Dow Chemical - Excerpts from Dow Financial Reports on Controversies Associated with Dow's Asbestos Liability.

Because many of the pending claims do not allege a particular injury, the Corporation has calculated several probable liability outcomes based on estimates and historic distributions of personal injury claim types and settlement and resolution amounts. The liability estimates ranged from a low of $351 million to a high of $455 million. Upon review by management, it was determined that the most reasonable estimate was $362 million, which is within the estimable range.

Fourth Quarter 2002 Press release reported in form 8-K

• Results for the quarter were impacted by a pretax charge of $828 million related to Union Carbide Corporation's potential asbestos-related liability and a pretax charge of $225 million for merger-related expenses and restructuring.

• The Company reported a loss in net income of $809 million and a loss in earnings per share of $0.89. Excluding unusual items, net income was a loss of $172 million and earnings per share were a loss of $0.18.

During the fourth quarter of 2002, a pretax charge of $828 million was recorded by Union Carbide for the estimated cost of resolving pending and future asbestos claims. Analysis, Research & Planning Corporation (ARPC), a consulting firm with broad experience in estimating liabilities associated with mass tort litigation including asbestos, provided Union Carbide with an analysis of its potential asbestos liability. Union Carbide had asked ARPC to explore whether it would be possible to estimate the cost of resolving pending and future asbestos-related personal injury claims that have been, and could reasonably be expected to be, filed against Union Carbide and Amchem Products, Inc., a former subsidiary of Union Carbide. Based on the results of ARPC's analysis, Union Carbide increased the reserve for its asbestos-related liabilities for pending and future claims at December 31, 2002 to $2.2 billion. Union Carbide also increased the receivable for insurance recoveries related to asbestos liability to $1.35 billion at December 31, 2002. This resulted in a net income statement impact to Union Carbide of $828 million on a pretax basis, or $522 million on an after-tax basis, in the fourth quarter of 2002.

"We recognize that the asbestos issue has created uncertainty for investors. We believe that quantifying the cost of resolving Carbide's asbestos claims will alleviate that uncertainty and enable our company to realize its full value," said Stavropoulos. "This does not signal any change in Union Carbide's legal strategy." Additionally, the Company recorded a pretax charge of $225 million for merger-related expenses and restructuring, which included severance payments and merger integration costs, as well as write-offs of assets in Canada, South Africa and the United States. Also in the fourth quarter, Dow recorded a reduction to stockholders' equity of $1.3 billion due to the decline in market value of Dow's pension fund portfolio and lower discount rate assumptions. This charge had no impact on earnings or cash flow.

10-K Issued March 2003

Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised Union Carbide that it would be possible to determine an estimate of a reasonable forecast of the cost of resolving pending and future asbestos-related claims likely to face Union Carbide and Amchem, if certain assumptions were made. Specifically, ARPC advised Union Carbide that for purposes of determining an estimate it is reasonable to assume that in the near term asbestos-related claims filed against Union Carbide and Amchem are unlikely to return to levels below those experienced prior to 2001 - when the recent spike in filings commenced - and that average claim values are unlikely to return to levels below those experienced in 2001-2002, the years immediately following CCR’s cessation of operations. ARPC advised Union Carbide that, by assuming that future filings were unlikely to exceed the levels experienced prior to 2001 and extrapolating from 2001 and 2002 average claim values, ARPC could make a reasonable forecast of the cost of resolving asbestos-related claims facing Union Carbide and Amchem. ARPC also advised Union Carbide that forecasts of resolution costs for a 10 to 15 year period from the date of the forecast are likely to be more accurate than forecasts for longer periods of time.

In projecting Union Carbide’s resolution costs for future asbestos-related claims, ARPC applied two methodologies that have been widely used for forecasting purposes. Applying these methodologies, ARPC forecast the number and allocation by disease category of those potential future claims on a year-by-year basis through 2049. ARPC then calculated the percentage of claims in each disease category that had been closed with payments in 2001 and 2002. Using those percentages, ARPC calculated the number of future claims by disease category that would likely require payment by Union Carbide and Amchem and multiplied the number of such claims by the mean values paid by Union Carbide and Amchem, respectively, to dispose of such claims in 2001 and 2002. In estimating Union Carbide’s cost of resolving pending claims, ARPC used a process similar to that used for calculating the cost of resolving future claims.

As of December 31, 2002, ARPC estimated the undiscounted cost of resolving pending and future asbestos-related claims against Union Carbide and Amchem, excluding future defense and processing costs, for the 15-year period from the present through 2017 to be between approximately $2.2 billion and $2.4 billion, depending on which of the two accepted methodologies was used. Although ARPC provided estimates for a longer period of time, based on ARPC’s advice that forecasts for shorter periods of time are more accurate and in light of the uncertainties inherent in making long-term projections, Union Carbide determined that the 15-year period through 2017 is the reasonable time period for projecting the cost of disposing of its future asbestos-related claims. Union Carbide concluded that it is probable that the undiscounted cost of disposing of asbestos-related pending and future claims ranges from $2.2 billion to $2.4 billion, which is the range for the 15-year period ending in 2017 as estimated by ARPC using both methodologies. Accordingly, Union Carbide increased its asbestos-related liability for pending and future claims at December 31, 2002 to $2.2 billion, excluding future defense and processing costs. For pending claims, Union Carbide had an asbestos-related liability of $233 million at December 31, 2001. Union Carbide also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002, substantially exhausting its asbestos product liability coverage. This resulted in a net income statement impact to Union Carbide of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002. Union Carbide’s receivable for insurance recoveries related to its asbestos liability was $223 million at December 31, 2001. The insurance receivable related to the asbestos liability was determined by Union Carbide after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which Union Carbide and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers.