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Article by DailyStocks_admin    (11-18-08 07:01 AM)

The Dow Chemical Company. CEO ANDREW N LIVERIS bought 20000 shares on 11-11-2008 at $23

BUSINESS OVERVIEW

THE COMPANY

The Dow Chemical Company was incorporated in 1947 under Delaware law and is the successor to a Michigan corporation, of the same name, organized in 1897. Except as otherwise indicated by the context, the terms "Company" or "Dow" as used herein mean The Dow Chemical Company and its consolidated subsidiaries. On February 6, 2001, the merger of Union Carbide Corporation ("Union Carbide") with a subsidiary of The Dow Chemical Company was completed, and Union Carbide became a wholly owned subsidiary of Dow.

The Company is engaged in the manufacture and sale of chemicals, plastic materials, agricultural and other specialized products and services.

The Company's principal executive offices are located at 2030 Dow Center, Midland, Michigan 48674, telephone 989-636-1000. Its Internet website address is www.dow.com . All of the Company's filings with the U.S. Securities and Exchange Commission are available free of charge through the Investor Relations page on this website, immediately upon filing.

BUSINESS AND PRODUCTS

Corporate Profile

Dow is a diversified chemical company that combines the power of science and technology with the "Human Element" to constantly improve what is essential to human progress. The Company delivers a broad range of products and services to customers in approximately 160 countries, connecting chemistry and innovation with the principles of sustainability to help provide everything from fresh water, food and pharmaceuticals to paints, packaging and personal care products. In 2007, Dow had annual sales of $53.5 billion and employed approximately 45,900 people worldwide. The Company has 150 manufacturing sites in 35 countries and produces approximately 3,100 products. The following descriptions of the Company's operating segments include a representative listing of products for each business.

PERFORMANCE PLASTICS

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

Dow Automotive serves the global automotive market and is a leading supplier of plastics, adhesives, sealants and other plastics-enhanced products for interior, exterior, under-the-hood, vehicle body structure and acoustical management technology solutions. With offices and application development centers around the world, Dow Automotive provides materials science expertise and comprehensive technical capabilities to its customers worldwide.

•
Products : AFFINITY™ polyolefin plastomers; AMPLIFY™ functional polymers; BETABRACE™ reinforcing composites; BETADAMP™ acoustical damping systems; BETAFOAM™ NVH and structural foams; BETAGUARD™ sealants; BETAMATE™ structural adhesives; BETASEAL™ glass bonding systems; CALIBRE™ polycarbonate resins; DOW™ polyethylene resins; DOW™ polypropylene resins and automotive components made with DOW™ polypropylene; IMPAXX™ energy management foam; INSPIRE™ performance polymers; INTEGRAL™ adhesive film; ISONATE™ pure and modified methylene diphenyl diisocyanate (MDI) products; ISOPLAST™ engineering thermoplastic polyurethane resins; MAGNUM™ ABS resins; PAPI™ polymeric MDI; PELLETHANE™ thermoplastic polyurethane elastomers; Premium brake fluids and lubricants; PULSE™ engineering resins; SPECFLEX™ semi-flexible polyurethane foam systems; SPECTRIM™ reaction moldable polymers; STRANDFOAM™ polypropylene foam; VERSIFY™ plastomers and elastomers; VORANATE™ specialty isocyanates; VORANOL™ polyether polyols

Dow Building Solutions manufactures and markets an extensive line of insulation, weather barrier, and oriented composite building solutions, as well as a line of cushion packaging foam solutions. The business is the recognized leader in extruded polystyrene (XPS) insulation, known industry-wide by its distinctive Blue color and the Dow STYROFOAM™ brand for more than 50 years. The business also manufactures foam solutions for a wide range of applications including cushion packaging, electronics protection and material handling.


•
Products : EQUIFOAM™ comfort products; FROTH-PAK™ polyurethane spray foam; GREAT STUFF™ polyurethane foam sealant; IMMOTUS™ acoustic panels; INSTA-STIK™ roof insulation adhesive; QUASH™ sound management foam; SARAN™ vapor retarder film and tape; STYROFOAM™ brand insulation products (including XPS and polyisocyanurate rigid foam sheathing products); SYMMATRIX™ oriented composites; SYNERGY™ soft touch foam; TILE BOND™ roof tile adhesive; TRYMER™ polyisocyanurate foam pipe insulation; WEATHERMATE™ weather barrier solutions (housewraps, sill pans, flashings and tapes)

Dow Epoxy is a leading global producer of epoxy resins, intermediates and specialty resins for a wide range of industries and applications such as coatings, electrical laminates, civil engineering, adhesives and composites. With plants strategically located across four continents, the business is focused on providing customers around the world with differentiated solution-based epoxy products and innovative technologies and services.

•
Products : D.E.H.™ epoxy curing agents or hardeners; D.E.N.™ epoxy novolac resins; D.E.R.™ epoxy resins (liquids, solids and solutions); Epoxy intermediates (Acetone, Allyl chloride, Bisphenol-A, Epichlorohydrin, OPTIM™ synthetic glycerine and Phenol); Specialty acrylic monomers (Glycidyl methacrylate, Hydroxyethyl acrylate and Hydroxypropyl acrylate); UCAR™ solution vinyl resins

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

•
Products : ENFORCER™ Technology and ENHANCER™ Technology for polyurethane carpet and turf backing; ISONATE™ MDI; PAPI™ polymeric MDI; Propylene glycol; Propylene oxide; SPECFLEX™ copolymer polyols; SYNTEGRA™ waterborne polyurethane dispersions; VORACOR™, VORALAST™, VORALUX™ and VORASTAR™ polyurethane systems; VORANATE™ isocyanate; VORANOL™ and VORANOL™ VORACTIV™ polyether and copolymer polyols

Specialty Plastics and Elastomers is a business portfolio of specialty products including a broad range of engineering plastics and compounds, performance elastomers and plastomers, specialty copolymers, synthetic rubber, polyvinylidene chloride resins and films (PVDC), and specialty film substrates. The business serves such industries as automotive, civil construction, wire and cable, building and construction, consumer electronics and appliances, food and specialty packaging, and footwear.

•
Products : AFFINITY™ polyolefin plastomers (POPs); AMPLIFY™ functional polymers; CALIBRE™ polycarbonate resins; DOW XLA™ elastic fiber; EMERGE™ advanced resins; ENGAGE™ polyolefin elastomers; FLEXOMER™ very low density polyethylene (VLDPE) resins; INTEGRAL™ adhesive films; ISOPLAST™ engineering thermoplastic polyurethane resins; MAGNUM™ ABS resins; NORDEL™ hydrocarbon rubber; PELLETHANE™ thermoplastic polyurethane elastomers; PRIMACOR™ copolymers; PROCITE™ window envelope films; PULSE™ engineering resins; REDI-LINK™ polyethylene-based wire & cable insulation compounds; SARAN™ PVDC resin and SARAN™ PVDC film; SARANEX™ barrier films; SI-LINK™ polyethylene-based low voltage insulation compounds; TRENCHCOAT™ protective films; TYRIL™ SAN resins; TYRIN™ chlorinated polyethylene; UNIGARD™ HP high-performance flame-retardant compounds; UNIGARD™ RE reduced emissions flame-retardant compounds; UNIPURGE™ purging compound; VERSIFY™ plastomers and elastomers

The Technology Licensing and Catalyst business includes licensing and supply of related catalysts, process control software and services for the UNIPOL™ polypropylene process, the METEOR™ process for ethylene oxide (EO) and ethylene glycol (EG), the LP OXO™ process for oxo alcohols, the QBIS™ bisphenol A process, and Dow's proprietary technology for production of purified terephthalic acid (PTA). Licensing of the UNIPOL™ polyethylene process and sale of related catalysts, including metallocene catalysts, are handled through Univation Technologies, LLC, a 50:50 joint venture of Union Carbide.

•
Products : LP OXO™ process technology and NORMAX™ catalysts; METEOR™ EO/EG process technology and catalysts; PTA process technology; QBIS™ bisphenol A process technology and DOWEX™ QCAT™ catalyst; UNIPOL™ PP process technology and SHAC™ catalyst systems

The Performance Plastics segment also includes a portion of the results of the SCG-Dow Group, a group of Thailand-based joint ventures.

CEO BACKGROUND

Arnold A. Allemang, 65. Director since 1996.
Employee of Dow 1965-2008. Manufacturing General Manager, Dow Benelux N.V.* 1992-93. Regional Vice President, Manufacturing and Administration, Dow Benelux N.V.* 1993. Vice President, Manufacturing Operations, Dow Europe GmbH* 1993-95. Dow Vice President and Director of Manufacturing and Engineering 1996-97. Dow Vice President, Operations 1997-2000. Executive Vice President 2000-04. Senior Advisor 2004-08. Member of the Boards of Directors of National Action Counsel for Minorities in Engineering; Michigan Molecular Institute; MiTECH+; Michigan Baseball Foundation; and MidMichigan Innovation Center. Trustee of The Manufacturing Institute. Board of Fellows for Saginaw Valley State University; Advisory Board for Kansas State University, College of Engineering; President's Circle of Sam Houston State University; American Chemical Society; and RPM Ventures.



Jacqueline K. Barton, 55. Arthur and Marian Hanisch Memorial Professor of Chemistry, California Institute of Technology. Director since 1993.
Assistant Professor of Chemistry and Biochemistry, Hunter College, City University of New York 1980-82. Columbia University: Assistant Professor 1983-85, Associate Professor 1985-86, Professor of Chemistry and Biological Sciences 1986-89. California Institute of Technology: Professor of Chemistry 1989 to date, Arthur and Marian Hanisch Memorial Professor of Chemistry 1997 to date. Named a MacArthur Foundation Fellow 1991, the American Academy of Arts and Sciences Fellow 1991, the American Philosophical Society Fellow 2000 and National Academy of Sciences member 2002. Named Outstanding Director 2006 by the Outstanding Director Exchange, Recipient of the Willard Gibbs Award 2006, Recipient of the American Chemical Society ("ACS") Breslow Award 2003, ACS William H. Nichols Medal Award 1997, Columbia University Medal of Excellence 1992, ACS Garvan Medal 1992, Mayor of New York's Award in Science and Technology 1988, ACS Award in Pure Chemistry 1988 and the Alan T. Waterman Award of the National Science Foundation 1985. Member of the Gilead Sciences Scientific Advisory Board. Director, GeneOhm Sciences Inc. 2001-05.



James A. Bell, 59. Executive Vice President, Finance; Chief Financial Officer, The Boeing Company. Director since 2005.
The Boeing Company - Executive Vice President, Finance and Chief Financial Officer, 2003 to date; Senior Vice President of Finance and Corporate Controller, 2000-03. Previous positions include Vice President of Contracts and Pricing for Boeing Space and Communications, 1996-2000; Director of Business Management of the Space Station Electric Power System at Boeing Rocketdyne unit, 1992-96. Member of the Boards of Directors of Joffrey Ballet, The Chicago Urban League, and New Leaders for New Schools. Member of the World Business Chicago, the Chicago Economic Club, and the Commercial Club of Chicago.



Jeff M. Fettig, 50. Chairman and Chief Executive Officer, Whirlpool Corporation. Director since 2003.
Whirlpool Corporation - Chairman and Chief Executive Officer 2004 to date; President and Chief Operating Officer 1999-2004; Executive Vice President 1994-99; President, Whirlpool Europe and Asia 1994-99; Vice President, Group Marketing and Sales, North American Appliance Group 1992-94; Vice President, Marketing, Philips Whirlpool Appliance Group of Whirlpool Europe B.V. 1990-92; Vice President, Marketing, KitchenAid Appliance Group 1989-90; Director, Product Development 1988-89. Director of Whirlpool Corporation.



Barbara Hackman Franklin, 67. President and CEO of Barbara Franklin Enterprises and Former U.S. Secretary of Commerce. Director 1980-92 and 1993 to date.
President and CEO, Barbara Franklin Enterprises, private investment and management consulting firm, 1995 to date. Business consultant 1993-95. U.S. Secretary of Commerce 1992-93. President and CEO, Franklin Associates 1984-92. Senior Fellow and Director of Government and Business Program, Wharton School, University of Pennsylvania 1979-88. Commissioner, U.S. Consumer Product Safety Commission 1973-79. Staff Assistant to the President of the United States 1971-73. Asst. Vice President, Citibank 1969-71 and manager in corporate planning, the Singer Company 1964-70. President's Advisory Council for Trade Policy and Negotiations 1982-86, 1989-92. Directorship 100 , (the most influential people in corporate governance) 2007. Outstanding Director, 2003, Outstanding Directors Exchange (ODX). Director of the Year, National Association of Corporate Directors 2000. John J. McCloy Award for contributions to auditing excellence 1992. Trustee and Chairman Emerita of the Economic Club of New York, member of the board of the National Association of Corporate Directors, the National Committee on U.S.-China Relations, the Atlantic Council, and Past Vice Chair of the U.S.-China Business Council. Member of the Public Company Accounting Oversight Board Advisory Council. Director of Aetna, Inc. Director or trustee of three funds in the American Funds family of mutual funds; Director of JP Morgan Value Opportunities Fund, Inc.



John B. Hess, 53. Chairman and Chief Executive Officer, Hess Corporation. Director since 2006.
Hess Corporation - Employee since 1977; Director 1978 to date; Chairman and Chief Executive Officer 1995 to date. Director of National Advisory Board of J.P. Morgan Chase & Co. Member of The Business Council, The National Petroleum Council, The Council of Foreign Relations, Dean's Advisors of Harvard Business School, Board of Trustees for the Mount Sinai Hospital, Wildlife Conservation Society/NY Zoo, United Cerebral Palsy Research and Educational Foundation. Member of the Board of Directors of Lincoln Center for the Performing Arts. Former member of the Secretary of Energy Advisory Board.


Andrew N. Liveris, 53. Dow President, Chief Executive Officer & Chairman. Director since 2004.
Employee of Dow since 1976. General manager of Dow's Thailand operations 1989-92. Group business director for Emulsion Polymers and New Ventures 1992-93. General manager of Dow's start-up businesses in Environmental Services 1993-94. Vice President of Dow's start-up businesses in Environmental Services 1994-95. President of Dow Chemical Pacific Limited* 1995-98. Vice President of Specialty Chemicals 1998-2000. Business Group President for Performance Chemicals 2000-03. President and Chief Operating Officer 2003-04. President and Chief Executive Officer 2004 to date and Chairman 2006 to date. Director of Citigroup, Inc. and the United States Climate Action Partnership. Chairman Emeritus of the American Chemistry Council. Chairman of the Board of the International Council of Chemical Associations. Member of the American Australian Association, The Business Council, the Business Roundtable, The Detroit Economic Club, the New York Economic Club, the International Business Council, the National Petroleum Council, the Société de Chimie Industrielle, the U.S.-China Business Council and the World Business Council for Sustainable Development. Member of the Board of Trustees of Tufts University and the Herbert H. and Grace A. Dow Foundation.


MANAGEMENT DISCUSSION FROM LATEST 10K

ABOUT DOW

Dow is a diversified chemical company that combines the power of science and technology with the "Human Element" to constantly improve what is essential to human progress. The Company offers a broad range of products and services, connecting chemistry and innovation with the principles of sustainability to help provide everything from fresh water, food, and pharmaceuticals to paints, packaging and personal care products. Dow is the largest U.S. producer of chemicals and plastics, in terms of sales, with total sales of $53.5 billion in 2007. The Company conducts its worldwide operations through global businesses, which are reported in six operating segments: Performance Plastics, Performance Chemicals, Agricultural Sciences, Basic Plastics, Basic Chemicals, and Hydrocarbons and Energy.

In 2007, the Company sold its approximately 3,100 products and its services to customers in approximately 160 countries throughout the world. Thirty-eight percent of the Company's sales were to customers in North America; 37 percent were in Europe; while the remaining 25 percent were to customers in Asia Pacific and Latin America. The Company employs approximately 45,900 people and has a broad, global reach with 150 manufacturing sites in 35 countries.

RESULTS OF OPERATION

Dow reported record sales of $53.5 billion in 2007, up 9 percent from $49.1 billion in 2006 and up 16 percent from $46.3 billion in 2005. Compared with last year, prices rose 7 percent (with currency accounting for approximately 3 percent of the increase), with increases in all operating segments and in all geographic areas. In 2007, the most significant price increases were reported in Basic Plastics and Hydrocarbons and Energy, driven by continuing increases in feedstock and energy costs. In 2007, volume improved 2 percent from last year, with growth in all segments with the exception of a slight decline in Basic Chemicals. From a geographic standpoint, 2007 volume in the United States was down slightly, due in part to weakness in the housing and automotive industries, while Europe and the rest of the world reported significant volume growth. Growth was strong in Asia Pacific, up 8 percent from 2006, and Latin America, up 7 percent.

In 2006, sales rose 6 percent from 2005, as prices rose 5 percent, with increases in all operating segments except Agricultural Sciences, which was down 2 percent, and in all geographic areas. Volume increased 1 percent. Prices continued to be driven primarily by escalating feedstock and energy costs.

Sales in the United States accounted for 34 percent of total sales in 2007, compared with 37 percent in 2006 and 38 percent in 2005.

See the Sales Price and Volume table at the end of the section entitled "Segment Results" for details regarding the change in sales by operating segment and geographic area. In addition, sales and other information by operating segment and geographic area are provided in Note S to the Consolidated Financial Statements.

Gross margin for 2007 was $7.1 billion, compared with $7.6 billion in 2006 and $8.0 billion in 2005. Despite higher selling prices of nearly $3.3 billion, gross margin declined in 2007 compared with 2006, principally due to an increase of $2.5 billion in feedstock and energy costs, higher costs of other raw materials, the unfavorable impact of currency on costs, and increased freight costs. Gross margin for 2006 declined $433 million from 2005, principally due to an increase of $2.0 billion in feedstock and energy costs and increases of more than $400 million in the cost of other raw materials.

Dow's global plant operating rate (for its chemicals and plastics businesses) was 87 percent of capacity in 2007, up from 85 percent of capacity in 2006 and 84 percent of capacity in 2005. Operating rates improved in 2007 for most of the Company's businesses, reflecting a higher level of demand and the closure of some of the Company's manufacturing facilities. In 2006, Dow's operating rates improved for many of the Company's Basics businesses. Overall, Dow's operating rate for 2006 reflected the impact of planned maintenance turnarounds at several of Dow's manufacturing facilities. Depreciation expense was $1,959 in 2007 and $1,904 million in 2006 and 2005.

Personnel count was 45,856 at December 31, 2007; 42,578 at December 31, 2006; and 42,413 at December 31, 2005. During 2007, headcount was impacted by the addition of research and development employees in India and China in support of the Company's growth initiatives; the addition of approximately 110 employees with the second quarter acquisition of Hyperlast Limited; and the addition of approximately 1,700 employees with the second quarter acquisition of Wolff Walsrode. During 2006, headcount was impacted by the addition of approximately 550 employees associated with the acquisition of Zhejiang Omex Environmental Engineering Co. LTD by FilmTec Corporation, a wholly owned subsidiary of the Company, and a reduction of approximately 260 employees due to the sale of the plastics division of Sentrachem Limited.

Operating expenses (research and development, and selling, general and administrative expenses) totaled $3,169 million in 2007, up 12 percent from $2,827 million in 2006. Operating expenses were $2,618 million in 2005. Research and development ("R&D") expenses were $1,305 million in 2007, compared with $1,164 million in 2006 and $1,073 million in 2005. Selling, general and administrative expenses were $1,864 million in 2007, compared with $1,663 million in 2006 and $1,545 million in 2005. Consistent with the Company's strategy, approximately 75 percent of the increase in operating expenses in 2007 was related to spending for growth initiatives and product development in the Performance businesses, including expenses related to the 2007 acquisition of Wolff Walsrode and Hyperlast Limited, and for early stage research into new growth opportunities. The balance of the increase was related to the global expansion of the Company's corporate branding campaign and other corporate expenses. Approximately 60 percent of the increase in operating expenses in 2006 was related to spending for growth initiatives in the Performance businesses, consistent with the Company's strategy. The balance of the increase was principally due to the allocation of a portion of stock-based compensation expense to operating expenses in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123R. Prior to the adoption of SFAS No. 123R on January 1, 2006, all stock-based compensation expense was reflected in "Cost of sales." (See Notes A and N to the Consolidated Financial Statements for additional information on this accounting standard.) Operating expenses were 5.9 percent of sales in 2007, 5.8 percent of sales in 2006 and 5.7 percent of sales in 2005.

The following table illustrates the relative size of the primary components of total production costs and operating expenses of Dow. More information about each of these components can be found in other sections of Management's Discussion and Analysis of Financial Condition and Results of Operation, Notes to the Consolidated Financial Statements, and Part II, Item 6. Selected Financial Data.

Amortization of intangibles was $72 million in 2007, $50 million in 2006 and $55 million in 2005. Amortization of intangibles was up in 2007 due to acquisitions. During 2007, the Company performed impairment tests for goodwill in conjunction with its annual long-term financial planning process. As a result of this review, it was determined that no goodwill impairments existed. See Note G to the Consolidated Financial Statements for additional information regarding goodwill and other intangible assets.

On December 3, 2007, the Company's Board of Directors approved a restructuring plan that includes the shutdown of a number of assets and organizational changes within targeted support functions to improve the efficiency and cost effectiveness of the Company's global operations. As a result of these shutdowns and organizational changes, which are scheduled to be completed by the end of 2009, the Company recorded pretax restructuring charges totaling $590 million in 2007. The charges consisted of asset write-downs and write-offs of $422 million, costs associated with exit or disposal activities of $82 million and severance costs of $86 million. The impact of the charges is shown as "Restructuring charges" in the consolidated statements of income and was reflected in the Company's segment results as follows: Performance Plastics $184 million, Performance Chemicals $85 million, Agricultural Sciences $77 million, Basic Plastics $88 million, Basic Chemicals $7 million, Hydrocarbons and Energy $44 million, and Unallocated and Other $105 million. When the restructuring plans have been fully implemented, the Company expects to realize ongoing annual savings of approximately $180 million. See Note B to the Consolidated Financial Statements for details on the restructuring charges.

On August 29, 2006, the Company's Board of Directors approved a plan to shut down a number of assets around the world as the Company continued its drive to improve the competitiveness of its global operations. As a consequence of these shutdowns, which are scheduled to be completed in the first quarter of 2009, and other optimization activities, the Company recorded pretax restructuring charges totaling $591 million in 2006. The charges included asset write-downs and write-offs of $346 million, costs associated with exit or disposal activities of $172 million and severance costs of $73 million.. The charges are shown as "Restructuring charges" in the consolidated statements of income and are reflected in the Company's segment results as follows: Performance Plastics $242 million, Performance Chemicals $12 million, Basic Plastics $16 million, Basic Chemicals $184 million, and Unallocated and Other $137 million. In 2007, the Company recorded a $12 million reduction of the 2006 restructuring charges, which included an $8 million reduction of the estimated severance costs and a $4 million reduction of the reserve for contract termination fees. These reductions impacted the Performance Plastics segment by $4 million and the Unallocated and Other segment by $8 million. When the restructuring plans have been fully implemented, the Company expects to realize ongoing annual savings of approximately $160 million. See Note B to the Consolidated Financial Statements for details on the restructuring charges.

In the fourth quarter of 2005, the Company recorded pretax charges totaling $114 million related to restructuring activities, as the Company continued to focus on financial discipline and made additional decisions regarding noncompetitive and underperforming assets, as well as decisions regarding the consolidation of manufacturing capabilities. The charges included costs of $67 million related to the closure of approximately 20 small plants around the world, losses of $12 million on asset sales, the write-off of an intangible asset of $10 million and employee-related expenses of $25 million (which was paid to 197 employees in the fourth quarter of 2005). The total of these charges is shown as "Restructuring charges" in the consolidated statements of income. The charges were recorded against the Company's operating segments as follows: $28 million against Performance Plastics, $14 million against Performance Chemicals, $9 million against Agricultural Sciences, $12 million against Basic Plastics and $3 million against Basic Chemicals. Charges to Unallocated and Other amounted to $48 million. For additional information, see Note B to the Consolidated Financial Statements.

During 2007, pretax charges totaling $57 million were recorded for purchased in-process research and development ("IPR&D"). See Note C to the Consolidated Financial Statements for information regarding these charges. Future costs required to bring the purchased IPR&D projects to technological feasibility are expected to be immaterial.

Following the December 2006 completion of a study to review Union Carbide's asbestos claim and resolution activity, Union Carbide decreased its asbestos-related liability for pending and future claims (excluding future defense and processing costs) by $177 million. The reduction was shown as "Asbestos-related credit" in the 2006 consolidated statements of income and reflected in the results of Unallocated and Other. See Note J to the Consolidated Financial Statements for additional information regarding asbestos-related matters of Union Carbide.

Dow's share of the earnings of nonconsolidated affiliates in 2007 was $1,122 million, compared with $959 million in 2006 and $964 million in 2005. Equity earnings in 2007 exceeded $1 billion for the first time in the Company's history, reflecting increased earnings from EQUATE Petrochemical Company K.S.C. ("EQUATE"), MEGlobal and the OPTIMAL Group of Companies ("OPTIMAL"). Equity earnings in 2006 declined slightly from 2005 despite improved results from Dow Corning Corporation ("Dow Corning"), which was due in part to a favorable tax settlement reached in the second quarter of 2006; MEGlobal; Compañía Mega S.A.; and Univation Technologies, LLC. These improvements were offset by lower results from Equipolymers and Siam Polyethylene Company Limited ("Siam Polyethylene" which is part of the SCG-Dow Group), and the absence of equity earnings from UOP LLC ("UOP") and DuPont Dow Elastomers L.L.C., both of which the Company exited in 2005. See Note F to the Consolidated Financial Statements for additional information on nonconsolidated affiliates.

On December 13, 2007, the Company and PIC announced plans to form a 50:50 joint venture that will be a market-leading, global petrochemicals company. The joint venture, to be headquartered in the United States, will manufacture and market polyethylene, ethyleneamines, ethanolamines, polypropylene, and polycarbonate. To form the new joint venture, Dow will sell a 50 percent interest in the business assets included in the transaction to PIC. In turn, PIC and Dow will each contribute their assets into the joint venture. The resulting joint venture is expected to have revenues of more than $11 billion and employ more than 5,000 people worldwide. The transaction is subject to the completion of definitive agreements, customary conditions and regulatory approvals, and is anticipated to close in late 2008.

Sundry income – 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 for 2007 was $324 million, up from $137 million in 2006 and down from $755 million in 2005. In 2007, the increase in net sundry income reflected the impact of favorable foreign exchange hedging results and gains on the sale of miscellaneous assets. In 2006, sundry income was reduced by the recognition of a loss contingency of $85 million (reflected in the Performance Plastics segment) related to a fine imposed by the European Commission ("EC") associated with synthetic rubber industry matters (see Note J to the Consolidated Financial Statements for additional information). Sundry income for 2005 included a gain of $637 million on the sale of Union Carbide's indirect 50 percent interest in UOP (reflected in the Performance Plastics segment) and a $70 million gain ($41 million reflected in the Basic Chemicals segment; $29 million reflected in the Basic Plastics segment) on the sale of a portion of Union Carbide's interest in 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 ownership interest from 45 percent to 42.5 percent. Sundry income for 2005 was reduced by a cash donation of $100 million to The Dow Chemical Company Foundation for aid to education and community development and a loss of $31 million associated with the early extinguishment of $845 million of debt (both reflected in Unallocated and Other).

Basic Chemicals Outlook for 2008

Caustic soda prices are expected to remain flat in 2008, while volume is expected to decline due to three significant maintenance turnarounds planned for 2008.

VCM sales are expected to increase in 2008 due to an anticipated increase in volume in Europe and Latin America, and expected increased prices driven by higher hydrocarbon and energy costs. Average industry operating rates for EG in 2008 are expected to be consistent with the average operating rate for 2007. However, 2008 supply/demand balance is expected to be tight early in the year, and then weaken slowly as a result of new industry capacity scheduled to come on-line late in the year, compressing margins. Equity earnings are expected to remain strong in 2008. The EG joint venture with PIC is expected to start production in the second half of 2008, adding to equity earnings.

Solvents and intermediates' diversity of applications and increased geographic growth beyond North America and Asia Pacific will enable sustained demand for 2008. Sales volume is expected to grow slightly and margins should remain favorable despite continued high feedstock and energy costs, as no new industry capacity is scheduled to come on-line in 2008 in Asia Pacific and supply/demand is expected to remain balanced.

HYDROCARBONS AND ENERGY

Hydrocarbons and Energy sales were $7,105 million in 2007, compared with $6,205 million in 2006 and $6,061 million in 2005. In 2007, prices were up 12 percent and volume increased 3 percent from 2006. Prices increased in 2007 due to the continued rise in crude oil and feedstock costs, and tight supply/demand balances for certain hydrocarbon products. Volume increased in 2007 primarily due to additional U.S. power sales resulting from the fourth quarter 2006 acquisition of the Plaquemine Cogeneration Facility in Louisiana. In 2006, prices increased 11 percent and volume decreased 9 percent from 2005. Compared with 2005, prices rose following the rise in crude oil and feedstock costs; volume declined due to outages, both scheduled and unscheduled, at a number of the Company's facilities.

The Hydrocarbons and Energy business transfers materials to Dow's derivative businesses at cost, which results in EBIT that is at or near breakeven. In 2007, EBIT was a loss of $45 million due to restructuring charges of $44 million recorded in the fourth quarter principally due to the shutdown of the Company's styrene monomer plant in Camaçari, Brazil, and the closure of storage wells in Fort Saskatchewan, Alberta, Canada (see Note B to the Consolidated Financial Statements). EBIT for the segment was at or near breakeven in 2006 and 2005.

The Company uses derivatives of crude oil and natural gas as feedstocks in its ethylene facilities, while natural gas is used as a fuel. The Company's cost of purchased feedstocks and energy rose approximately $2.5 billion (11 percent) in 2007 due to increased prices. Crude oil prices increased for much of the year, and on average, 2007 prices were $7 per barrel higher than 2006 levels. Conversely, on average, North American natural gas prices continued the downward trend, and were approximately $0.13 per million Btu lower than in 2006, a decrease of approximately 2 percent.

Hydrocarbons and Energy Outlook for 2008

Crude oil and natural gas prices are expected to remain volatile and sensitive to external factors such as weather, economic growth/sub-prime credit effects and geopolitical tensions. The Company expects crude oil prices, on average, to be higher than 2007. Ethylene margins are expected to be somewhat lower in 2008 due to global capacity growth, particularly in the Middle East, exceeding global demand growth. Ethylene margins could improve compared to these expectations, with stronger than anticipated demand and delayed startups of new capacity within the industry. The economic outlook is uncertain, and a faltering economy and/or major spike in crude oil prices may contribute to a decline in margins and volume.

UNALLOCATED AND OTHER

Sales for Unallocated and Other, which primarily relate to the Company's insurance operations, were $421 million in 2007, compared with $316 million in 2006 and $306 million in 2005. Included in the results for Unallocated and Other are:

•
results of insurance company operations,
•
gains and losses on sales of financial assets,
•
stock-based compensation expense,
•
changes in the allowance for doubtful receivables,
•
expenses related to New Ventures,
•
asbestos-related defense and resolution costs,
•
foreign exchange hedging results, and
•
certain overhead and other cost recovery variances not allocated to the operating segments

EBIT was a loss of $897 million in 2007 compared with a loss of $594 million in 2006 and a loss of $1,048 million in 2005. EBIT for 2007 was reduced by 2007 restructuring charges totaling $105 million, including employee-related severance expenses of $86 million, pension curtailment costs and termination benefits of $15 million and asset write-offs of $4 million; franchise taxes of approximately $80 million; and higher performance-based compensation expenses (including stock-based compensation) of approximately $230 million. EBIT for 2007 was favorably impacted by improved results from insurance company operations, foreign exchange hedging results, and an $8 million favorable adjustment to the restructuring charge recorded in the third quarter of 2006 for employee-related severance.

EBIT for 2006 was negatively impacted by restructuring charges of $137 million (including employee-related severance expenses of $73 million, pension curtailment costs and termination benefits of $33 million, asset write-offs of $18 million related to the shutdown of several small facilities around the world, and asbestos abatement of $10 million and environmental remediation of $3 million related to the shutdown of all production facilities at the Company's site in Sarnia, Ontario, Canada); performance-based stock compensation expenses of $86 million; other severance costs of $52 million; asbestos-related defense and resolution costs (net of insurance) of $45 million; and expenses of $59 million related to the Company's corporate branding program. EBIT for 2006 was favorably impacted by a $177 million reduction in Union Carbide's asbestos-related liability for pending and future claims (excluding future defense and processing costs). EBIT for 2005 was negatively impacted by charges totaling $48 million for restructuring activities in the fourth quarter of 2005 (including employee-related expenses of $25 million, the write-off of an intangible asset of $10 million and costs of $13 million related to the closure of three small plants), severance costs of $68 million, a cash donation of $100 million to The Dow Chemical Company Foundation, performance-based stock compensation expenses of $276 million, asbestos-related defense and resolution costs (net of insurance) of $75 million, and a loss of $31 million associated with the early extinguishment of debt.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

RESULTS OF OPERATIONS



Net sales for the second quarter of 2008 were $16.4 billion, up 23 percent from $13.3 billion in the second quarter of last year. Compared with the same quarter of 2007, prices rose 18 percent, driven by continuing increases in feedstock and energy costs, and volume increased 5 percent. Double-digit price increases were reported in all operating segments as the Company focused on restoring margins through price increases, led by a 42 percent increase in Hydrocarbons and Energy, a 22 percent increase in Basic Plastics and a 20 percent increase in Basic Chemicals. Prices were also up in the Performance segments with a 14 percent increase in Performance Chemicals, a 12 percent increase in Agricultural Sciences and an 11 percent increase in Performance Plastics. From a geographic standpoint, double-digit price increases were reported in all geographic areas. Prices were up 25 percent in Europe (where currency accounted for approximately one half of the increase), 16 percent in North America, 20 percent in Latin America, 18 percent in the India, Middle East and Africa (“IMEA”) region and 12 percent in Asia Pacific. Compared with the second quarter of last year, the change in volume by operating segment was mixed, with increases in Hydrocarbons and Energy of 19 percent, Agricultural Sciences of 13 percent, Performance Plastics of 7 percent and Performance Chemicals of 6 percent. The Basic segments declined with Basic Plastics down 3 percent and Basic Chemicals down 7 percent. By geographic area, volume growth in IMEA, Asia Pacific, Europe and Latin America more than offset a decline in North America which was down due to continued weakness in the residential construction and automotive industries as well as plant closures and divestitures.



Net sales for the first six months of 2008 were $31.2 billion, up 21 percent from $25.7 billion in the same period last year. Compared with the first half of 2007, prices were up 18 percent and volume increased 3 percent. Prices increased by double-digits across all operating segments with the largest increases in the Basic segments. Strong volume growth in Agricultural Sciences (up 13 percent) and Hydrocarbons and Energy (up 10 percent) and solid volume growth in Performance Chemicals (up 6 percent) and Performance Plastics (up 5 percent), more than offset volume declines in Basic Plastics (down 3 percent) and Basic Chemicals (down 6 percent). For additional details regarding the change in net sales, see the Sales Volume and Price table at the end of the section entitled “Segment Results.”



Gross margin was $1,737 million for the second quarter of 2008, down from $1,867 million in the second quarter of last year. Gross margin declined as higher selling prices and improved volume did not fully offset significantly higher hydrocarbon and energy (“H&E”) costs (up approximately $2.4 billion or 42 percent), the unfavorable impact of currency on costs, higher costs for other raw materials and increased freight costs. Year to date, gross margin was $3,653 million, compared with $3,694 million in the first six months of 2007.



The Company’s global plant operating rate (for its chemicals and plastics businesses) was 83 percent in the second quarter of 2008, down from 86 percent in the second quarter of 2007. For the first half of 2008, Dow’s global plant operating rate was 84 percent, down from 87 percent in the same period of 2007. The Company’s operating rate for the second quarter of 2008 reflected the impact of planned maintenance turnarounds, unplanned outages and the intentional temporary idling of facilities.



Personnel count was 46,008 at June 30, 2008, up from 45,856 at December 31, 2007 and 45,073 at June 30, 2007. Headcount increased from year-end 2007 due the addition of temporary summer and seasonal employees, offset by the divestiture of two small companies. The addition of research and development employees in India and China in support of the Company’s growth initiatives increased headcount in the second half of 2007.



Operating expenses (research and development, and selling, general and administrative expenses) totaled $850 million in the second quarter of 2008, up $53 million (7 percent) from $797 million in the second quarter of last year. Compared with last year, research and development (“R&D”) expenses increased $15 million, and selling, general and administrative (“SG&A”) expenses increased $38 million. For the first half of 2008, operating expenses totaled $1,679 million, up $162 million (11 percent) from $1,517 million in the first half of 2007. The increase in operating expenses was primarily related to planned spending for growth initiatives in the Performance businesses and operating expenses for new acquisitions.



Amortization of intangibles was $25 million in the second quarter of 2008, up from $18 million in the second quarter of last year, with the increase due to 2007 acquisitions. For the first half of 2008, amortization of intangibles was $47 million, compared with $29 million for the same period last year. See Note E to the Consolidated Financial Statements for additional information on intangible assets.



Dow’s share of the earnings of nonconsolidated affiliates was $251 million in the second quarter of 2008, down slightly from $258 million in the second quarter of last year. Compared with the same quarter of last year, earnings improved at EQUATE Petrochemical Company K.S.C. (“EQUATE”) and the OPTIMAL Group of Companies (“OPTIMAL”). Results from Equipolymers B.V. (“Equipolymers”), MEGlobal and Siam Polyethylene Company Limited (“Siam Polyethylene”) were lower compared with the second quarter of last year. For the first six months of 2008, Dow’s share of the earnings of nonconsolidated affiliates was $525 million, down slightly from $532 million for the same period last year. Compared with last year, earnings improved at EQUATE, OPTIMAL and MEGlobal. Results were lower for Equipolymers and Siam Polyethylene. Results for the second quarter of 2008 included Dow’s share of the earnings of Americas Styrenics LLC, a polystyrene joint venture between Dow and Chevron Phillips Chemical with assets in North America and Latin America, which began operations in the second quarter of 2008.


On December 13, 2007, the Company and Petrochemical Industries Company (“PIC”) of Kuwait, a wholly owned subsidiary of Kuwait Petroleum Corporation, announced plans to form a 50:50 joint venture that will be a market-leading, global petrochemicals company. The joint venture, K-Dow Petrochemicals (“KDP”), to be headquartered in southeast Michigan in the United States, will manufacture and market polyethylene, ethyleneamines, ethanolamines, polypropylene, and polycarbonate. The joint venture is expected to have revenues of more than $11 billion and employ more than 5,000 people worldwide. The transaction is subject to the completion of definitive agreements, customary conditions and regulatory approvals, and is anticipated to close in late 2008.



Sundry income – 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 – net for the second quarter of 2008 was $37 million, compared with $123 million in the same quarter of 2007, and reflected a decrease in gains on the sale of assets and a decrease in foreign exchange gains. Year to date, sundry income – net was $83 million, compared with $192 million in the first half of 2007.



Net interest expense (interest expense less capitalized interest and interest income) was $126 million in the second quarter of 2008, compared with $96 million in the second quarter of last year. Year to date, net interest expense was $247 million, versus $202 million in the first six months of 2007. Compared with last year, year-to-date interest income was down $24 million principally due to lower levels of cash and cash equivalents, while year-to-date interest expense increased $21 million primarily due to newly issued debt.



The effective tax rate for the second quarter of 2008 was 23.7 percent, versus 20.7 percent for the second quarter of 2007. The effective tax rate for the first six months of 2008 was 23.7 percent, compared with 22.9 percent for the same period last year. The Company’s effective tax rate fluctuates based on, among other factors, where income is earned and the level of income relative to tax credits available.



Net income available for common stockholders was $762 million or $0.81 per share for the second quarter of 2008, compared with $1,039 million or $1.07 per share for the second quarter of 2007. Net income for the first six months of 2008 was $1,703 million or $1.80 per share, compared with $2,012 million or $2.07 per share for the same period of 2007.



On July 10, 2008, the Company and the Rohm and Haas Company (“Rohm and Haas”) announced a definitive agreement, under which the Company will acquire all outstanding shares of Rohm and Haas common stock for $78 per share in cash. The acquisition of Rohm and Haas will make the Company the world’s leading specialty chemicals and advanced materials company, combining the two organizations’ best-in-class technologies, broad geographic reach and strong industry channels to create a business portfolio with significant growth opportunities.



Financing for the transaction will include equity investments by Berkshire Hathaway Inc. and the Kuwait Investment Authority in the form of convertible preferred stock for $3 billion and $1 billion, respectively. In addition, debt financing of $13 billion has been committed by Citi, Merrill Lynch, Morgan Stanley and certain of their respective affiliates. These financing commitments are conditional upon the closing of the transaction and subject to other customary conditions.



The Company expects the transaction to be accretive to earnings in the second year following completion, with pretax annual cost synergies expected to be at least $800 million per year. Key areas of cost savings include increased purchasing power for raw materials; manufacturing and supply chain work process improvements; and the elimination of redundant corporate overhead for shared services and governance. The Company also anticipates that the transaction will produce significant revenue synergies, through the application of each company’s innovative technologies and as a consequence of the combined businesses’ broader product portfolio in key industry segments with strong global growth rates.



The transaction, which has been unanimously approved by the Boards of Directors of both companies, remains subject to approval by Rohm and Haas shareholders, customary conditions and receipt of regulatory approvals. The companies are targeting completion of the transaction in early 2009.



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 by operating segment includes all operating items relating to the businesses; items that principally apply to the Company as a whole are assigned to Unallocated. See Note M to the Consolidated Financial Statements for a reconciliation of EBIT to “Net Income Available for Common Stockholders.”



PERFORMANCE PLASTICS



Performance Plastics sales were $4,418 million for the second quarter of 2008, up 18 percent from $3,742 million in the second quarter of 2007. Prices increased 11 percent, with currency accounting for approximately half of the increase, and volume improved 7 percent. The improvement in prices was widespread across the segment as businesses took action to

mitigate the impact of increasing raw material costs. Volume improved due in part to a new marketing agreement with Nippon Unicar Company Limited (“NUC”) (a nonconsolidated affiliate), which was effective in the first quarter of 2008, as well as recent acquisitions. EBIT for the segment totaled $268 million in the second quarter, down from $382 million in the same period last year. EBIT declined as the benefit of higher prices and improved volume was more than offset by the impact of higher raw material prices, the unfavorable impact of currency on costs, higher freight costs and higher operating expenses.



Dow Automotive sales for the second quarter of 2008 were up 12 percent from one year ago, establishing a new quarterly record for the business during a challenging time for the industry. Prices improved 14 percent while volume declined 2 percent as continued weakness in North America more than offset volume gains in Europe and Latin America. EBIT for the business declined versus the second quarter of last year as the benefit of higher selling prices did not keep pace with the impact of higher raw material costs, the unfavorable impact of currency on costs, and spending associated with asset consolidation activities and product qualification trials.



Dow Building Solutions sales in the second quarter of 2008 improved 7 percent versus the same quarter last year as prices increased 6 percent due to the favorable impact of currency and volume improved 1 percent despite a decline in new housing starts in the United States to historical low levels. EBIT declined as the business struggled with soft industry conditions that limited the business’ ability to raise prices, coupled with higher raw material costs, the unfavorable impact of currency on costs and higher freight costs.



Dow Epoxy sales were up 17 percent from the second quarter of 2007 with a 12 percent increase in volume and a 5 percent improvement in prices due to the favorable impact of currency. Significant volume gains were realized across Europe, IMEA and North America, driven by solid demand for electrical laminate applications and volume growth from recent epoxy systems acquisitions that participate in wind energy and infrastructure applications. Additional industry capacity of epoxy intermediates limited the Company’s ability to raise prices. Despite the improvement in volume, the business posted lower EBIT in the second quarter of 2008 due to higher raw material costs and the limited ability to raise prices.



Polyurethanes and Polyurethane Systems sales improved 16 percent versus the same quarter last year with a 12 percent increase in prices and a 4 percent increase in volume. The improvement in prices was broad-based across all businesses and geographic areas in response to tight industry supply/demand conditions for toluene diisocyanate and sharply higher raw material costs which supported increased selling prices for propylene oxide / propylene glycol. Sales volume improved primarily in Polyurethane Systems due to the impact of recent acquisitions and growth in cold storage and pipeline applications. EBIT declined versus the second quarter of 2007 due to margin pressure from higher raw material costs, the unfavorable impact of currency on costs, an increase in freight costs and higher operating expenses (related to acquisitions), which were not fully mitigated by improved prices.



Specialty Plastics and Elastomers sales continued to grow, up 27 percent from the second quarter of 2007 with a 14 percent increase in prices and a 13 percent improvement in volume. Prices improved across all geographic areas as the business took action to offset the impact of higher raw material costs. Volume improved due to a new marketing agreement with NUC, which became effective in the first quarter of 2008. Excluding the impact of the NUC agreement, volume was flat, as the impact of weak housing and automotive industries in the United States overshadowed volume growth in Europe. Despite the improvement in sales, EBIT was down from the second quarter of 2007 due to higher raw material prices, an increase in freight costs, and the impact of plant turnarounds and unplanned outages during the quarter.



Technology Licensing and Catalyst sales for the second quarter were up 11 percent compared with the same period last year, driven by higher revenue from UNIPOL™ technology licensing. The increase in licensing revenue drove a solid improvement in EBIT for the business compared with the second quarter of 2007.



For the first half of 2008, Performance Plastics sales were $8,381 million, up 15 percent from $7,271 million in the first half of 2007. Prices were up 10 percent, with currency accounting for approximately half of the increase, while volume improved 5 percent. Volume improved primarily due to the new marketing agreement with NUC. Performance Plastics EBIT for the first six months of 2008 was $597 million, down from $823 million in the first half of 2007. The decline in EBIT was driven by higher raw material costs, the unfavorable impact of currency on cost, increased spending on business growth activities across the segment, increased freight costs and increased operating expenses.



PERFORMANCE CHEMICALS



Performance Chemicals sales were $2,476 million in the second quarter of 2008, up 20 percent from $2,071 million in the second quarter of 2007. Compared with the second quarter of 2007, volume increased 6 percent and prices increased 14 percent, with currency accounting for approximately one third of the increase. The increase in prices was broad-based, with increases reported in all geographic areas and across all major product groups. The increase in volume was principally due to the second quarter of 2007 acquisition of Wolff Walsrode. EBIT for the second quarter was $290 million, down slightly from $294 million in the second quarter of 2007, as the benefit of higher prices and increased equity earnings from OPTIMAL and Dow Corning Corporation was offset by the impact of higher raw material costs, the unfavorable impact of currency on costs, and higher operating expenses to support growth initiatives.



Designed Polymers sales for the second quarter of 2008 were up 46 percent from the second quarter of 2007, reflecting a 39 percent increase in volume and a 7 percent increase in prices. The improvement in volume was principally due to the second quarter of 2007 acquisition of Wolff Walsrode. Excluding sales from the acquisition, volume for the business was up 8 percent with strong sales for biocides, FILMTEC™ reverse osmosis membranes, acrolein derivatives and ANGUS Chemical products. In addition to the volume increase in Europe related to Wolff Walsrode, volume was strong across all other geographic areas, led by Latin America. Compared with the second quarter of last year, EBIT increased due to higher prices and strong volume growth that more than offset the unfavorable impact of currency on costs and integration costs associated with the acquisition of Wolff Walsrode.



Dow Latex sales for the quarter were up 8 percent compared with the second quarter of 2007, as a 4 percent decline in volume was offset by a 12 percent increase in prices. Latex prices were up in all geographic areas. Volume declined overall as sluggish demand for architectural coatings in North America driven by continued softness in the housing industry more than offset modest improvements in the other areas. Despite higher sales, EBIT for the second quarter of 2008 declined significantly from the same quarter last year due to rising raw material costs.



Specialty Chemicals sales were up 14 percent compared with the second quarter of 2007, as a 4 percent decline in volume was offset by an 18 percent increase in prices. Prices were higher in all geographic areas and across all major product groups driven by significant increases in raw material costs. Volume decreased due to raw material shortages and planned and unplanned plant outages at several of the Company’s U.S. manufacturing facilities. Despite higher prices and higher equity earnings from OPTIMAL, EBIT decreased due to higher raw material costs, the unfavorable impact of currency on costs and lower volume in the second quarter of this year.



Performance Chemicals sales were $4,799 million for the first six months of 2008, up 18 percent from $4,073 million in the same period last year, reflecting a 6 percent increase in volume and a 12 percent increase in prices, with currency accounting for approximately half of the increase. EBIT for the first six months of 2008 was $561 million, compared with $606 million in 2007. Despite increased prices and volume growth, EBIT declined in 2008 due to increased raw material costs, the unfavorable impact of currency on costs, higher freight costs and increased spending on product development and business growth initiatives.



AGRICULTURAL SCIENCES



Agricultural Sciences sales were $1,360 million in the second quarter of 2008, up 25 percent from $1,091 million in the second quarter of 2007, posting a new quarterly sales record for the segment. Compared with the second quarter of 2007, volume improved 13 percent and prices rose 12 percent, with currency accounting for approximately half of the increase, as growers were motivated to spend more on crop protection in response to escalating farm commodity prices. All geographic areas experienced double-digit increases in sales compared with the same period last year, as a result of Dow AgroSciences’ strong product portfolio and robust global agricultural economics. Sales of new products increased 65 percent compared with the second quarter of 2007. Sales of penoxsulam herbicide doubled and sales of florasulam herbicide increased 50 percent while the 2008 launches of pyroxsulam herbicide and spinetoram insecticide continued to receive excellent channel support. EBIT for the second quarter of 2008 was $335 million, also a new quarterly record for the segment, up from $208 million in the second quarter of 2007 as the improvement in sales exceeded an increase in operating expenses related to growth initiatives and the unfavorable impact of currency on costs.



For the first six months of 2008, sales for Agricultural Sciences were $2,674 million, up 26 percent from $2,127 million in 2007, as volume increased 13 percent and prices rose 13 percent , with currency accounting for approximately half of the increase. Continued grower confidence and economic stability in Latin America, increased cereal acres planted in Canada and Europe, product line extensions in the United States, and new product launches in Asia Pacific all contributed to the strong performance. For the first six months of 2008, EBIT for the segment was $666 million, an increase from $490 million in the same period last year, primarily driven by price increases and strong sales volume growth.



BASIC PLASTICS



Basic Plastics sales for the second quarter of 2008 were $3,780 million, up 19 percent from $3,180 million in the second quarter of last year. Compared with last year, prices increased 22 percent, with currency accounting for approximately one fourth of the increase, and volume decreased 3 percent. Double-digit price increases were reported in all geographic areas, reflecting the impact of significantly higher feedstock and energy costs. The volume decline was concentrated in North America and was attributable to the May 2008 formation of Americas Styrenics LLC, a joint venture between the Company and Chevron Phillips Chemical Company LP; and to the December 2007 closure of the polypropylene manufacturing facility at St. Charles Operations in Hahnville, Louisiana; as well as ongoing weakness in the U.S.

economy. Volume increased in all other geographic areas as demand remained solid and customers increased purchases in anticipation of future price increases. EBIT for the second quarter was $388 million, down from $529 million in the second quarter of 2007. While the business aggressively raised prices, the increases were not sufficient to offset the significantly higher feedstock and energy and other raw materials costs, and the unfavorable impact of currency on costs. EBIT was also negatively impacted by lower equity earnings as an increase in earnings from EQUATE was more than offset by lower earnings from Equipolymers and Siam Polyethylene. In the second quarter of 2007, EBIT was favorably impacted by a gain on the sale of a low density polyethylene plant at CubatĂŁo, Brazil.



Polyethylene sales were up 33 percent from the second quarter of 2007 as prices increased 27 percent and volume increased 6 percent. Higher prices were seen in all geographic areas as prices were increased in response to significantly higher feedstock and energy costs. Volume improved in all geographic areas as customers increased their purchases in anticipation of future price increases. Despite the improvement in sales, EBIT for the second quarter of 2008 declined significantly compared with the same period last year, due to higher raw material and energy costs. EBIT in the second quarter of 2007 also included the impact of the gain associated with the sale of the CubatĂŁo, Brazil polyethylene plant.



Polypropylene sales were up 4 percent over the second quarter of 2007 as price increases of 18 percent were largely offset by a decrease in volume of 14 percent. Prices were increased in response to rising feedstock and energy costs, and improvement was seen in all geographic areas. Volume in North America was significantly lower as the result of the December 2007 closure of the Company’s polypropylene manufacturing facility at St. Charles Operations in Hahnville, Louisiana. EBIT was up slightly from the second quarter of 2007.



Polystyrene sales for the second quarter of 2008 were down 19 percent compared with the second quarter of 2007. Volume was down 26 percent with the decline most pronounced in North America and Latin America due to the formation of Americas Styrenics LLC. Volume also declined in Asia Pacific and Europe as higher prices resulted in lower demand. Prices were up in all geographic areas as the result of higher feedstock and energy costs. EBIT was down significantly from the second quarter of 2007 as higher feedstock and energy costs and higher other raw material costs more than offset the improvement in prices.



Basic Plastics sales for the first six months of 2008 were $7,272 million, up 20 percent from $6,074 million in the first half of 2007. Compared with 2007, prices were up 23 percent, while volume declined 3 percent. EBIT for the first half of 2008 was $815 million, down from $1,056 million in the first half of 2007. EBIT declined as the impact of higher feedstock and energy costs, higher costs for other raw materials and lower equity earnings more than offset the impact of the higher selling prices. In the first half of 2007, EBIT was favorably impacted by a gain on the sale of a low density polyethylene plant at CubatĂŁo, Brazil.



BASIC CHEMICALS



Basic Chemicals sales were $1,642 million for the second quarter of 2008, up 13 percent from $1,455 million in the second quarter of 2007. Prices increased 20 percent, while volume declined 7 percent. Prices were up for ethylene glycol (“EG”) due to higher feedstock and energy costs. The economic slow down in the United States and Europe, a planned maintenance turnaround at the Plaquemine, Louisiana production facility and unplanned outages at several facilities resulted in lower volume for EG compared with the same period last year. The Company also reduced production at some facilities to match demand. Caustic soda also reported increases in prices, reflecting tight demand in all geographic areas. Volume for caustic soda declined slightly due to the sale of the Company’s caustic soda distribution business in Western Canada in the fourth quarter of 2007, and lower operating rates, which were reduced to match demand for chlorine derivatives. Prices were up for vinyl chloride monomer (“VCM”) due to higher feedstock and energy costs; volume for VCM increased slightly compared with last year due to a planned maintenance turnaround that occurred in the second quarter of 2007 at the Plaquemine, Louisiana production facility. Solvents and intermediates also reported price increases due to higher feedstock and energy costs. Despite higher selling prices, EBIT for the second quarter of 2008 fell to $29 million from $165 million in the second quarter of last year due to significantly higher feedstock and energy costs, lower volume, and lower equity earnings from MEGlobal.



For the first half of 2008, sales for Basic Chemicals were $3,201 million, up 17 percent from $2,726 million last year, as prices increased 23 percent and volume decreased 6 percent. EBIT for the first six months of 2008 was $188 million, down from $299 million in the same period last year as higher prices and higher equity earnings from MEGlobal, EQUATE and OPTIMAL could not offset the increase in feedstock and energy costs, other raw materials costs and lower volume.

HYDROCARBONS AND ENERGY



Hydrocarbons and Energy sales for the second quarter of 2008 were $2,618 million, up 61 percent from $1,623 million in the second quarter of 2007. Prices increased 42 percent, while volume increased 19 percent. The increase in selling prices in the second quarter of 2008 was driven by significantly higher overall feedstock and energy prices. Sales of refinery products increased compared with the same quarter of last year due to a planned maintenance turnaround in the second quarter of last year. Styrene sales also increased due to a new supply contract with Americas Styrenics, LLC. For the first half of 2008, sales were $4,783 million for the segment, up 48 percent from $3,235 million in the same period of 2007 as prices increased 38 percent and volume increased 10 percent.



The Hydrocarbons and Energy business transfers materials to Dow’s derivatives businesses at net cost. As a result, EBIT for this operating segment was at or near breakeven for the three months and six months ended June 30, 2008 and 2007.


CONF CALL

Howard Ungerleider - Vice President of Investor Relations

Thanks, Derek. Good morning everyone and welcome. As usual, we are making this call available to investors and the media via webcast. This call is the property of the Dow Chemical Company. Any redistribution, retransmission or rebroadcast of this call in any form without Dow's expressed written consent is strictly prohibited.

On the call with me today are Andrew Liveris, Dow's Chairman and CEO; Geoffery Merszei, Dow's Executive Vice President and Chief Financial Officer; and Jeff Tate, Director in Investor Relations.

Around 6.30 this morning, October 23rd, our earnings release went out on PR Newswire and was posted on the Internet on Dow's website dow.com. We have prepared some slides to supplement our comments on this conference call. The slides are posted on our website, available on the presentations page of the Investor Relations section or through the link to our webcast.

As you know, some of our comments today may include statements about our expectations for the future. Those expectations involve risks and uncertainties. We can't guarantee that the accuracy of any of our forecasts or estimates and we do not plan to update any forward-looking statements during the quarter. Now, if you would like more information on the risks involved in forward-looking statements, please see our SEC filings. In addition some of our comments may reference non-GAAP financial measures. A reconciliation to the most directly comparable GAAP financial measure and other associated disclosures are contained in our earnings release on our website. Our earnings release, as well as recent 10-Qs, 10-Ks, 8-Ks and annual reports are available on the Internet at dow.com in the financial reports page of the Investor Relations section.

Starting with the agenda on slide 3, Geoffery will begin today's call with a high level review of our third quarter. He will turn the call back to me for some additional detail at the operating segment level. Geoffery will then address several critical issues that are on the minds of many of our investors, such as what we're doing to address the global economic crisis and he'll give you an update on two of the larger transformational actions we have underway, the formation of K-Dow Petrochemicals and our planned acquisition of Rohm and Haas, as well as our outlook.

Finally, after our prepared remarks, we'll move to your questions for both Andrew and Geoffery. Now turning to slide 4, you'll see a summary of the financial highlights for the quarter.

Let me hand it over to Geoffery.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Thank you, Howard, and good morning The third quarter was characterized by three major events-the record high feedstock and energy costs, the weakening global demand, and finally, the two large hurricanes that hit the US Gulf Coast I believe Dow performed well in the quarter, despite these challenges delivering significant price increases tight cost controls and once again strong and consistent equity earnings.

So let's get into the details on slide five. Sales for the third quarter increased 13% from the same period last year to $15.4 billion. Price increased 22% with double digit price gains in all operating segments and all geographic areas. In fact, this was the largest year-over-year percentage increase in price since the first quarter of 2005.

Now volume was down 9% globally reduced 2% by the impact of the hurricanes Gustav and Ike, further weakening of demand and our focus on implementing price increases in the quarter. Now excluding the impact of acquisitions and divestitures and the hurricanes, volume was down 5%.

I am pleased to report that the outstanding performance in Agricultural Sciences continued setting a new third quarter sales and EBIT record. And equity earnings were $266 million for the third quarter, marking the seventh consecutive quarter that earnings from our joint ventures exceeded $250 million.

Now, in spite of the recent significant declines in energy prices, which occurred near the end of the quarter purchased, feedstock and energy costs surged 48% representing an increase of $2.6 billion over the same quarter last year. And actually, we were up more than $350 million, or $0.27 per share sequentially.

This was the largest year-over-year increase in the company's history and the third consecutive quarter in which these costs reached new heights. So as a result, margin expansion in the quarter was not achieved by either our basic or performance segments as the hurricanes idled approximately 80% of our North American capacity in September, just as feedstock costs were declining. All of this led to reported earnings for the quarter of $0.46 per share.

Now, turning to slide six, please keep in mind that this number reflects the unfavorable impact on the hurricanes composed of $0.09 per share in costs and $0.03 per share in margin on lost sales. In addition, there was a $0.03 per share impact for purchased in-process research and development charges, and $0.02 per share for expenses related to our announced acquisition of Rohm and Haas.

Now, if we add this to the reported earnings of $0.46, you get to an adjusted earnings level of $0.63. And this does not take into account that we had an unusually high tax rate of 29% in the quarter, which would add another $0.03 per share.

So as I said earlier, I believe this was a good quarter for Dow, particularly, considering the numerous challenges we faced through the quarter. Another way to look at our earnings is to start with our second quarter earnings of $0.81, then subtract the earnings difference in our AgroSciences division of $0.18, which is due to the normal seasonality of this business.

And next, factoring the substantial increase in our hydrocarbon and energy costs of $0.27 per share on a sequential basis that I referred to earlier. Now, adding these two items together, could have dropped our earnings to as low as $0.36. But due to the success of our pricing increases and our aggressive cost controls, I hope you agree that we delivered significantly better results.

And this does not even take into account that the third quarter is traditionally Dow's weakest quarter or that we incurred various hurricane-related impacts. Now, before I turn the call back to Howard, I would like to briefly highlight the strong contributions from our joint ventures as seen on slide seven.

Let's begin with Dow Corning which reported record third quarter sales and earnings due in part to excellent results at its Hemlock semiconductor unit. Next, our joint venture OPTIMAL in Malaysia had a solid quarter as well with margin expansion driven by higher prices and cost advantaged feedstocks. And our joint venture EQUATE in Kuwait reported strong polyethylene results driven by higher prices and their advantaged feedstock position. However, these strong results were offset by lower ethylene glycol earnings.

And now, I'd like to turn the call back to Howard for a review of our performance by operating segment in the quarter

Howard Ungerleider - Vice President of Investor Relations

Thanks, Geoffery. Now, starting with slide eight in Performance Plastics, the majority of the businesses in this segment posted double-digit price gains with price up 14% overall. Volume was down 4% on further declines in the North American automotive and housing industries. Demand also softened in these same industries in Europe, particularly in residential and commercial construction in Spain and the UK.

In Dow Polyurethanes, volumes declined due to softening demand for furniture bedding and appliance applications as well as our aggressive efforts to raise prices and the impact of the hurricanes, which limited supply.

Polyurethane Systems, however, reported strong demand for insulation materials used in oil and gas exploration applications. In fact, the business broke ground on an expansion at its Izolan system house in Russia during the quarter to capitalize on growth in this area.

In Dow Epoxy, there was significant margin squeeze in intermediates because of industry oversupply, which limited our ability to raise prices enough to offset higher costs In Dow Epoxy Systems, growth in wind energy and infrastructure applications, however, remain strong.

Despite robust price gains across the segment, selling prices continue to lag significant increases in raw material costs during the quarter. And with the impact of the hurricanes, EBIT in the Performance Plastics segment was down versus the same period last year.

Now moving to slide nine, for the ninth consecutive quarter Performance Chemicals posted year-over-year price gains up 21%. In North America, Asia-Pacific and Latin America price improved in each of these regions by more than 20%. Designed Polymers reported strong demand in food, pharmaceutical and personal care applications in Dow Wolff Cellulosics, which partially offset weakness in construction polymers.

Dow Water Solutions reported growth for FILMTEC reverse-osmosis membranes and ion-exchange resins as global water industry fundamentals remain strong due to growing demand for clean water. Outstanding results were reported in Biocides driven by growth in oil and gas applications.

In Specialty Chemicals, prices were higher in all geographical areas and strong demand was reported in industrial and household cleaning applications as well as in the agricultural industry. Margins for Dow Latex expanded in the quarter, due to our strong focus on price, which was aided by a limited supply of a key raw material.

Equity earnings were strong in the quarter based on results from OPTIMAL and Dow Corning. Sales and earnings accelerated during the quarter at Dow Corning due to continued strong demand in the Solar industry as well as new capacity at their Hemlock semiconductor unit, which was operational for the full quarter.

For the Performance Chemicals segment overall, EBIT increased as improvement in sales and higher equity earnings offset an increase in raw material costs.

Slide 10 highlights our continued strong performer Dow AgroSciences. Following a stellar performance in the first half of the year and despite this being a seasonally slow quarter, Dow AgroSciences delivered a third quarter sales and EBIT record. Price was up 18% while volume increased 8% reflecting organic growth and growth from recent acquisitions.

Our broad product portfolio of both agricultural, chemicals, and seeds continue to benefit from robust global demand for agricultural output. Sales in seeds and traits increased in the quarter led by a higher demand for sunflower oil and seed in Latin America.

Chlorine sales in Brazil also rose in the quarter, due to an improved farm economy and a solid performance from our Agromen acquisition. Strong demand was reported for cereal and broadleaf crop herbicides in North America and Northern Europe, due to high cereal prices, an increase in planted acres and the very successful launch of Pyroxsulam in Canada which exceeded customer expectations.

Glyphosate sales were up in the quarter, driven by higher prices due to tight industry supply conditions. Strong volume growth continued for new products Penoxsulam rice herbicide and Aminopyralid herbicide for range and pasture.

Spinetoram insecticide sales continued to ramp-up from product launches in the United States The business announced two new bolt-on acquisitions in the quarter; Dairyland Seed and Renze Hybrids. These represent the fifth and sixth acquisitions Dow AgroSciences has completed since May 2007.

Earnings were unfavorably impacted by pretax charges totaling $27 million for purchased in-process research and development related to these acquisitions.

Now shifting to the basic on slide 11, sales in Basic Plastics rose 7% to $3.5 billion, up from $3.3 billion in the same period last year. Price increased a robust 25% and was up in all businesses and in all geographic areas.

Volume, however, decreased 18% due in part to several portfolio management actions Dow has taken over the past year namely the shutdown of capacity in Louisiana and Brazil and the formation of our Americas Styrenics joint venture in May of this year. Volumes were also unfavorably impacted by the hurricanes.

Strong price gains in polyethylene more than offset increases in purchased feedstock and energy costs. Demand for polypropylene was down, again, this quarter, due to lower consumer spending and slowdowns in the housing and automotive sectors.

Equity earnings were up versus the same period last year on improved earnings from EQUATE EBIT for Basic Plastics was down compared with the same period last year, due to price increases not being sufficient to offset significantly higher raw material costs as well as the impact of the hurricanes.

And finally in Basic Chemicals on slide 12, sales of $1.5 billion for the quarter were flat with the same period last year. This segment recorded a 20% gain in price and a 20% decline in volume. Compared with last year volumes were lower due to the sale of the caustic soda business in western Canada in December of 2007.

Pricing for caustic soda continued to be strong benefiting from ongoing favorable industry supply demand fundamentals. Demand for vinyl chloride monomer used in PVC production, however, continued to decline as end use applications for PVC in residential building and construction applications remained extremely weak.

Results for the ChlorVinyls business were also impacted by the hurricanes which extended an earlier unplanned outage at our manufacturing facility in Freeport Texas. Volume was down in the ethylene oxide/ethylene glycol business due to weak industry fundamentals and further declines in polyester fiber demand in Asia-Pacific.

The EO/EG business was also negatively impacted by the two hurricanes in the quarter. Despite selling prices that are higher and higher equity earnings from OPTIMAL EBIT was significantly lower compared with the third quarter of 2007.

One final data point, our operating rates for the quarter was 76%, down from 83% last quarter primarily because of the hurricanes. Excluding the hurricane impact, our operating rate would have been slightly higher sequentially at 84%.

Now, I'd like to turn the call back to Geoffery, who will address several critical issues that are on the minds of many of our investors.

Geoffery E. Merszei - Executive Vice President and Chief Financial Officer

Thank you, Howard. Let's now turn to slide 13, and the topic of risk management, I would like to share with you what we have done to preserve our financial flexibility and further strengthen our financial discipline. As we all know these are clearly challenging times, but I want to assure you that Dow remains financially strong; our balance sheet is in good shape; and the company has sufficient liquidity and financial flexibility to meet all of its business obligations.

When we saw the credit markets were beginning to tighten back in the summer of 2007, we proactively focused our risk management activities in two areas liquidity and counterparty risk. Today, in the area of liquidity, we have committed credit lines of approximately $5 billion, of which half remains unused. In addition, we have other sources of funding available to us throughout the world. And for example, here in the US, we regularly issue medium-term retail bonds.

Now regarding counterparty risk, we diversified our financial exposures. And by this, I'm referring to investments as well as the derivatives. We've also limited the maximum amount of exposure we would have to each counterparty as well as being very selective in the type of investments we make.

In addition to preserving our financial flexibility, our financial discipline also remains intact. We've taken a number of actions to preserve cash, defer or eliminate capital spending and cut costs. First, we're re-examining all capital projects in light of the new economic environment and plan to reduce our capital spending by $100 million by year end.

So this will lower our capital spending goal from $2.2 billion to $2.1 billion Next, we're delaying all discretionary spending. In fact, in the third quarter, we successfully reduced our SG&A expenses by almost $20 million sequentially. And in light of the current economic environment, we have put in place new plans to reduce spending by an additional $100 million to $150 million before year end.

We also have a goal to reduce our working capital by several $100 million. Specifically, here we plan to reduce DSI by three days to 59 days by year end. And we are very actively managing our credit policies. In fact our days sales outstanding tied a yearly low of 38 days in the third quarter.

So we believe that these are prudent measures, given the economic slowdown and the uncertain times ahead. I would also like to mention that Dow has been actively managing its business portfolio and taking action on underperforming underutilized or non-competitive assets for quite sometime now.

For example, in the last two years, we've announced 43 plant shutdowns, we exited 17 sites, and we've divested 18 businesses. And we will continue to trim spending on businesses that cannot hold their ground during tough economic conditions

In fact, year-to-date, we have divested nine businesses with revenues of approximately $1.5 billion and more than $40 million of negative EBIT. So we're also actively realigning existing businesses for growth and profitability. The recent realignment in Dow Emulsion Polymers is a good example. The outcome of this effort will be more focused lean and a more agile business model.

By the end of 2008 Dow Emulsion Polymers will have reduced its production capacity by about 20% here in North America and 10% in Europe. The business will also have reduced its workforce by approximately 22%.

So this strong financial discipline has become part of our culture. This provides Dow with the strength and stability needed to navigate even in these challenging times. And speaking of strength and stability, nothing communicates this more than our cash dividend.

So as you can see on, slide 14 Dow has a long and distinguished dividend history And according to my own research Dow is the only company in the Fortune 200 that has either maintained or increased its regular quarterly dividend since 1912.

Now this includes paying our dividend through two world wars, the Great Depression, the oil shock of the '70s, the savings and loan collapse of the '80s, the Asian financial crisis in the '90s as well as numerous industry cycles. If you add it up, that's 388 consecutive quarters of remunerating our shareholders without reduction or interruption.

I would like to reassure our investors that we have every intention to continue this long standing tradition. And at today's stock price, our dividend yield is over 7% making Dow a very appealing investment choice indeed.

Now in the time that remains, I would like to update you on the two large transformational actions, we have underway. First on slide 15, I would like to discuss the formation of K-Dow Petrochemicals, our joint venture with our Kuwaiti partners.

Now over the past 10 months, we have been hard at work on this extremely exciting new venture and we're still on track to close this transaction by year end, which was the expected timing that we communicated when we announced this new joint venture last December.

Now when this transaction is complete, we will have created a global petrochemical leader with sales of approximately $14 billion. In fact since we're a public company, it would rank in the Fortune 200. As you can imagine, creating a Fortune 200 company from scratch is extremely complex. This carve out includes over 60 plants, 50 manufacturing sites and 11 joint ventures spread out in 11 countries.

Given the size and geographic reach of this joint venture, K-Dow is establishing more than 60 new legal entities. And to facilitate the negotiation, a data room containing more than 12,000 documents and over 150,000 pages was established. More than 1,000 Dow employees have been actively engaged in this project throughout the year.

And because Dow and K-Dow will be both customer and supplier to one another at many sites, we've created approximately 250 supply, service and technology agreements. It's important to remember that these are agreements, which will preserve the value of Dow's integration and our ability to supply our performance businesses with key raw materials.

Recently, we named the K-Dow leadership team and announced that its corporate headquarters will be located in southeast Michigan. The management team at K-Dow will consist of both Dow and Kuwaiti leaders, who have many years of experience with the businesses being contributed to this joint venture and operating successfully through numerous petrochemical industry cycles.

Now this management team has already been working diligently to obtain financing for K-Dow. And as a result of this effort, K-Dow will have the funds necessary to successfully operate independently and grow on day one. This is a clear recognition that these are high quality businesses and are strong cash generators throughout the ethylene cycle.

And needless to say. this also speaks to the reputation and financial strength of both companies. Remember Kuwaiti Petroleum Corporation is one of the world's top 10 energy companies. So where are we in the closing process?

Well, regarding regulatory approvals, the transaction has received clearance from the FTC here in the United States and the European Commission, and the project has been cleared by the Committee on Foreign Investment in the US also known as CFIUS, due to it being deemed outside of their scope.

This transaction has also been approved in Kuwait by the Board of Directors of both PIC and its parent the Kuwait Petroleum Corporation. And we are currently awaiting final approval from the Kuwaiti government via their Supreme Petroleum Council. So as I said earlier we remain on track to close this transaction by the end of the year.

Now moving on to slide 16, I'd like to talk about our announced acquisition of Rohm and Haas. We remain on track to close this transaction in the early part of 2009 pending, of course, regulatory approvals. In order to complete the transaction, we have secured a $13 billion bridge loan. This facility has been fully committed and successfully syndicated amongst 19 banks with very favorable terms and conditions.

We have also secured $4 billion in convertible preferred securities for this acquisition: $1 billion from the Kuwaiti Investment Authority and $3 billion from Berkshire Hathaway. These two facilities are contingent upon the close of the Rohm and Haas acquisition, and they're also committed. And as you recall, these securities carry a coupon of 8.5%.

Now I believe, Warren Buffett chose to invest in Dow because one, we have a good brand; two, an excellent management team; and three, a sound strategy and business position in our industry. And I also believe, his involvement in this transaction is a sound endorsement of our transformational strategy and most importantly the long-term value it will create.

And after utilizing these funding sources and the proceeds from the formation of K-Dow, we expect to draw approximately $4 billion to $6 billion from a $13 billion bridge facility in order to complete this acquisition. And as we said, back in July, Rohm and Haas is a strong operational fit for Dow.

And this combination brings together best-in-class products and technologies broad geographic reach and leading industry positions in coatings, electronics and adhesives to create an outstanding business portfolio with significant growth opportunities. And we're also making great progress on identifying synergies between the two companies, and we remain confident, we will achieve the $800 million in cost synergies that we announced back in July.

Now I'd like to remind you that this $800 million we committed is in addition to the $110 million announced restructuring program that Rohm and Haas already has underway. And given the current economic climate, we are already identifying new ways to accelerate the implementation of the $800 million synergy commitment.

As part of our acceleration effort, we have set a goal to be at a $100 million annual run rate by day one of the new Dow, an achievement rare in acquisitions. So here are just a few examples of the work that has begun to get us to this run rate commitment.

First is an example in the IT space, where we will be able to immediately rationalize similar capabilities and stop redundant project work. In fact just looking at Dow's current IT activity, we have already identified a 100,000 hours of active project work that could possibly be eliminated.

Now, this is especially true in SAP development and implementation, AND another example is in the purchase services area, where we expect to have reductions in spending on IT from critical vendors based on the increased scale of our new company.

And we've set an aggressive timeline to implement these cost reductions, where we fully expect to achieve our run rate in the range of $40 million to $50 million in savings immediately following the close of the transaction. I'll share with you another example in marketing and sales We believe Rohm and Haas has the best-in-class marketing organization in our sector and knows how to drive profitable growth from customer-driven technologies and products.

Now it's our intention to integrate this capability throughout the Dow organization. In doing so, we'll achieve marketing and sales cost synergies with an estimated run rate of $30 million on day one as well. So as you can see the majority of the $100 million day one run rate has already been identified.

And finally, in order to accelerate the capture of synergies post-closing and be ready to implement on day one we have launched a number of clean teams to focus on cost and growth synergies. Now, this is no different from what we have done in the past with some of our past acquisitions.

Clean teams are typically comprised of third parties such as Dow retirees or independent consultants, who do much of the pre-work in advance of closings. And these teams gather and analyze the data as well as formulate recommendations, which will be shared with the implementation teams immediately after closing.

So, clean teams have been established in the functional areas of purchasing, supply chain, tax controllers and manufacturing. And all of these efforts are aimed at jump-starting synergy capture on day one.

So as you can see on slide 17, here is a summary of the major categories of savings we've identified in our $800 million commitment.

In summary, we remain very confident in our ability to deliver total savings of at least $910 million and do it quickly after close.

Now I'd like to share with you a few more updates on important milestones regarding this transaction. We're currently responding to a second request for information, which we received from the FTC here in the United States and we are cooperating.

Now in an effort to mitigate potential antitrust issues, we proactively announced that we are exploring divestiture options for our Clear Lake, Texas Acrylic Acid and Esters business as well as our UCAR Emulsions Systems Specialty Latex business here in North America. And we're also cooperating in the European Commission's review of this transaction and they are on track to file regulatory documents in that process.

And finally, there is a Rohm and Haas shareholder vote on the proposed acquisition, which is scheduled for October 29. So at this point we're not aware of issues that would prevent us from achieving any of the milestones, I just outlined with you and we reconfirm our intent to close this transaction in the early part of 2009.

Our acquisition of Rohm and Haas is very consistent with our strategy… increase the percentage of specialty businesses in our portfolio, so we are better able to withstand the ups and downs of the economic and industry cycle, and most importantly, create shareholder value in the long-term.

So turning now to slide 18, I'd like to make a few comments about our outlook and what to expect from Dow in the fourth quarter. The global economy is now clearly feeling the effects of the same economic issues that have plagued the US for the past several quarters. These issues have been magnified by a lack of consumer confidence resulting in a drop in demand not only in the US but, in fact, around the world.

So while feedstock and energy costs have significantly declined from the all-time highs that we experienced only recently, we believe margin expansion of fourth quarter will likely be muted by weakening demand. So as I mentioned earlier, Dow is well-positioned to weather this increasingly difficult economic downturn.

We have a strong balance sheet. We have a track record of strong financial discipline. And we are accelerating our focus on what we can control namely price, volume, management as well as cutting costs, deferring or canceling capital spending and continued business portfolio management.

And in addition, we will continue to implement actions that are aligned with our transformational strategy, such as completing our petrochemical joint venture with our Kuwaiti partners and closing our announced acquisition of Rohm and Haas.

So thank you very much. And at this time, I will hand the call back to Howard for the Q&A portion.

Howard Ungerleider - Vice President of Investor Relations

Thanks, Geoffery. That wraps up our prepared remarks. For your reference, a copy of these comments will be posted on Dow's website later today. Now, we'll move onto your questions.

Before we do though, I'd like to remind you that my comments on forward-looking statements and non-GAAP financial measures apply to both our prepared remarks and to anything that may come up during the Q&A Derek would you please explain the Q&A procedure?

Question and Answer


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