~9 percent~~ decline in ~~volume.~~volume of 12 percent. Prices increased in all geographic areas as ~~Dow~~the business focused on recovering margin lost to high raw material costs. ~~Volume~~Compared with last year, volume declined for most ~~notably~~products and in ~~North America,~~all geographic areas, due in part to ~~a shift~~the Company’s efforts to improve margins. Volume was also affected by the impact of Hurricane Rita on the business’ production facilities in ~~customer base to Asia Pacific.~~Texas. EBIT in the ~~second~~third quarter of 2005 improved as higher selling prices ~~were partially~~more than offset ~~by higher raw material costs,~~ the decline in volume and lower operating rates.

Polyurethanes and Thermoset Systems sales for the quarter were up 2616 percent from the ~~second~~third quarter of 2004. Compared with last year, prices rose 2921 percent, driven by price increases for polyols and methylene diphenyl diisocyanate ~~("MDI"~~(“MDI”), ~~polyols and thermoset systems,~~ while volume fell 3 percent, principally due to the sale of the DERAKANE™ epoxy vinyl ester resin business in the fourth quarter of 2004. Excluding this divestiture, volume was down 1 percent versus the second quarter of 2004.declined 5 percent. Volume improved in the Thermoset Systems business, while volume for most polyurethane products declined due to some softness in industry conditions and a strategic shift to sell a higher percentage of these products through the Thermoset Systems business. ~~Operating rates continue to be low for toluene diisocyanate ("TDI") due to industry overcapacity.~~ Despite the decline in volume and lower operating rates, EBIT improved significantly from last year due to increased margins resulting from higher selling prices.

Technology Licensing and Catalyst sales for the ~~second~~third quarter were ~~down 36~~up 46 percent from the same period a year ago due to ~~a decline~~increased revenues in ~~licensing royalties related to~~ polyethylene, polypropylene, and ethylene oxide/ethylene glycol ~~technology, a result~~licensing. Compared with the third quarter of ~~the mid-2004 formation of MEGlobal. Despite improved equity earnings from UOP LLC,~~last year, EBIT ~~declined from last year~~increased significantly due to the ~~decline~~increase in ~~sales.~~sales and higher equity earnings, primarily from Univation Technologies, LLC and UOP LLC.

Wire and Cable Compounds sales for the quarter were up 2917 percent from last year, due to a 2315 percent increase in price and 6a 2 percent ~~volume growth.~~increase in volume. Despite higher selling prices, EBIT ~~improved~~for the quarter declined due to an increase in raw material costs and a decline in equity earnings from last ~~year, reflecting improved margins.~~year. Equity earnings in the third quarter of 2004 included the Company’s share of a gain on the sale of Nippon Unicar Company Limited’s silicon business.

For the first ~~six~~nine months of 2005, sales for the ~~year,~~ Performance Plastics ~~sales were $5,528 million, up 24~~segment increased 23 percent from ~~$4,458~~$6,875 million in ~~the same period last year, reflecting~~2004 to $8,467 million in 2005. The increase was due to a 2522 percent increase in prices and a 1 percent ~~decline~~increase in ~~volume due to the sale of the DERAKANE™ business.~~volume. Year to date, EBIT for the segment was ~~$914~~$1,494 million, up significantly from ~~$459~~$697 million in ~~the first half of~~ 2004, as higher selling prices and ~~improved~~higher equity earnings more than offset increased raw material costs ~~lower volume~~ and lower operating rates. In 2004, EBIT for the segment was negatively impacted by the first quarter write-down of the net book value of the ~~Company's~~Company’s polyols production facility in Priolo, Italy ($22 million), following ~~Dow's~~Dow’s decision to close the facility (see Note F to the Consolidated Financial Statements).
PERFORMANCE CHEMICALS

Performance Chemicals sales were ~~$1,938~~$1,906 million in the ~~second~~third quarter of 2005, up 1913 percent from ~~$1,624~~$1,694 million in the ~~second~~third quarter of 2004. Compared with last year, prices rose 2317 percent, while volume declined 4 percent. EBIT for the ~~second~~third quarter was ~~$343~~$298 million, up from ~~$113~~$162 million in the ~~second~~third quarter of 2004. Compared with the ~~second~~third quarter of ~~2004,~~last year, EBIT improved as higher selling prices and higher equity earnings more than offset higher raw material costs, a decline in volume and lower operating rates and lower equity earnings. EBIT in the second quarter of 2004 was reduced 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 Specialty Polymers business; and an $8 million write-off of a latex manufacturing facility, which was shut down in the second quarter of 2004 (see Notes F and G to the Consolidated Financial Statements). Excluding these asset impairments, EBIT increased $141 million from the second quarter of 2004.rates.

Acrylics and Oxide Derivatives sales for the quarter were up 3312 percent from the ~~second~~third quarter of 2004, reflecting a 4025 percent increase in prices and a 713 percent decline in volume, principally due ~~principally~~ to ~~customer inventory de-stocking in~~softer industry demand and the ~~current quarter.~~impact of the hurricanes on plant operations. Prices increased due to ~~tight supply/demand balances across most product lines and~~ rising raw material costs. Compared with last year, EBIT improved significantly as higher selling prices and higher equity earnings from OPTIMAL overcame an increase in raw material costs, ~~the~~a decline in volume and lower ~~equity earnings from OPTIMAL.~~operating rates.

Dow Latex sales for the quarter were up 2716 percent compared with the ~~second~~third quarter of 2004, as prices rose 3118 percent and volume declined 42 percent. Prices for styrene-butadiene latex sold into the coated paper and carpet industries ~~were up in most geographic areas,~~continued to rise, driven by increased ~~styrene~~butadiene monomer costs. ~~Volume declined~~While volume of acrylic latexes sold to key paint manufacturers in North America improved, it was offset by a decline in volume for styrene-butadiene latex ~~sold into the paper industry, driven by a 7-week strike~~due to weak demand within the paper ~~industry in Finland. Volume improved for the UCAR™ Emulsion Systems business with higher sales to key paint manufacturers.~~industry. EBIT improved significantly from last year as higher selling prices helped to restore margins. ~~In the second quarter of last year, EBIT was reduced by an $8 million write-off of a latex manufacturing facility.~~

Specialty Chemicals sales were up 1311 percent compared with the ~~second~~third quarter of 2004, due to a 1410 percent increase in prices and a 1 percent ~~decline~~increase in volume, as the business sought to maximize margins through price/volume management. Price increases were driven by a tight industry supply/demand balance and higher propylene- and ethylene-based raw material costs. EBIT was up from last year as higher selling prices and higher equity earnings from OPTIMAL more than offset higher raw material ~~costs and lower equity earnings from OPTIMAL.~~costs.

Specialty Polymers sales inwere up 6 percent compared with the ~~second~~third quarter of ~~2005 were up~~2004, due to a 4 percent increase in volume and a 2 percent ~~from the same quarter last year, as prices rose 3 percent, including the favorable impact of currency~~increase in ~~Europe, and volume declined 1 percent.~~prices. While volume was strong in Latin America, ~~and North America, volume declined in~~ Europe and Asia Pacific, ~~due to~~volume declined in North America, affected by two U.S. Gulf Coast hurricanes and a decline in demand for certain products used for building materials and paint applications. ~~Sales were~~Volume was strong in the ~~second~~third quarter of 2005 for ~~FILMTEC™~~FILMTEC^TM membranes, METHOCEL^TM cellulose ethers, POLYOX^TM water soluble resins and hair/skin care products from Amerchol Corporation. InAs a result of the ~~second quarter of~~increases in both volume and price, EBIT improved from last year, EBIT was reduced $21 million by the partial write-down of a Hampshire Chemical business (see Notes F and G to the Consolidated Financial Statements). Excluding this 2004 write-down, EBIT declined due to higher raw material costs, lower operating rates and higher operating expenses.year.

25

Performance Chemicals sales were ~~$3,910~~$5,816 million for the first ~~six~~nine months of the year, up 2219 percent from ~~$3,200~~$4,894 million in the same period last year, reflecting a 2421 percent increase in prices and a 2 percent decline in volume. EBIT for the first ~~six~~nine months of 2005 was ~~$737~~$1,035 million, compared with ~~$255~~$417 million for the same period of 2004. EBIT improved significantly in 2004. In addition to the previously mentioned asset impairments of $89 million recorded in the second quarter of 2004, year-to-date EBIT for 2004 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 (see Notes F and G to the Consolidated Financial Statements for additional information). Excluding these charges, year-to-date EBIT for 2005 ~~improved over 2004~~ as higher selling prices more than offset the impact of increased feedstock costs, lower volume and operating rates, and a decline in equity earnings. In 2004, EBIT was negatively impacted by charges of $111 million for asset impairments as follows: a $60 million write-down of the Company’s contract manufacturing plant in Smithfield, Rhode Island, resulting from the pending sale or shutdown of the site; a $21 million partial write-down of a Specialty Polymers business; an $8 million write-off of a latex manufacturing facility, which was shut down in the second quarter of 2004; and $22 million related to the shutdown of Hampshire Chemical’s Nashua, New Hampshire, manufacturing site. See Notes F and G to the Consolidated Financial Statements for additional information regarding the 2004 asset impairments.
AGRICULTURAL SCIENCES
~~While second~~
Sales in the third quarter ~~sales~~ of ~~$1,031 million~~2005 for the Agricultural Sciences segment were ~~up only slightly~~$615 million, down 6 percent from ~~$1,029~~$657 million in the ~~second~~third quarter of 2004. Compared with last year, volume decreased 8 percent while prices rose 2 percent. While volume improved for seeds in the ~~increase represented a new quarterly record~~third quarter of 2005, especially for ~~sales. Prices rose 4 percent, with approximately half~~sunflower seed in Argentina and the United States due to increased demand for heart-healthy oils, volume declined in many of the ~~increase~~business’ agricultural chemicals. In the United States, sales were reduced due to ~~the favorable impact~~lack of ~~currency~~soybean rust infestation. Volumes in ~~Europe, while volume~~Brazil declined ~~4 percent,~~ due ~~in part~~ to lower soybean herbicide sales ~~in Brazil~~ and ~~Canada. Second quarter sales~~challenging economic conditions. Insecticide volumes were ~~also~~ impacted by ~~dry weather conditions~~lack of insect pressure and competing technologies in ~~Europe~~Pakistan and ~~North America, which restricted the normal seasonal demand for herbicide products. Nevertheless, the business reported the successful introduction~~India. Partially offsetting these declines, sales of ~~its penoxsulam rice herbicide~~chlorpyrifos insecticides in the United States ~~Asia Pacific~~improved due to a mite and ~~Europe, and the continued growth of new formulations of existing herbicides, particularly related to small grain applications.~~aphid outbreak on soybeans. EBIT for the ~~second~~third quarter of 2005 was ~~$238~~a loss of $28 million, ~~down from~~compared with a gain of $43 million for the ~~quarterly record of $271 million set in the second~~third quarter of 2004. Compared with last ~~year.~~year, EBIT declined due to lower volume, lower operating rates, and increased spending for new product launches including penoxulam herbicide, aminopyralid insecticide and ~~higher operating expenses.~~WIDESTRIKE^TM cotton traits.

For the first ~~six~~nine months of 2005, Agricultural Sciences sales were ~~$2,020~~$2,635 million, up 31 percent from ~~$1,953~~$2,610 million in ~~2004, due to price increases, primarily reflecting the favorable impact of currency in Europe.~~2004. Compared with the first ~~half~~nine months of 2004, prices increased 4 percent while volume ~~was flat.~~declined 3 percent. Year-to-date EBIT for 2005 was ~~$497~~$469 million, down ~~slightly~~ from ~~$502~~$545 million ~~last year.~~in the first nine months of 2004.
PLASTICS

Plastics sales for the ~~second~~third quarter of 2005 were ~~$2,774~~$2,900 million, up 1911 percent from ~~$2,325~~$2,608 million a year ago, as prices increased 229 percent and volume ~~declined 3~~grew 2 percent. ~~Double-digit~~Price increases ~~in selling prices~~ were reported in all geographic areas, driven by increases in feedstock and energy costs, with the most significant increases occurring in the United States. During the third quarter of 2005, Dow’s U.S. Gulf Coast manufacturing facilities were temporarily shutdown due to two hurricanes. Compared with the third quarter of last year, volume grew in all geographic areas except North America, where volume declined 4 percent due to the hurricanes. EBIT for the third quarter of 2005 was $420 million, down from $428 million for the same period last year. Despite the increase in selling prices, EBIT declined versus the third quarter of last year due to significantly higher feedstock and energy costs and the unfavorable impact of lower operating rates.
Polyethylene sales were up significantly from the third quarter of 2004, as prices increased 12 percent and volume increased 4 percent. Double-digit price increases were recorded in North America, driven by escalating feedstock and energy costs. Compared with the same period last year, prices rose in all other geographic areas as well. Volume in North America declined slightly during the quarter as a result of the hurricanes, while solid volume growth was recorded in Asia Pacific, Europe and Latin America. Compared with last year, EBIT for the third quarter improved slightly as increased selling prices roughly offset feedstock and energy costs for the business.
Polypropylene sales were up 2 percent over the third quarter of 2004, due to a 7 percent increase in prices, substantially offset by a 5 percent decline in volume. Price increases, which reflected the impact of higher feedstock and energy costs, were recorded in all geographic areas, except Asia Pacific, compared with the third quarter of 2004. Volume declined significantly in North America due to the hurricane-related shutdown of Dow’s polypropylene facilities along the U.S. Gulf Coast. The polypropylene plant at St. Charles Operations in Louisiana was down for approximately one month, resulting in a declaration of force majeure for this location. Compared with last year, EBIT for the third quarter of 2005 declined as the higher selling prices were more than offset by higher feedstock and energy costs and hurricane-related production outages.
26

Polystyrene sales for the third quarter of 2005 were up 5 percent, as prices increased 1 percent and volume increased 4 percent. Strong improvement in price was recorded in North America as the business increased prices in response to higher energy costs and limited styrene monomer availability due to the hurricanes. In Europe and Asia Pacific, prices were down from the third quarter of 2004, due to significantly lower styrene monomer costs. While volume was down in North America as a result of the hurricanes, demand in Europe and Asia Pacific improved significantly over 2004, resulting in improved volume overall. Despite lower styrene monomer costs, EBIT for the third quarter of 2005 was relatively flat, primarily due to hurricane-related costs. During the third quarter of 2005, operating rates declined and the business declared force majeure due to the limited availability of styrene monomer.
Plastics sales for the first nine months of 2005 were $8,682 million, up 21 percent from $7,167 million in the first nine months of 2004. Compared with 2004, prices were up 22 percent, while volume declined 1 percent. Compared with last year, volume declined in Europe due to the mid-2004 formation of Equipolymers, a 50:50 joint venture with PIC. Beginning July 1, 2004, sales of purified terephthalic acid ~~("PTA"~~(“PTA”) and polyethylene terephthalate ~~("PET"~~(“PET”) resins are reflected in the operating results of that joint venture. Excluding the impact of this divestiture, year-to-date volume was ~~flat compared with~~up 1 percent from the ~~second quarter~~first nine months of 2004. In April 2005, volume declined as customers reduced inventories with the expectation that a decline in feedstock and energy costs early in the quarter would lead to price reductions. With the reversal of the downward trend in feedstock and energy costs in May, and with a strong focus on price/volume management by Dow's businesses, volume improved and prices stabilized by the end of the second quarter of 2005.
EBIT for the ~~second quarter~~first nine months of 2005 was ~~$575~~$1,795 million, up significantly from ~~$399~~$1,134 million in the ~~second quarter~~first nine months of 2004. Compared with the first nine months of last year, EBIT improved as ~~the impact of~~ higher selling prices and ~~increased~~improved equity earnings from Siam Polyethylene Company Limited and EQUATE more than offset the ~~rise~~increase in feedstock and energy costs. In addition, ~~results for the second quarter~~EBIT in first nine months of 2005 included a gain of $29 million associated with the sale of EQUATE shares, as previously described in Results of Operations, and a gain of $31 million associated with the divestiture of ~~Dow's~~Dow’s interest in ~~DuPont Dow Elastomers ("DDE"), the Company's 50:50 joint venture with E. I. du Pont de Nemours and Company,~~DDE and the acquisition of certain DDE assets. On January 3, 2005, the Company announced it had exercised its option to acquire certain assets (ethylene and chlorinated elastomers, including ~~ENGAGE™~~ENGAGE^TM, ~~NORDEL™~~NORDEL^TM and ~~TYRIN™~~TYRIN^TM elastomers) from DDE. The transaction was completed during the second quarter of 2005. ~~Going forward, the impact to the Plastics segment is expected to be~~

~~immaterial.~~ See Note H to the Consolidated Financial Statements for information regarding the transaction. ~~Results for~~EBIT in the ~~second quarter~~first nine months of 2004 included a gain of $124 million ~~associated with~~on the ~~divestiture~~sale of ~~assets~~the PET/PTA business in conjunction with the formation of Equipolymers.
Polyethylene sales were up significantly from the second quarter of 2004, as prices increased 22 percent and volume increased 2 percent. Double-digit price increases were recorded in all geographic areas, reflecting the impact of higher feedstock and energy costs. Volume in the second quarter of 2005 improved in Europe and Asia Pacific. Volume was down in North America and Latin America as customers reduced inventories. Despite higher feedstock and other raw material costs, EBIT for the quarter improved significantly from the second quarter of 2004 due to higher selling prices and improved equity earnings from EQUATE and Siam Polyethylene Company Limited.
        Polypropylene sales were up 20 percent over the second quarter of 2004 as prices increased 21 percent and volume declined 1 percent. Price increases reflected the impact of higher feedstock and energy costs. Volume declined as customers reduced inventories, anticipating that declining propylene costs would lead to lower prices. Volume began to recover in the second half of the quarter. EBIT improved versus the same quarter last year as higher selling prices offset the impact of increases in feedstock and energy costs.
        Polystyrene sales for the second quarter of 2005 were up 28 percent compared with second quarter last year, as prices rose 29 percent and volume declined 1 percent. Strong improvement in price was reported in all geographic areas as the business raised prices in response to higher feedstock costs. Modest volume improvement was seen in all geographic areas except North America. EBIT for the second quarter improved significantly from the second quarter of 2004, as higher prices more than offset the impact of higher feedstock and energy costs.
        Plastics sales for the first half of 2005 were $5,782 million, up 27 percent from $4,559 million in the first half of 2004, with prices up 29 percent and volume down 2 percent. EBIT for the first half of 2005 was $1,375 million, up significantly from $706 million in the first half of 2004 as higher selling prices and improved equity earnings more than offset the impact of higher feedstock costs and the $124 million gain recognized in 2004 on the sale of the PET/PTA business. EBIT in the first half of 2005 also included a gain of $29 million associated with the sale of EQUATE shares, as previously described in Results of Operations.
CHEMICALS
~~Second~~
Third quarter sales for the Chemicals segment were ~~$1,355~~$1,297 million, down 13 percent from ~~$1,370~~$1,340 million for the third quarter of last year as a 9 percent increase in prices was more than offset by a 12 percent decline in volume. Compared with last year, the improvement in price was driven by increases in caustic soda as supply remained tight and was further restricted by two hurricanes that affected production in the U.S. Gulf Coast late in the third quarter of 2005. The decline in sales volume was primarily due to plant outages caused by the hurricanes, with ethylene oxide and ethylene glycol most significantly impacted. EBIT for the segment was $168 million in the ~~second~~third quarter of ~~2004,~~2005, down from $292 million in the same period of last year. Compared with the same period last year, EBIT in the third quarter of 2005 declined as price increases did not keep pace with sharp increases in feedstock and energy costs, resulting in a decline in margin compared with the third quarter of 2004. In addition, equity earnings from EQUATE were lower than last year due to an unplanned outage at the joint venture’s ethylene glycol facility in the third quarter of 2005.
For the first nine months of 2005, sales for the Chemicals segment were $4,126 million, up 4 percent from $3,986 million last year, as prices ~~increased 18~~rose 19 percent and volume declined 1915 percent. ~~Prices were especially strong for caustic soda due to a continued tightening of supply as the industry continued to operate close to effective capacity.~~ Compared with the ~~second quarter~~first nine months of last year, volume declined primarily due to the mid-2004 formation of MEGlobal, a 50:50 joint venture with ~~PIC of Kuwait.~~PIC. Since July 1, 2004, certain sales of ethylene glycol ~~("EG")~~ are sold by that joint venture, rather than by Dow. Excluding these sales, year-to-date volume for 2005 for the Chemicals segment declined 35 percent compared with the ~~second quarter~~same period of 2004. Volume was down for vinyl chloride monomer, due to lower demand for polyvinyl chloride within the housing industry, as customers reduced inventories, and EG, due to reduced availability resulting from planned maintenance turnarounds. EBIT for the segment was $267 million in the second quarter of 2005, down from $726 million in the second quarter of last year. Last year, EBIT included a gain of $439 million associated with the divestiture of assets in conjunction with the formation of MEGlobal. In addition, second quarter equity earnings from OPTIMAL and EQUATE were lower than last year, due to unplanned outages at both joint ventures in the second quarter of 2005.
        For the first half of 2005, sales for the Chemicals segment were $2,829 million, up 7 percent from $2,646 million last year, as prices increased 24 percent and volume declined 17 percent. Excluding the decline in volume related to the formation of MEGlobal, volume for the Chemicals segment declined 1 percent. EBIT for the first ~~six~~nine months of 2005 was ~~$695~~$863 million, down from ~~$899~~$1,191 million infor the ~~same period last year. Excluding the $439 million gain last year on the sale~~first nine months of ~~assets related to the formation of MEGlobal,~~2004. EBIT ~~improved as higher selling prices more than offset the impact of higher feedstock and energy costs, lower operating rates and lower equity earnings. In addition, year-to-date results~~ for 2005 included a gain of $41 million associated with the sale of EQUATE shares, as previously described in Results of Operations. EBIT for 2004 included a gain of $439 million associated with the divestiture of assets in conjunction with the formation of MEGlobal. Excluding these gains, year-to-date EBIT for 2005 improved from 2004 as higher selling prices more than offset the impact of higher feedstock and energy costs, lower volume and operating rates, and lower equity earnings. Equity earnings from OPTIMAL and EQUATE were lower than last year, due to unplanned outages at both joint ventures in 2005.
27

HYDROCARBONS AND ENERGY

Hydrocarbons and Energy sales for the ~~second~~third quarter of 2005 were ~~$1,468~~$1,541 million, up 3019 percent from ~~$1,127~~$1,294 million in the ~~second~~third quarter of 2004, as selling prices rose 2312 percent and volume grew 7 percent. The significant increase in selling prices was driven by ~~higher~~the continued rise in feedstock costs, which were influenced in the third quarter of 2005 by two hurricanes in the U.S. Gulf Coast. While the storms caused minimal property damage to Dow’s facilities, the disruption of oil and ~~strong demand for refined products~~gas production in the Gulf of Mexico and ~~hydrocarbon monomers. Volume was up compared~~the closure of regional shipping ports resulted in a further tightening of ethylene and propylene market conditions and significant increases in feedstock and energy costs. Compared with the ~~second~~third quarter of last year, volume was up due to higher refined product sales ~~related to improved~~

~~operations at the supplying refinery, as well as~~and an increase in sales of ethylene due to the formation of MEGlobal. For the first ~~half~~nine months of 2005, sales for the Hydrocarbons and Energy segment were ~~$2,902~~$4,443 million, up 3328 percent from ~~$2,186~~$3,480 million last year, due to a 2725 percent increase in selling prices and volume growth of 63 percent.

The Hydrocarbons and Energy business transfers materials to ~~Dow's~~Dow’s derivative businesses at ~~cost.~~cost; therefore, EBIT for ~~Hydrocarbons and Energy for~~ the ~~second~~third quarter of 2005 and for the same period last year was $0. Year to date, EBIT for 2005 was $0, compared with a loss of $1 million for the same period of 2004.
UNALLOCATED AND OTHER

Included in the results for Unallocated and Other are:
•
results of insurance operations,

•
~~Dow's~~Dow’s share of the earnings/losses of Dow Corning,

•
gains and losses on sales of financial assets,

•
expenses related to Dow Ventures,

•
asbestos-related defense and resolution costs,

•
foreign exchange hedging results, and

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

EBIT for the ~~second~~third quarter of 2005 was a loss of ~~$95~~$164 million compared with a loss of ~~$616~~$129 million for the ~~second~~third quarter of 2004. Results for the ~~second~~third quarter of 2005 ~~reflected~~included performance-based stock compensation expense of $36 million ($12 million in the third quarter of 2004), asbestos-related defense and resolution costs (net of insurance) of $24 million ($19 million in the third quarter of 2004), and severance costs of $14 million (no severance was recorded in the third quarter of 2004).
EBIT for the first nine months of 2005 was a loss of $579 million compared with a loss of $917 million for the same period last year. Results for the first nine months of 2005 included an improvement in equity earnings compared with the ~~second quarter of~~same period last year (due to improved results from Dow Corning and the absence of equity losses from Cargill Dow), ~~partially offset by~~performance-based stock compensation expense of $241 million, asbestos-related defense and resolution costs (net of insurance) of $56 million, and a loss of $31 million associated with the early extinguishment of ~~$845 million of~~ debt. InResults for the ~~second quarter~~first nine months of 2004 ~~EBIT was negatively impacted by the following items:~~included employee-related restructuring charges, including severance of $225 million and curtailment costs of $71 million associated with ~~Dow's~~Dow’s defined benefit plans; 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 (sold in the third quarter of 2004). See Note C to the Consolidated Financial Statements for additional information regarding these restructuring charges.
        EBIT for the first six months of 2005 was a loss of $415 million compared with a loss of $788 million for the same period last year. Compared with last year, year-to-date results for 2005 were reduced by higher performance-based stock compensation expense of approximately $170 million and higher expense of approximately $20 million related to the allowance for doubtful receivables. In addition to the restructuring charges, ~~recorded in the second quarter of 2004, described in the preceding paragraph,~~ year-to-date results for 2004 were reduced by asbestos-related defense and resolution costs (net of insurance) of $92 million, performance-based stock compensation expense of $42 million, and losses on the sale of assets of $36 million. ~~Asbestos-related defense and resolution costs were $32 million in the first six months of 2005, compared with $73 million in the same period last year.~~
28

Sales Volume and Price by Operating Segment and Geographic Area

Three Months Ended
June 30, 2005
Six Months Ended
June 30, 2005

Percentage change from prior year

Volume
Price
Total
Volume
Price
Total

Operating segments
Performance Plastics (2 )% 24 % 22 % (1 )% 25 % 24 %
Performance Chemicals (4 ) 23 19 (2 ) 24 22
Agricultural Sciences (4 ) 4 — — 3 3
Plastics (3 ) 22 19 (2 ) 29 27
Chemicals (19 ) 18 (1 ) (17 ) 24 7
Hydrocarbons and Energy 7 23 30 6 27 33

Total (4 )% 20 % 16 % (3 )% 24 % 21 %

Geographic area sales
United States (2 )% 18 % 16 % — 21 % 21 %
Europe (2 ) 23 21 (1 )% 26 25
Rest of World (10 ) 21 11 (8 ) 23 15

Total (4 )% 20 % 16 % (3 )% 24 % 21 %

Three Months Ended
Sept. 30, 2005

Nine Months Ended
Sept. 30, 2005

Percentage change from prior year

Volume

Price

Total

Volume

Price

Total

Operating segments

Performance Plastics

5
%
17
%
22
%
1
%
22
%
23
%
Performance Chemicals

(4
)
17

13

(2
)
21

19

Agricultural Sciences

(8
)
2

(6
)
(3
)
4

1

Plastics

2

9

11

(1
)
22

21

Chemicals

(12
)
9

(3
)
(15
)
19

4

Hydrocarbons and Energy

7

12

19

3

25

28

Total

—

12
%
12
%
(2
)%
20
%
18
%
Geographic area sales

United States

(5
)%
14
%
9
%
(2
)%
19
%
17
%
Europe

8

9

17

1

21

22

Rest of World

(4
)
13

9

(7
)
20

13

Total

—

12
%
12
%
(2
)%
20
%
18
%
OUTLOOK

The outlook for the chemical industry remains positive for the fourth quarter, with an expectation of ~~higher~~solid demand, driven by continued global GDP growth. ~~With limited supply growth, industry~~In the near term, supply/demand balances ~~should continue~~for some chemical industry products are expected to ~~improve.~~be very tight due to constrained industry production following the hurricanes on the U.S. Gulf Coast and other outages. Continued volatility in feedstock and energy costs ~~however,~~ adds uncertainty to the industry profit outlook. While there is some risk that sustained high energy costs may dampen economic growth in the United States, that risk is moderated by the fact that the overall U.S. economy is less energy intensive than it ~~was~~has been in the past.
~~Price~~
Going forward, price momentum is favorable, with significant increases announced in many Dow businesses for the fourth quarter. Demand for Dow ~~moving into~~products is expected to be roughly the same as in the third quarter, with improvements in some businesses offsetting seasonal declines in others, primarily those related to the building and ~~Dow expects~~construction industry and those with significant exposure to ~~see good demand growth from second quarter levels in many businesses, as the inventory correction, which lasted longer than expected, appears to have run its course. As usual,~~pre-holiday demand in China, as that demand typically slows down late in the year. Lingering effects of the hurricanes on logistics and certain raw material supplies may have a negative impact on volume and cost for some Dow ~~AgroSciences~~products, but the impact is expected to ~~decline in the second half of 2005, versus the first half of the year, due to normal seasonal patterns. Other businesses are also expected to show seasonal variations. Dow's purchased~~be relatively minor. Purchased feedstock and energy costs are expected to remain highly ~~volatile and~~volatile; therefore, Dow’s costs are expected to increase significantly compared with the ~~second quarter, and forward~~third quarter. Forward prices for oil and gas indicate that Dow’s purchased feedstock and energy costs ~~may~~could rise ~~even further~~by more than twice the approximately $400 million increase that it experienced during the third quarter. The impact of announced price increases in the fourth ~~quarter.~~quarter should allow Dow to cover these higher purchased feedstock and energy costs, resulting in stable or improved margins for the Company as a whole compared with the third quarter, although the extent of margin recovery will vary from business to business.

Dow will continue to focus on ~~cost control~~financial discipline and margin management to restore margins to reinvestment levels across ~~the Company's~~its business portfolio. Given continued macroeconomic growth, Dow continues to expect volume growth for the full year to be between 2 and 5 percent, although, given the extent of the recent inventory correction, growth is likely to be closer to the low end of this range. DowThe Company expects to continue to see year-over-year earnings improvements through 2005, and expects ~~that~~ 2006 ~~will~~to show further earnings growth.
29

CHANGES IN FINANCIAL CONDITION

The ~~Company's~~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:
~~Cash Flow Summary~~

Six Months Ended

Cash Flow Summary

Nine Months Ended

In millions
In millions
June 30,
2005
June 30,
2004

Sept. 30,
2005

Sept. 30,
2004

Cash provided by (used in): Cash provided by (used in):

Operating activities $ 2,442 $ 719
Investing activities (855 ) 81
Financing activities (1,304 ) (894 )
Effect of exchange rate changes on cash (229 ) (4 )

Operating activities

$
3,543

$
1,548

Investing activities

(1,198
)
(225
)
Financing activities

(2,092
)
(1,308
)
Effect of exchange rate changes on cash

(182
)
(5
)
Net change in cash and cash equivalents Net change in cash and cash equivalents $ 54 $ (98 )

$
71

$
10

Due to improved earnings year over year, cash provided by operating activities increased significantly in the first ~~six~~nine months of 2005 ~~versus~~compared with the same period last year, despite an increase in working capital requirements and contributions of ~~$436~~$634 million to the ~~Company's~~Company’s pension plans (see Note I to the Consolidated Financial Statements).

Cash used in investing activities in the first ~~six~~nine months of 2005 increased ~~versus~~compared with the same period last year ~~primarily~~ due to ~~increases in~~increased capital expenditures, investments in consolidated companies (including $98 million for the remaining 28 percent of PBBPolisur) and investments in nonconsolidated affiliates (including $170 million paid to Cargill ~~Dow,~~Dow; see Note C to the Consolidated Financial Statements). In the first ~~six~~nine months of 2004, cash ~~provided~~used by investing activities included proceeds of $845 million related to the divestiture of assets in conjunction with the formation of MEGlobal and Equipolymers. These proceeds were partially offset by the use of cash to acquire the acrylates business of Celanese ~~AG.~~AG and capital expenditures.
~~During the second quarter of 2005, the Company significantly reduced debt levels, including the early extinguishment of $845 million of debt.~~
Cash used in financing activities in the first ~~six~~nine months of 2005 ~~of $1,304 million~~ increased compared with the same period last year principally due to a reduction in debt levels, including the early extinguishment of $923 million of debt through the third quarter of 2005. In the first nine months of 2004, cash used in financing activities included proceeds of $621 million from the issuance of long-term ~~debt compared with the same period last year.~~debt.

The following tables present working capital, total debt and certain balance sheet ratios at ~~June~~September 30, 2005 and December 31, 2004:
Working Capital

In millions
June 30,
2005
Dec. 31,
2004
Current assets $ 16,073 $ 15,890
Current liabilities 9,566 10,506

Working capital $ 6,507 $ 5,384

Current ratio 1.68:1 1.51:1
Days-sales-outstanding-in-receivables 41 40
Days-sales-in-inventory 60 57

Total Debt

In millions
June 30,
2005
Dec. 31,
2004

Notes payable $ 133 $ 104
Long-term debt due within one year 1,235 861
Long-term debt 10,023 11,629

Gross debt $ 11,391 $ 12,594

Cash and cash equivalents $ 3,162 $ 3,108
Marketable securities and interest-bearing deposits 39 84

Net debt $ 8,190 $ 9,402

Gross debt as a percent of total capitalization 42.6 % 47.9 %
Net debt as a percent of total capitalization 34.8 % 40.7 %

Working Capital
In millions

Sept. 30,
2005

Dec. 31,
2004

Current assets

$
16,850

$
15,890

Current liabilities

9,728

10,506

Working capital

$
7,122

$
5,384

Current ratio

1.73:1

1.51:1

Days-sales-outstanding-in-receivables

39

40

Days-sales-in-inventory

64

57

Total Debt
In millions

Sept. 30,
2005

Dec. 31,
2004

Notes payable

$
203

$
104

Long-term debt due within one year

719

861

Long-term debt

9,969

11,629

Gross debt

$
10,891

$
12,594

Cash and cash equivalents

$
3,179

$
3,108

Marketable securities and interest-bearing deposits

31

84

Net debt

$
7,681

$
9,402

Gross debt as a percent of total capitalization

40.5
%
47.9
%
Net debt as a percent of total capitalization

32.4
%
40.7
%
30

As part of its ongoing financing activities, Dow has the ability to issue promissory notes under its U.S. and Euromarket commercial paper programs. At ~~June~~September 30, 2005, there were no commercial paper borrowings outstanding. In the event Dow has short term liquidity needs and is unable to access these short-term markets ~~due to a systemic disruption or other extraordinary events,~~for any reason, 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 2006, and a $1.75 billion 5-year revolving credit facility, which matures in April 2009.

At ~~June~~September 30, 2005, 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~~Company’s Euro Medium Term Note Program.

On July 14, 2005, the Board of Directors authorized the repurchase of up to 25 million shares of Dow common stock over the period ending on December 31, 2007. During the third quarter of 2005, the Company purchased 303,200 shares of the Company’s common stock under this program. See PART II, Item 2. Unregistered Sales of Equity Securities and Use of Proceeds for additional information.
Contractual Obligations

Information related to the ~~Company's~~Company’s contractual obligations and commercial commitments at December 31, 2004 can be found in Notes K, L, M, N and T to the Consolidated Financial Statements in the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, 2004. With the exception of the items included in the following tables, there have been no material changes in the ~~Company's~~Company’s contractual obligations or commercial commitments since December 31, 2004.
Contractual Obligations at September 30, 2005

Payments Due by Year

In millions

2005

2006

2007

2008

2009

2010 and beyond

Total

Long-term debt – current and noncurrent (1)

$
104

$
1,354

$
1,273

$
576

$
783

$
6,598

$
10,688

Pension and other postretirement benefits (2)

165

358

366

460

537

1,749

3,635

Expected cash requirements for interest (1)

120

625

563

494

462

5,042

7,306

~~Contractual Obligations at June 30, 2005~~(1)

Payments Due by Year

In millions
2005
2006
2007
2008
2009
2010 and
beyond
Total
Long-term debt—current and noncurrent(1) $ 671 $ 1,363 $ 1,276 $ 576 $ 783 $ 6,589 $ 11,258
Pension and other postretirement benefits(2) 392 358 366 460 537 1,674 3,787
Expected cash requirements for interest(1) 326 630 565 495 463 4,994 7,473
~~(1)~~
Updated to reflect the early extinguishment of ~~$845~~$923 million of debt inthrough the ~~second~~third quarter of 2005.

(2)
Updated to reflect the ~~Company's~~Company’s revised estimate regarding its contributions to ~~Dow's~~Dow’s pension plans in 2005 (see Note I to the Consolidated Financial Statements).

~~Contractual Obligations at December 31, 2004~~

Payments Due by Year

In millions
2005
2006
2007
2008
2009
2010 and
beyond
Total
Long-term debt—current and noncurrent $ 861 $ 1,480 $ 1,362 $ 587 $ 1,300 $ 6,900 $ 12,490
Pension and other postretirement benefits 383 440 566 680 537 1,541 4,147
Expected cash requirements for interest 735 699 634 566 521 5,306 8,461

Contractual Obligations at December 31, 2004

Payments Due by Year

In millions

2005

2006

2007

2008

2009

2010 and beyond

Total

Long-term debt – current and noncurrent

$
861

$
1,480

$
1,362

$
587

$
1,300

$
6,900

$
12,490

Pension and other postretirement benefits

383

440

566

680

537

1,541

4,147

Expected cash requirements for interest

735

699

634

566

521

5,306

8,461

The Company also had outstanding guarantees at ~~June~~September 30, 2005. Additional information related to these guarantees can be found in the ~~"Guarantees"~~“Guarantees” table provided in Note H to the Consolidated Financial Statements.
Dividends

On ~~July 29,~~October 28, 2005, the Company paid a quarterly dividend of $0.335 per share to stockholders of record on ~~June~~September 30, 2005. Since 1912, the Company has paid a cash dividend every quarter and, in each instance, Dow has maintained or increased the amount of the dividend, adjusted for stock splits. During that 93-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.
Subsequent Event
On October 3, 2005, the Company announced that Union Carbide Corporation had agreed on September 30, 2005, to the sale of its indirect 50 percent interest in UOP LLC (“UOP”) to Honeywell Specialty Materials LLC (which currently owns the remaining 50 percent interest in UOP) for a purchase price of $825 million plus or minus 50 percent of UOP’s net cash at closing. The transaction, which is subject to regulatory review, is expected to be completed in the fourth quarter of 2005 and result in the recording of a gain.
31

OTHER MATTERS
Accounting Changes

See Note B to the Consolidated Financial Statements for a discussion of accounting changes and recently issued accounting pronouncements.
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"~~(“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~~Company’s Annual Report on Form 10-K for the year ended December 31, 2004 ("(“2004 ~~10-K"~~10-K”) describes the significant accounting policies and methods used in the preparation of the consolidated financial statements. ~~Dow's~~Dow’s critical accounting policies that are impacted by judgment, assumptions and estimates are described in ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations in the ~~Company's~~Company’s 2004 10-K. Since December 31, 2004, there have been no material changes in the ~~Company's~~Company’s critical accounting policies.
Asbestos-Related Matters of Union Carbide Corporation

The following disclosure should be read in conjunction with the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
Introduction

Union Carbide Corporation ("(“Union ~~Carbide"~~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~~Carbide’s premises, and Union ~~Carbide's~~Carbide’s responsibility for asbestos suits filed against a former Union Carbide subsidiary, Amchem Products, Inc. ~~("Amchem"~~(“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~~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. Since then, the rate of filing has significantly abated. 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 for the ~~six~~nine months ended ~~June~~September 30, 2005 and 2004:

2005
2004

Claims unresolved at January 1 203,416 193,891
Claims filed 20,456 34,013
Claims settled, dismissed or otherwise resolved (25,402 ) (24,389 )

Claims unresolved at June 30 198,470 203,515
Claimants with claims against both Union Carbide and Amchem 64,682 69,647

Individual claimants at June 30 133,788 133,868

~~Plaintiffs'~~

2005

2004

Claims unresolved at January 1

203,416

193,891

Claims filed

27,715

45,324

Claims settled, dismissed or otherwise resolved

(51,928
)
(37,110
)
Claims unresolved at September 30

179,203

202,105

Claimants with claims against both Union Carbide and Amchem

61,524

72,302

Individual claimants at September 30

117,679

129,803

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, those damages are not expressly identified as to Union Carbide, Amchem or any other particular defendant, even when specific damages are alleged with respect to a specific disease or injury. In fact, there are no personal injury cases in which only Union Carbide and/or Amchem are the sole named defendants. For these reasons and based upon Union ~~Carbide's~~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.
32

Estimating the Liability

Based on a study completed by Analysis, Research & Planning Corporation ~~("ARPC"~~(“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 resolution costs. 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 November 2004, Union Carbide requested ARPC to review Union ~~Carbide's~~Carbide’s historical asbestos claim and resolution activity and determine the appropriateness of updating its January 2003 study. In January 2005, ARPC provided Union Carbide with a report summarizing the results of its study. Based on ~~ARPC's~~ARPC’s studies, Union ~~Carbide's~~Carbide’s recent asbestos litigation experience, and the uncertainties surrounding asbestos litigation and legislative reform efforts, Union ~~Carbide's~~Carbide’s management determined that no change to the accrual was required at December 31, 2004.

Based on Union ~~Carbide's~~Carbide’s review of 2005 activity, Union Carbide determined that no change to the accrual was required at ~~June~~September 30, 2005.

Union ~~Carbide's~~Carbide’s asbestos-related liability for pending and future claims was $1.5 billion at ~~June~~September 30, 2005 and $1.6 billion at December 31, 2004. At ~~June~~September 30, 2005, approximately 3936 percent of the recorded liability related to pending claims and approximately 6164 percent related to future claims. At December 31, 2004, approximately 37 percent of the recorded liability related to pending claims and approximately 63 percent related to future claims.
Defense and Resolution Costs

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
Six Months Ended
Aggregate Costs

In millions
June 30,
2005
June 30,
2004
to Date as of
June 30, 2005
Defense costs $ 32 $ 47 $ 376
Resolution costs 98 148 1,024

Defense and Resolution Costs

Nine Months Ended

Aggregate Costs

In millions

Sept. 30,
2005

Sept. 30,
2004

to Date as of
Sept. 30, 2005

Defense costs

$
55

$
66

$
399

Resolution costs

$
122

$
250

$
1,048

The average resolution payment per asbestos claimant and the rate of new claim filings has fluctuated both up and down since the beginning of 2001. Union ~~Carbide's~~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.

Insurance Receivables

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. 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. The Wellington Agreement and other agreements with insurers are designed to facilitate an orderly resolution and collection of Union ~~Carbide's~~Carbide’s insurance policies and to resolve issues that the insurance carriers may raise.

Union ~~Carbide's~~Carbide’s receivable for insurance recoveries related to its asbestos liability was ~~$590~~$550 million at ~~June~~September 30, 2005 and $712 million at December 31, 2004. At ~~June~~September 30, 2005, ~~$453~~$443 million ($543 million at December 31, 2004) of the receivable for insurance recoveries was related to insurers that are not signatories to the Wellington Agreement and/or do not otherwise have agreements in place regarding their asbestos-related insurance coverage.

In addition, 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,
2005
December 31,
2004
Receivables for defense costs $ 91 $ 85
Receivables for resolution costs 368 406

Total $ 459 $ 491

Receivables for Costs Submitted to Insurance Carriers
In millions

Sept. 30,
2005

Dec. 31,
2004

Receivables for defense costs

$
86

$
85

Receivables for resolution costs

333

406

Total

$
419

$
491

33

Union Carbide expenses defense costs as incurred. The pretax impact for defense and resolution costs, net of insurance, was ~~$14~~$24 million in the ~~second~~third quarter of 2005 ($4819 million in the ~~second~~third quarter of 2004) and ~~$32~~$56 million in the first ~~six~~nine months of 2005 ($7392 million in the first ~~six~~nine months of 2004), and was reflected in ~~"Cost~~“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 (the ~~"West~~“West Virginia ~~action"~~action”) and to facilitate an orderly and timely collection of insurance proceeds. 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, in order to facilitate an orderly resolution and collection of such insurance policies and to resolve issues that the insurance carriers may raise. In early 2004, several of the defendant insurers in the West Virginia action filed a competing action in the Supreme Court of the State of New York, County of New York. As a result of motion practice, the West Virginia action was dismissed in August 2004 on the basis offorum non conveniens ~~(i.e.~~(i.e., West Virginia is an inconvenient location for the parties). The comprehensive insurance coverage litigation is now proceeding in the New York courts (the ~~"New~~“New York ~~action"~~action”). Through the ~~second~~third quarter of 2005, Union Carbide reached settlements with several of the carriers involved in the New York action. 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, Union Carbide continues to believe that its recorded receivable for insurance recoveries from all insurance carriers is probable of collection.
Summary

The amounts recorded by Union Carbide for the asbestos-related liability and related insurance receivable described above were based upon current, 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~~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~~Carbide’s management believes that it is reasonably possible that the cost of disposing of Union ~~Carbide's~~Carbide’s asbestos-related claims, including future defense costs, could have a material adverse impact on Union ~~Carbide's~~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~~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~~Company’s results of operations and cash flows for a particular period and on the consolidated financial position of the Company.

34

The Dow Chemical Company and Subsidiaries
PART I—I – FINANCIAL INFORMATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
~~Dow's~~
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~~“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~~Company’s results.

The global nature of ~~Dow's~~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~~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—~~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,"~~“swaptions,” and exchange-traded instruments to accomplish this objective. The ~~Company's~~Company’s primary exposure is to the U.S. dollar yield curve.

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~~Company’s market risk policies and procedures.

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

Dow uses value at risk ~~("VAR"~~(“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 movement 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 daily VAR for the aggregate of non-trading and trading positions for 2004 and 2003 are shown below:
Total Daily VAR at December 31*

2004
2003
In millions
Year-end
Average
Year-end
Average
Foreign exchange $ 2 $ 2 $ 1 $ 2
Interest rate 80 87 109 108
Equity exposures, net of hedges 1 2 2 2
Commodities 26 29 12 14
Total Daily VAR at December 31*

2004

2003

In millions

Year-end

Average

Year-end

Average

Foreign exchange

$
2

$
2

$
1

$
2

Interest rate

80

87

109

108

Equity exposures, net of hedges

1

2

2

2

Commodities

26

29

12

14

*
Using a 95 percent confidence level

Since December 31, 2004, there have been no material changes in the ~~Company's~~Company’s risk management ~~policies. In~~policies or in the ~~second quarter of 2005, the Company's~~Company’s daily VAR for the aggregate of non-trading and trading positions declined from a total year-end VAR of $109 million to a total of $82 million at June 30, 2005. The decline was primarily the result of a decline in the interest rate VAR from a year-end VAR of $80 million to $64 million, due to a reduction in the Company's long-term debt, and a decline in the commodities VAR from a year-end VAR of $26 million to $11 million at June 30, 2005, due to changes in the Company's hedging strategies.positions.

For further disclosure regarding market risk, see Note I to the Consolidated Financial Statements in the ~~Company's~~Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
35

ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure 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~~Company’s Disclosure Committee and the ~~Company's~~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~~Company’s disclosure controls and procedures pursuant to paragraph (b) of Exchange Act Rules 13a-15 or 15d-15. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the ~~Company's~~Company’s disclosure controls and procedures were effective.
Changes in Internal Control Over Financial Reporting

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

36

The Dow Chemical Company and Subsidiaries
PART ~~II—~~II – OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
Asbestos-Related Matters of Union Carbide Corporation

No material developments regarding this matter occurred during the ~~second~~third quarter of 2005. For a summary of the history and current status of this matter, see ~~Management's~~Management’s Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters of Union Carbide Corporation; and Note H to the Consolidated Financial Statements.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

The following table provides information regarding purchases of the Company’s common stock by the Company during the three months ended September 30, 2005:
Issuer Purchases of Equity Securities
Period

Total number of
shares purchased (1)

Average price
paid per share

Total number of shares
purchased as part of the
Company’s publicly
announced share
repurchase program (2)

Maximum number of
shares that may yet be
purchased under the
Company’s publicly
announced share
repurchase program

July 2005

—

—

—

25,000,000

August 2005

261,738

$
45.10

234,200

24,765,800

September 2005

69,000

43.22

69,000

24,696,800

Third quarter 2005

330,738

$
44.71

303,200

24,696,800

(1)    Includes 27,538 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 deferred stock. For information regarding the Company’s stock option plans, see Note O to the Consolidated Financial Statements in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004.
(2)On July 14, 2005, the Company publicly announced that the Board of Directors had authorized on that day the repurchase of up to 25 million shares of Dow common stock over the period ending on December 31, 2007. Prior to that authorization (and since August 3, 1999 when the Board of Directors terminated its 1997 authorization which allowed the Company to repurchase shares of Dow common ~~stock. Since that time,~~stock), the only shares purchased by the Company ~~are~~were 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 O to the Consolidated Financial Statements in the Company's Annual Report on Form 10-K for the year ended December 31, 2004.deferred stock.
        ~~On July 14, 2005, the Board of Directors authorized the repurchase of up to 25 million shares of Dow common stock over the period ending on December 31, 2007.~~

~~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 12, 2005. At that meeting, Jacqueline K. Barton, Anthony J. Carbone, Barbara Hackman Franklin, Andrew N. Liveris and Harold T. Shapiro were re-elected to the Company's Board of Directors for one-year terms to expire at the annual meeting in 2006. In addition, the terms of the following directors continued after that meeting: Arnold A. Allemang, J. Michael Cook, Willie D. Davis, Jeff M. Fettig, Keith R. McKennon, J. Pedro Reinhard, James M. Ringler, William S. Stavropoulos 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:
Jacqueline K. Barton 804,452,952 N/A 20,621,196 N/A N/A
Anthony J. Carbone 795,403,647 N/A 29,670,501 N/A N/A
Barbara Hackman Franklin 803,088,275 N/A 21,985,873 N/A N/A
Andrew N. Liveris 798,048,078 N/A 27,026,070 N/A N/A
Harold T. Shapiro 804,165,687 N/A 20,908,461 N/A N/A

2.

Ratification of the appointment of Deloitte & Touche LLP as the Company's independent auditors for 2005

803,911,425

15,299,911

N/A

5,862,812

N/A

3.

Stockholder Proposal on Certain Toxic Substances

48,638,499

583,956,287

N/A

74,108,915

118,370,447
~~N/A—Not applicable~~

ITEM 6. EXHIBITS.

See the Exhibit Index on page 40 of this Quarterly Report on Form 10-Q for exhibits filed with this report.
37

The Dow Chemical Company and Subsidiaries
Trademark Listing

The following trademarks of The Dow Chemical Company appear in this report: ENGAGE, METHOCEL, NORDEL, STYROFOAM, TYRIN

The following trademark of Ashland, Inc. appears in this report: DERAKANE

The following trademark of Dow AgroSciences LLC appears in this report: WIDESTRIKE
The following trademark of FilmTec Corporation appears in this report: FILMTEC

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

The following trademark of Union Carbide Corporation appears in this report: ~~UCAR~~POLYOX
38

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: November 1, 2005
~~THE DOW CHEMICAL COMPANY~~
~~Registrant~~

~~Date: August 2, 2005~~

/s/ FRANK H. BROD
Frank H. Brod
Corporate Vice President and Controller

39

The Dow Chemical Company and Subsidiaries
Exhibit Index
EXHIBIT NO.
DESCRIPTION

~~10(ee)~~

~~A copy of the template for communication to employee Directors who are decelerating pursuant to The Dow Chemical Company Retirement Policy for Employee Directors~~

23

10
(ff)
Purchase and Sale Agreement dated as of September 30, 2005 between Catalysts, Adsorbents and Process Systems, Inc. and Honeywell Specialty Materials LLC.
23
Analysis, Research & Planning ~~Corporation's~~Corporation’s Consent.

~~31(a)~~

31
(a)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~31(b)~~

31
(b)
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~32(a)~~

32
(a)
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~32(b)~~

32
(b)
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
40

~~QuickLinks~~
~~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 PART I—FINANCIAL INFORMATION, Item 1. Financial Statements. Notes to the Consolidated Financial Statements~~
~~The Dow Chemical Company and Subsidiaries PART I—FINANCIAL INFORMATION, Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.~~
~~The Dow Chemical Company and Subsidiaries PART I—FINANCIAL INFORMATION~~
~~ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.~~
~~ITEM 4. CONTROLS AND PROCEDURES.~~
~~The Dow Chemical Company and Subsidiaries PART II—OTHER INFORMATION~~
~~ITEM 1. LEGAL PROCEEDINGS.~~
~~ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.~~
~~ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.~~
~~ITEM 6. EXHIBITS.~~
~~The Dow Chemical Company and Subsidiaries Trademark Listing~~
~~The Dow Chemical Company and Subsidiaries Signature~~
~~The Dow Chemical Company and Subsidiaries Exhibit Index~~

						PAGE
~~PART I—FINANCIAL INFORMATION~~
PART I - FINANCIAL INFORMATION		~~Item 1. Financial Statements.~~		3

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		6

	Notes to the Consolidated Financial Statements		7

Item 2. ~~Management's~~	Management’s Discussion and Analysis of Financial Condition and Results of Operations.		21

	Disclosure Regarding Forward-Looking Information		21

	Results of Operations		21 22

	Changes in Financial Condition		29 30
		~~Other Matters~~		31
	Other Matters		32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk.		35

Item 4.	Controls and Procedures.		36
~~PART II—OTHER INFORMATION~~
PART II – OTHER INFORMATION		~~Item 1. Legal Proceedings.~~		37

Item 1.	Legal Proceedings.		37

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.		37
	~~Item 4. Submission of Matters to a Vote of Security Holders.~~		37
	Item 6. ~~Exhibits.~~		Exhibits.		37
~~SIGNATURE~~			39
SIGNATURE			39

EXHIBIT INDEX			40

											Three Months Ended				Nine Months Ended
		Three Months Ended				Six Months Ended					Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,
In millions, except per share amounts (Unaudited)	In millions, except per share amounts (Unaudited)	June 30, 2005		June 30, 2004		June 30, 2005		June 30, 2004			2005		2004		2005		2004
Net Sales	Net Sales	$	11,450	$	9,844	$	23,129	$	19,153		$	11,261	$	10,072	$	34,390	$	29,225

	Cost of sales		9,300		8,345		18,637		16,252
	Research and development expenses		271		262		526		513
	Selling, general and administrative expenses		383		347		774		710
	Amortization of intangibles		13		16		27		45
	Restructuring net gain		—		20		—		20
	Equity in earnings of nonconsolidated affiliates		224		254		499		394
	Sundry income (expense) — net		57		13		139		(15	)
	Interest income		27		21		56		39
	Interest expense and amortization of debt discount		188		182		375		368

Cost of sales											9,610		8,697		28,247		24,949
Research and development expenses											264		248		790		761
Selling, general and administrative expenses											379		341		1,153		1,051
Amortization of intangibles											13		19		40		64
Restructuring net gain											—		—		—		20
Equity in earnings of nonconsolidated affiliates											240		232		739		626
Sundry income - net											39		35		178		20
Interest income											42		19		98		58
Interest expense and amortization of debt discount											168		193		543		561
Income before Income Taxes and Minority Interests	Income before Income Taxes and Minority Interests		1,603		1,000		3,484		1,703		1,148		860		4,632		2,563

	Provision for income taxes		317		284		825		488
	Minority interests' share in income		21		31		41		61

Provision for income taxes											328		214		1,153		702
Minority interests’ share in income											19		29		60		90
Net Income Available for Common Stockholders	Net Income Available for Common Stockholders	$	1,265	$	685	$	2,618	$	1,154		$	801	$	617	$	3,419	$	1,771

Share Data	Share Data
	Earnings per common share—basic	$	1.31	$	0.73	$	2.73	$	1.23
	Earnings per common share—diluted	$	1.30	$	0.72	$	2.69	$	1.22
	Common stock dividends declared per share of common stock	$	0.335	$	0.335	$	0.67	$	0.67
	Weighted-average common shares outstanding—basic		964.1		938.0		960.5		934.9
	Weighted-average common shares outstanding—diluted		976.2		947.9		974.7		945.8

Earnings per common share - basic											$	0.83	$	0.66	$	3.55	$	1.89
Earnings per common share - diluted											$	0.82	$	0.65	$	3.51	$	1.87
Common stock dividends declared per share of common stock											$	0.335	$	0.335	$	1.005	$	1.005
Weighted-average common shares outstanding - basic											965.2		940.9		962.1		937.0
Weighted-average common shares outstanding - diluted											978.4		951.4		974.2		948.8
Depreciation	Depreciation	$	451	$	458	$	924	$	920		$	454	$	515	$	1,378	$	1,435

Capital Expenditures	Capital Expenditures	$	364	$	329	$	650	$	530		$	400	$	321	$	1,050	$	851

									Sept. 30,			Dec. 31,
In millions (Unaudited)	In millions (Unaudited)		June 30, 2005			Dec. 31, 2004			2005			2004
Assets	Assets
Current Assets	Current Assets
	Cash and cash equivalents		$	3,162		$	3,108
	Marketable securities and interest-bearing deposits			39			84
	Accounts and notes receivable:
		Trade (net of allowance for doubtful receivables—2005: $167; 2004: $136)		4,758			4,753
		Other		2,526			2,604
	Inventories			5,203			4,957
	Deferred income tax assets—current			385			384

	Total current assets			16,073			15,890

Cash and cash equivalents									$	3,179		$	3,108
Marketable securities and interest-bearing deposits									31			84
Accounts and notes receivable:
Trade (net of allowance for doubtful receivables - 2005: $188; 2004: $136)									4,927			4,753
Other									2,870			2,604
Inventories									5,450			4,957
Deferred income tax assets - current									393			384
Total current assets									16,850			15,890
Investments	Investments
	Investment in nonconsolidated affiliates			2,166			2,698
	Other investments			2,201			2,141
	Noncurrent receivables			169			189

	Total investments			4,536			5,028

Investment in nonconsolidated affiliates									2,311			2,698
Other investments									2,185			2,141
Noncurrent receivables									141			189
Total investments									4,637			5,028
Property	Property
	Property			41,177			41,898
	Less accumulated depreciation			27,769			28,070

	Net property			13,408			13,828

Property									41,415			41,898
Less accumulated depreciation									28,085			28,070
Net property									13,330			13,828
Other Assets	Other Assets
	Goodwill			3,140			3,152
	Other intangible assets (net of accumulated amortization—2005: $533; 2004: $507)			493			535
	Deferred income tax assets—noncurrent			4,043			4,369
	Asbestos-related insurance receivables—noncurrent			901			1,028
	Deferred charges and other assets			2,293			2,055

	Total other assets			10,870			11,139

Goodwill									3,140			3,152
Other intangible assets (net of accumulated amortization - 2005: $534; 2004: $507)									475			535
Deferred income tax assets - noncurrent									4,032			4,369
Asbestos-related insurance receivables - noncurrent									854			1,028
Deferred charges and other assets									2,419			2,055
Total other assets									10,920			11,139
Total Assets	Total Assets		$	44,887		$	45,885		$	45,737		$	45,885

Liabilities and Stockholders' Equity
Liabilities and Stockholders’ Equity
Current Liabilities	Current Liabilities
	Notes payable		$	133		$	104
	Long-term debt due within one year			1,235			861
	Accounts payable:
		Trade		3,409			3,701
		Other		1,551			2,194
	Income taxes payable			358			419
	Deferred income tax liabilities—current			390			205
	Dividends payable			346			342
	Accrued and other current liabilities			2,144			2,680

	Total current liabilities			9,566			10,506

Notes payable									$	203		$	104
Long-term debt due within one year									719			861
Accounts payable:
Trade									3,478			3,701
Other									1,531			2,194
Income taxes payable									432			419
Deferred income tax liabilities - current									465			205
Dividends payable									327			342
Accrued and other current liabilities									2,573			2,680
Total current liabilities									9,728			10,506
Long-Term Debt	Long-Term Debt			10,023			11,629		9,969			11,629

Other Noncurrent Liabilities	Other Noncurrent Liabilities
	Deferred income tax liabilities—noncurrent			1,318			1,301
	Pension and other postretirement benefits—noncurrent			3,908			3,979
	Asbestos-related liabilities—noncurrent			1,452			1,549
	Other noncurrent obligations			3,243			3,202

	Total other noncurrent liabilities			9,921			10,031

Deferred income tax liabilities - noncurrent									1,467			1,301
Pension and other postretirement benefits - noncurrent									3,898			3,979
Asbestos-related liabilities - noncurrent									1,426			1,549
Other noncurrent obligations									3,253			3,202
Total other noncurrent liabilities									10,044			10,031
Minority Interest in Subsidiaries	Minority Interest in Subsidiaries			334			449		333			449

Preferred Securities of Subsidiaries	Preferred Securities of Subsidiaries			1,000			1,000		1,000			1,000

Stockholders' Equity
	Common stock			2,453			2,453
	Additional paid-in capital			507			274
	Unearned ESOP shares			(4	)		(12	)
	Retained earnings			13,479			11,527
	Accumulated other comprehensive loss			(1,757	)		(977	)
	Treasury stock at cost			(635	)		(995	)

	Net stockholders' equity			14,043			12,270

Total Liabilities and Stockholders' Equity			$	44,887		$	45,885

Stockholders’ Equity
Common stock									2,453			2,453
Additional paid-in capital									572			274
Unearned ESOP shares									(4		)	(12		)
Retained earnings									13,952			11,527
Accumulated other comprehensive loss									(1,689		)	(977		)
Treasury stock at cost									(621		)	(995		)
Net stockholders’ equity									14,663			12,270
Total Liabilities and Stockholders’ Equity									$	45,737		$	45,885

											Nine Months Ended
			Six Months Ended								Sept 30,			Sept 30,
In millions (Unaudited)	In millions (Unaudited)		June 30, 2005			June 30, 2004					2005			2004
Operating Activities		Net Income Available for Common Stockholders	$	2,618		$	1,154			Net Income Available for Common Stockholders	$	3,419		$	1,771
		Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation and amortization		1,010			1,016			Adjustments to reconcile net income to net cash provided by operating activities:
		Provision for deferred income tax		292			219			Depreciation and amortization	1,507			1,575
		Earnings/losses of nonconsolidated affiliates in excess of dividends received		(147	)		(236	)		Provision for deferred income tax	440			208
		Minority interests' share in income		41			61			Earnings/losses of nonconsolidated affiliates in excess of dividends received	(294		)	(442		)
		(Gain) loss on sales of investments, net		3			(13	)		Minority interests’ share in income	60			90
		Gain on sales of property and businesses, net		(46	)		(11	)		Gain on sales of ownership interest in consolidated companies, net	—			(1		)
		Other (gain) loss, net		(8	)		62			Gain on sales of investments, net	(15		)	(18		)
		Gain on sales of ownership interest in nonconsolidated affiliates		(101	)		(17	)		Gain on sales of property and businesses, net	(54		)	(13		)
		Net gain on asset divestitures related to formation of nonconsolidated affiliates		—			(563	)		Other loss, net	37			65
		Restructuring charges		—			496			Gain on sales of ownership interest in nonconsolidated affiliates, net	(98		)	(42		)
		Tax benefit—nonqualified stock option exercises		64			41			Net gain on asset divestitures related to formation of nonconsolidated affiliates	—			(563		)
		Changes in assets and liabilities that provided (used) cash:								Restructuring charges	—			421
		Accounts and notes receivable		137			(893	)		Tax benefit - nonqualified stock option exercises	66			52
		Inventories		(369	)		(336	)		Changes in assets and liabilities that provided (used) cash:
		Accounts payable		(711	)		584			Accounts and notes receivable	(29		)	(1,078		)
		Other assets and liabilities		(341	)		(845	)		Inventories	(371		)	(676		)
										Accounts payable	(604		)	1,012
		Cash provided by operating activities		2,442			719			Other assets and liabilities	(530		)	(813		)
										Cash provided by operating activities	3,534			1,548
Investing Activities		Capital expenditures		(650	)		(530	)		Capital expenditures	(1,050		)	(851		)
		Proceeds from sales of property and businesses		55			27			Proceeds from sales of property and businesses	82			37
		Acquisition of business		—			(149	)		Acquisition of business	—			(149		)
		Investments in consolidated companies		(105	)		—			Investments in consolidated companies	(105		)	(6		)
		Investments in nonconsolidated affiliates		(208	)		(56	)		Proceeds from sales of ownership interest in consolidated companies	—			7
		Distributions from nonconsolidated affiliates		41			3			Investments in nonconsolidated affiliates	(208		)	(81		)
		Proceeds from sales of nonconsolidated affiliates		87			33			Distributions from nonconsolidated affiliates	41			3
		Proceeds from asset divestitures related to formation of nonconsolidated affiliates		—			845			Proceeds from sales of ownership interest in nonconsolidated affiliates	89			70
		Purchases of investments		(475	)		(898	)		Proceeds from asset divestitures related to formation of nonconsolidated affiliates	—			845
		Proceeds from sales and maturities of investments		400			806			Purchases of investments	(725		)	(1,297		)
										Proceeds from sales and maturities of investments	687			1,197
		Cash provided by (used in) investing activities		(855	)		81			Cash used in investing activities	(1,189		)	(225		)

Financing Activities		Changes in short-term notes payable		20			(100	)		Changes in short-term notes payable	81			(123		)
		Payments on long-term debt		(913	)		(1,075	)		Payments on long-term debt	(1,422		)	(1,198		)
		Proceeds from issuance of long-term debt		4			618			Proceeds from issuance of long-term debt	4			621
		Purchases of treasury stock		(33	)		(7	)		Purchases of treasury stock	(48		)	(8		)
		Proceeds from sales of common stock		295			325			Proceeds from sales of common stock	323			393
		Distributions to minority interests		(36	)		(32	)		Distributions to minority interests	(66		)	(55		)
		Dividends paid to stockholders		(641	)		(623	)		Dividends paid to stockholders	(964		)	(938		)
										Cash used in financing activities	(2,092		)	(1,308		)
		Cash used in financing activities		(1,304	)		(894	)

Effect of Exchange Rate Changes on Cash	Effect of Exchange Rate Changes on Cash			(229	)		(4	)	Effect of Exchange Rate Changes on Cash		(182		)	(5		)

Summary		Increase (Decrease) in cash and cash equivalents		54			(98	)		Increase in cash and cash equivalents	71			10
		Cash and cash equivalents at beginning of year		3,108			2,392			Cash and cash equivalents at beginning of year	3,108			2,392
										Cash and cash equivalents at end of period	$	3,179		$	2,402
		Cash and cash equivalents at end of period	$	3,162		$	2,294

		Three Months Ended						Six Months Ended
In millions		June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004
Net income, as reported		$	1,265		$	685		$	2,618		$	1,154
Add: Stock-based compensation expense included in reported net income, net of tax			49			29			174			52
Deduct: Total stock-based compensation expense determined using fair value based method for all awards, net of tax			(33	)		(34	)		(143	)		(61	)

Pro forma net income		$	1,281		$	680		$	2,649		$	1,145

Earnings per share (in dollars):
	Basic—as reported	$	1.31		$	0.73		$	2.73		$	1.23
	Basic—pro forma		1.33			0.72			2.76			1.22
	Diluted—as reported		1.30			0.72			2.69			1.22
	Diluted—pro forma		1.31			0.72			2.72			1.21

Inventories In millions	June 30, 2005		Dec. 31, 2004
Finished goods	$	2,964	$	2,989
Work in process		1,203		889
Raw materials		562		605
Supplies		474		474

Total inventories	$	5,203	$	4,957

Inventories In millions	Sept. 30, 2005		Dec. 31, 2004
Finished goods	$	2,969	$	2,989
Work in process	1,176		889
Raw materials	825		605
Supplies	480		474
Total inventories	$	5,450	$	4,957

Goodwill In millions	Performance Plastics		Performance Chemicals		Agricultural Sciences		Plastics			Hydrocarbons and Energy		Total
Goodwill at December 31, 2004	$	913	$	750	$	1,320	$	106		$	63	$	3,152

Negative goodwill related to acquisition of remaining 28% interest in PBBPolisur S.A.		—		—		—		(12	)		—		(12	)

Goodwill at June 30, 2005	$	913	$	750	$	1,320	$	94		$	63	$	3,140

Goodwill In millions	Performance Plastics		Performance Chemicals		Agricultural Sciences		Plastics			Hydrocarbons and Energy		Total
Goodwill at December 31, 2004	$	913	$	750	$	1,320	$	106		$	63	$		3,152
Negative goodwill related to acquisition of remaining 28% interest in PBBPolisur S.A.	—		—		—		(12		)	—		(12			)
Goodwill at September 30, 2005	$	913	$	750	$	1,320	$	94		$	63	$	3,140

Other Intangible Assets		At June 30, 2005							At December 31, 2004
In millions		Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Intangible assets with finite lives:
	Licenses and intellectual property	$	281	$	(143	)	$	138	$	289	$	(138	)	$	151
	Patents		153		(100	)		53		154		(95	)		59
	Software		350		(203	)		147		352		(193	)		159
	Trademarks		138		(34	)		104		139		(31	)		108
	Other		104		(53	)		51		108		(50	)		58

	Total	$	1,026	$	(533	)	$	493	$	1,042	$	(507	)	$	535

Other Intangible Assets	At September 30, 2005							At December 31, 2004
In millions	Gross Carrying Amount		Accumulated Amortization			Net		Gross Carrying Amount		Accumulated Amortization			Net
Intangible assets with finite lives:
Licenses and intellectual property	$	265	$	(132	)	$	133	$	289	$	(138	)	$	151
Patents	150		(101		)	49		154		(95		)	59
Software	356		(213		)	143		352		(193		)	159
Trademarks	136		(35		)	101		139		(31		)	108
Other	102		(53		)	49		108		(50		)	58
Total	$	1,009	$	(534	)	$	475	$	1,042	$	(507	)	$	535

In millions	Estimated Amortization Expense
2005	$	96
2006	89
2007	80
2008	75
2009	36
2010	22

Receivables for Costs Submitted to Insurance Carriers In millions	June 30, 2005		Dec. 31, 2004
Receivables for defense costs	$	91	$	85
Receivables for resolution costs		368		406

Total	$	459	$	491

Fixed and Determinable Portion of Take or Pay and Throughput Obligations at December 31, 2004 In millions
2005	$	2,120
2006		1,966
2007		1,695
2008		1,482
2009		1,288
2010 through expiration of contracts		5,781

Total	$	14,332

Fixed and Determinable Portion of Take or Pay and Throughput Obligations at December 31, 2004 In millions
2005	$		2,120
2006	1,966
2007	1,695
2008	1,482
2009	1,288
2010 through expiration of contracts	5,781
Total	$	14,332

Guarantees at June 30, 2005 In millions	Final Expiration	Maximum Future Payments		Recorded Liability
Guarantees	2014	$	333	$	55
Residual value guarantees	2015		1,336		6

Total guarantees		$	1,669	$	61

Guarantees at December 31, 2004 In millions	Final Expiration	Maximum Future Payments		Recorded Liability
Guarantees	2018	$	729	$	202
Residual value guarantees	2015		1,342		4

Total guarantees		$	2,071	$	206

Guarantees at September 30, 2005 In millions	Final Expiration	Maximum Future Payments		Recorded Liability
Guarantees	2014	$	338	$	42
Residual value guarantees	2015	1,339		6
Total guarantees		$	1,677	$	48

Guarantees at December 31, 2004 In millions	Final Expiration	Maximum Future Payments		Recorded Liability
Guarantees	2018	$	729	$	202
Residual value guarantees	2015	1,342		4
Total guarantees		$	2,071	$	206

	Three Months Ended June 30, 2005				Three Months Ended June 30, 2004
In millions, except per share amounts	Three Months Ended June 30, 2005				Three Months Ended June 30, 2004
In millions, except per share amounts									Three Months Ended Sept. 30, 2005				Nine Months Ended Sept. 30, 2005
In millions, except per share amounts	Basic		Diluted		Basic		Diluted		Basic		Diluted		Basic		Diluted
In millions, except per share amounts	$	1,265	$	1,265	$	685	$	685	$	801	$	801	$	3,419	$	3,419

Weighted-average common shares outstanding		964.1		964.1		938.0		938.0	965.2		965.2		962.1		962.1
Add dilutive effect of stock options and awards		—		12.1		—		9.9	—		13.2		—		12.1

Weighted-average common shares for EPS calculations		964.1		976.2		938.0		947.9	965.2		978.4		962.1		974.2

Earnings per common share	$	1.31	$	1.30	$	0.73	$	0.72	$	0.83	$	0.82	$	3.55	$	3.51

Stock options excluded from EPS calculations(1)				5.8				5.4

Stock options and deferred stock awards excluded from EPS calculations (1)											12.4				4.9

	Six Months Ended June 30, 2005				Six Months Ended June 30, 2004
In millions, except per share amounts	Six Months Ended June 30, 2005				Six Months Ended June 30, 2004
In millions, except per share amounts	Basic		Diluted		Basic		Diluted
Net income available for common stockholders	$	2,618	$	2,618	$	1,154	$	1,154

Weighted-average common shares outstanding		960.5		960.5		934.9		934.9
Add dilutive effect of stock options and awards		—		14.2		—		10.9

Weighted-average common shares for EPS calculations		960.5		974.7		934.9		945.8

Earnings per common share	$	2.73	$	2.69	$	1.23	$	1.22

Stock options excluded from EPS calculations(1)				4.4				4.0

Earnings Per Share Calculations	Three Months Ended Sept. 30, 2004				Nine Months Ended Sept. 30, 2004
In millions, except per share amounts	Basic		Diluted		Basic		Diluted
Net income available for common stockholders	$	617	$	617	$	1,771	$	1,771
Weighted-average common shares outstanding	940.9		940.9		937.0		937.0
Add dilutive effect of stock options and awards	—		10.5		—		11.8
Weighted-average common shares for EPS calculations	940.9		951.4		937.0		948.8
Earnings per common share	$	0.66	$	0.65	$	1.89	$	1.87
Stock options excluded from EPS calculations (2)			5.3				4.5

Operating Segments and Geographic Areas	Three Months Ended						Nine Months Ended
In millions	Sept. 30, 2005			Sept. 30, 2004			Sept. 30, 2005			Sept. 30, 2004
Operating segment sales
Performance Plastics	$	2,939		$	2,417		$	8,467		$	6,875
Performance Chemicals	1,906			1,694			5,816			4,894
Agricultural Sciences	615			657			2,635			2,610
Plastics	2,900			2,608			8,682			7,167
Chemicals	1,297			1,340			4,126			3,986
Hydrocarbons and Energy	1,541			1,294			4,443			3,480
Unallocated and Other	63			62			221			213
Total	$	11,261		$	10,072		$	34,390		$	29,225
Operating segment EBIT (1)
Performance Plastics	$	580		$	238		$	1,494		$	697
Performance Chemicals	298			162			1,035			417
Agricultural Sciences	(28		)	43			469			545
Plastics	420			428			1,795			1,134
Chemicals	168			292			863			1,191
Hydrocarbons and Energy	—			—			—			(1		)
Unallocated and Other	(164		)	(129		)	(579		)	(917		)
Total	$	1,274		$	1,034		$	5,077		$	3,066
Geographic area sales
United States	$	4,123		$	3,771		$	12,868		$	11,013
Europe	4,036			3,457			12,643			10,356
Rest of World	3,102			2,844			8,879			7,856
Total	$	11,261		$	10,072		$	34,390		$	29,225

	Three Months Ended						Six Months Ended
Selected Financial Data													Three Months Ended						Nine Months Ended
In millions, except per share amounts	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004			Sept. 30, 2005			Sept. 30, 2004			Sept. 30, 2005			Sept. 30, 2004
Sales	$	11,450		$	9,844		$	23,129		$	19,153		$	11,261		$	10,072		$	34,390		$	29,225

Cost of sales		9,300			8,345			18,637			16,252		9,610			8,697			28,247			24,949
Percent of sales		81.2	%		84.8	%		80.6	%		84.9	%	85.3		%	86.3		%	82.1		%	85.4		%

Research and development, and selling, general and administrative expenses		654			609			1,300			1,223		643			589			1,943			1,812
Percent of sales		5.7	%		6.2	%		5.6	%		6.4	%	5.7		%	5.8		%	5.6		%	6.2		%

Effective tax rate		19.8	%		28.4	%		23.7	%		28.7	%	28.6		%	24.9		%	24.9		%	27.4		%

Net income available for common stockholders	$	1,265		$	685		$	2,618		$	1,154		$	801		$	617		$	3,419		$	1,771
Earnings per common share—basic	$	1.31		$	0.73		$	2.73		$	1.23
Earnings per common share—diluted	$	1.30		$	0.72		$	2.69		$	1.22

Earnings per common share – basic													$	0.83		$	0.66		$	3.55		$	1.89
Earnings per common share – diluted													$	0.82		$	0.65		$	3.51		$	1.87

Operating rate percentage		83	%		85	%		85	%		87	%	84		%	90		%	84		%	88		%

	Pretax Impact(1)						Impact on Net Income(2)						Impact on EPS(3)						Pretax Impact (1)						Impact on Net Income (2)						Impact on EPS (3)
	Three Months Ended						Three Months Ended						Three Months Ended						Nine Months Ended						Nine Months Ended						Nine Months Ended
In millions, except per share amounts	June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004			June 30, 2005			June 30, 2004			Sept. 30, 2005			Sept. 30, 2004			Sept. 30, 2005			Sept. 30, 2004			Sept. 30, 2005			Sept. 30, 2004
Gain on sale of EQUATE shares																			$	70		—			$	46		—			$	0.05		—
Loss on early extinguishment of debt	$	(31	)		—		$	(20	)		—		$	(0.02	)		—		(31		)	—			(20		)	—			(0.02		)	—
AJCA repatriation of foreign earnings		—			—			113			—			0.12			—		—			—			113			—			0.12			—
Employee-related restructuring charges		—		$	(296	)		—		$	(200	)		—		$	(0.21	)	—			$	(296	)	—			$	(200	)	—			$	(0.21	)
Gains on divestitures of assets related to formation of MEGlobal and Equipolymers joint ventures		—			563			—			379			—			0.40		—			563			—			379			—			0.40
Asset impairments		—			(99	)		—			(69	)		—			(0.08	)	—			(99		)	—			(69		)	—			(0.08		)
Recognition of liability related to Cargill Dow loan guarantee		—			(148	)		—			(93	)		—			(0.10	)	—			(148		)	—			(93		)	—			(0.10		)

Total	$	(31	)	$	20		$	93		$	17		$	0.10		$	0.01		$	39		$	20		$	139		$	17		$	0.15		$	0.01

		Three Months Ended June 30, 2005						Six Months Ended June 30, 2005
Percentage change from prior year		Three Months Ended June 30, 2005						Six Months Ended June 30, 2005
Percentage change from prior year		Volume		Price		Total		Volume		Price		Total
Operating segments
	Performance Plastics	(2	)%	24	%	22	%	(1	)%	25	%	24	%
	Performance Chemicals	(4	)	23		19		(2	)	24		22
	Agricultural Sciences	(4	)	4		—		—		3		3
	Plastics	(3	)	22		19		(2	)	29		27
	Chemicals	(19	)	18		(1	)	(17	)	24		7
	Hydrocarbons and Energy	7		23		30		6		27		33

	Total	(4	)%	20	%	16	%	(3	)%	24	%	21	%

Geographic area sales
	United States	(2	)%	18	%	16	%	—		21	%	21	%
	Europe	(2	)	23		21		(1	)%	26		25
	Rest of World	(10	)	21		11		(8	)	23		15

	Total	(4	)%	20	%	16	%	(3	)%	24	%	21	%

		Six Months Ended
Cash Flow Summary								Nine Months Ended
In millions	In millions	June 30, 2005			June 30, 2004			Sept. 30, 2005			Sept. 30, 2004
Cash provided by (used in):	Cash provided by (used in):
	Operating activities	$	2,442		$	719
	Investing activities		(855	)		81
	Financing activities		(1,304	)		(894	)
	Effect of exchange rate changes on cash		(229	)		(4	)

Operating activities								$	3,543		$	1,548
Investing activities								(1,198		)	(225		)
Financing activities								(2,092		)	(1,308		)
Effect of exchange rate changes on cash								(182		)	(5		)
Net change in cash and cash equivalents	Net change in cash and cash equivalents	$	54		$	(98	)	$	71		$	10

Working Capital In millions	Sept. 30, 2005		Dec. 31, 2004
Current assets	$	16,850	$	15,890
Current liabilities	9,728		10,506
Working capital	$	7,122	$	5,384
Current ratio	1.73:1		1.51:1
Days-sales-outstanding-in-receivables	39		40
Days-sales-in-inventory	64		57

Total Debt In millions	Sept. 30, 2005			Dec. 31, 2004
Notes payable	$	203		$	104
Long-term debt due within one year	719			861
Long-term debt	9,969			11,629
Gross debt	$	10,891		$	12,594
Cash and cash equivalents	$	3,179		$	3,108
Marketable securities and interest-bearing deposits	31			84
Net debt	$	7,681		$	9,402
Gross debt as a percent of total capitalization	40.5		%	47.9		%
Net debt as a percent of total capitalization	32.4		%	40.7		%

Contractual Obligations at September 30, 2005	Payments Due by Year
In millions	2005		2006		2007		2008		2009		2010 and beyond		Total
Long-term debt – current and noncurrent (1)	$	104	$	1,354	$	1,273	$	576	$	783	$	6,598	$	10,688
Pension and other postretirement benefits (2)	165		358		366		460		537		1,749		3,635
Expected cash requirements for interest (1)	120		625		563		494		462		5,042		7,306