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

FORM 10-Q

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

FOR THE QUARTER ENDED SEPTEMBER 30, 2002March 31, 2003

Commission file number 1-1463

UNION CARBIDE CORPORATION
(Exact name of registrant as specified in its charter)

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

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

At September 30, 2002,March 31, 2003, 1,000 shares of common stock were outstanding, all of which were held by the registrant's parent, The Dow Chemical Company.

The registrant meets the conditions set forth in General Instructions H(1)(a) and (b) for Form 10-Q and is therefore filing this form with a reduced disclosure format.

UNION CARBIDE CORPORATION

TABLE OF CONTENTSUnion Carbide Corporation
Table of Contents

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Union Carbide Corporation and Subsidiaries
Consolidated Statements of IncomeOperations

See Notes to the Consolidated Financial Statements.

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Union Carbide Corporation and Subsidiaries
Consolidated Balance Sheets

See Notes to the Consolidated Financial Statements.

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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Cash Flows

See Notes to the Consolidated Financial Statements.

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Union Carbide Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income

See Notes to the Consolidated Financial Statements.

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Union Carbide Corporation and Subsidiaries
Notes to the Consolidated Financial Statements

(Unaudited)

Note A—Consolidated Financial StatementsNOTE A    CONSOLIDATED FINANCIAL STATEMENTS

        Except as otherwise indicated by the context, the terms "Corporation" and "UCC" as used herein mean Union Carbide Corporation and its consolidated subsidiaries. The unaudited interimaccompanying consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) which, in the opinion of management, are considered necessary for a fair presentation of the resultsCorporation include the assets, liabilities, revenues and expenses of all majority-owned subsidiaries over which the Corporation exercises control. Intercompany transactions and balances are eliminated in consolidation. Investments in nonconsolidated affiliates (20-50 percent owned companies) are accounted for on the periods covered.equity basis.

        Since February 6, 2001, the Corporation has been a wholly owned subsidiary of The Dow Chemical Company ("Dow") as a consequence of the Corporation merging with a wholly owned subsidiary of Dow effective that date (the "merger" or "Dow merger"). Transactions with the Corporation's parent company, Dow, or other Dow subsidiaries have been reflected as related company transactions in the consolidated financial statements. See Note DH for further discussion. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per Share," the presentation of earnings per share is not required in financial statements of wholly owned subsidiaries.

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

        Since February 7, 2001, the Corporation has been included in Dow's consolidated federal income tax group and consolidated income tax return. The Corporation uses the separate return method to account for its income taxes; accordingly, there is no difference between the method used to account for income taxes at the UCC level and the formula used to compute the amount due to Dow for UCC's share of income taxes due on Dow's consolidated income tax return.

Certain reclassifications of prior years'year's amounts have been made to conform to the presentation adopted for 2002.2003. These statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Corporation's Annual Report on Form 10-K filed by the Corporation on March 20, 2002 for the year ended December 31, 2001.2002.

Note B—Accounting ChangesNOTE B    ACCOUNTING CHANGES

        TheIn June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," in June 1998. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The Corporation adopted SFAS No. 133, as amended and interpreted by the FASB and the Derivatives Implementation Group through "Statement 133 Implementation Issues", on January 1, 2001. Due to the Corporation's limited use of financial instruments to manage its exposure to market risks, primarily related to changes in foreign currency exchange rates, the adoption of SFAS No. 133 did not have a material impact on the Corporation's consolidated financial statements.

        In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement, which replaces SFAS No. 125, revises the standards for accounting for securitizations and other transfers of financial assets and collateral, and requires certain disclosures, but it carries over most of the provisions of SFAS No. 125 without reconsideration. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. It was effective for recognition and reclassifications of collateral and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The adoption of SFAS No. 140 did not have a material impact on the Corporation's consolidated financial statements.

        In July 2001, the FASB issued SFAS No. 141, "Business Combinations," which replaces Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations." Under SFAS No. 141, all business combinations

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initiated after June 30, 2001 are accounted for using the purchase method. The application of SFAS No. 141 did not result in the reclassification of any amounts previously recorded as goodwill or other intangible assets.

        In July 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets," which replaces APBreplaced Accounting Principles Board ("APB") Opinion No. 17, "Intangible Assets," and establishesestablished new accounting and reporting requirements for goodwill and other intangible assets, effective for fiscal years beginning after December 15, 2001. Under this statement, goodwill and intangible assets that are deemed to have indefinite useful lives are not amortized, but are subject to impairment testing. Impairment testing iswas required to be performed at adoption and at least annually thereafter. On an ongoing basis (absent any impairment indicators), Dow's global businesses plan to performthe annual impairment teststest is performed during the fourth quarter of each year, in conjunction with the nnualannual budgeting process. Effective January 1, 2002 UCC ceased all amortization of goodwill, which is its only intangible asset with an indefinite useful life, and tested recorded goodwill for impairment by comparing the fair value of each reporting unit, determined using a discounted cash flow method, with its carrying value. The results of the Corporation's goodwill impairment test indicated no impairment.

As required by SFAS No. 142, the Corporation also reassessed the useful lives and the classification of its identifiable intangible assets and determined them to be appropriate. See Note E for additional disclosures regarding the adoption of SFAS No. 142.related to other intangible assets.

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        In AugustJune 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations," which requires an entity to record the fair value of a liability for an asset retirement obligation in the period in which it is incurred and a corresponding increase in the related long-lived asset. The liability is adjusted to its present value each period and the asset is depreciated over its useful life. A gain or loss may be incurred upon settlement of the liability. SFAS No. 143 is effective for fiscal years beginning after June 15, 2002. The Corporation is currently assessing the impactadoption of adopting this statement.

        In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets," which replaces SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," and provisions of APB Opinion No. 30, "Reporting the Results of Operations—Reporting the Effects of Disposal of143 did not have a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for the disposal of segments of a business. The statement creates one accounting model, basedmaterial impact on the framework established in SFAS No. 121, to be applied to all long-lived assets including discontinued operations. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001. The Corporation determined that its current accounting policy for the impairment of long-lived assets is consistent with SFAS No. 144.Corporation's consolidated financial statements.

        In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which nullifies Emerging Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity." This statement, which iswas effective for exit or disposal activities initiated after December 31, 2002, will changechanges the measurement and timing of costs associated with exit and disposal activities undertaken by the Corporation in the future.

        On August 26, 2002, Dow announced that inIn the first quarter of 2003, it would begin expensing stock options issued to employees in accordance withDow adopted the fair value provisions of SFAS No. 123, "Accounting for Stock-Based Compensation.Compensation," Dow currently uses the accounting method prescribed by APB Opinion No. 25, "Accounting for Stock Issuednew grants of equity instruments to Employees," as allowed by SFAS No. 123; however, expensing stock options is considered the preferable method of accounting for stock-based compensation. In the announcement, Dow stated it expected the expense associated with stock options to be approximately $0.02 per share in 2003, growing to approximately $0.06 per share in 2005. The estimates were based on the current guidance of SFAS No. 123, the terms of Dow's stock option plans and current assumptions for stock option grants and valuation, which may change in the future.employees. The Corporation will beis allocated the portion of expense relating to its employees who receive stock options.stock-based compensation. This allocation was not material to the consolidated financial statements for the first quarter of 2003.

        In November 2002, the FASB issued FASB Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN No. 45 clarifies the requirements of SFAS No. 5, "Accounting for Contingencies," relating to the guarantor's accounting for and disclosures of certain guarantees issued. The initial recognition and measurement provisions of the interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor's fiscal year-end. The disclosure requirements of the interpretation are effective for financial statements of interim or annual periods ending after December 15, 2002. The Corporation's disclosures related to guarantees can be found in Note F.

        In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest Entities." FIN No. 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," to certain entities in which equity investors do not have the characteristics of a controlling financial interest or in which equity investors do not bear the residual economic risks. The interpretation applies to variable interest entities ("VIEs") created after January 31, 2003, and to VIEs in which an enterprise obtains an interest after that date. It applies in the fiscal year or interim period beginning after June 15, 2003, to VIEs in which an enterprise holds a variable interest that was acquired before February 1, 2003. See Note G for disclosures regarding the Corporation's VIE and the expected impact of adoption in the third quarter of 2003.

Note C—NOTE C    MERGER-RELATED EXPENSES AND RESTRUCTURING

Merger-related Expenses and Restructuring

        On March 29,Following the completion of the Dow merger in February 2001, management made certain decisions relative to employment levels, duplicate assets and facilities and excess capacity resulting from the Dow merger. These decisions were based on management's assessment of the actions necessary to achieve synergies as a result of the merger. The economic effects of these decisions, combined with merger-related transaction costs and certain asset impairments, resulted in a pretax special charge in the first quarter of 2001 of $1,275 million which was reduced by $52 million in subsequent quarters of 2001.

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        The special charge included $629 million for employee-related costs, which consisted predominantly of provisions for employee severance, change of control obligations, medical and retirement benefits, and outplacement services. The charge was increased by $3 million during 2001 as the original estimates of amounts expected to be paid were further refined. The integration plans included a workforce reduction of approximately 4,200 people. The charge for severance was based upon the severance plan provisions communicated to employees. According to the initial integration plans, the Corporation expected to expend approximately 66 percent of the employee-related costs within the first two years following the merger, though the timing of severance payments is dependent upon employee elections. Expenditures with respect to employee-related costs associated with pension and postretirement benefit plans will occur over a much more extended period. As of December 31, 2001, severance of approximately $327 million had been paid to approximately 2,900 former employees. In the first three quarters of 2002, severance of $91 million was paid to approximately 1,030 former employees, bringing the program-to-date amount to $418 million paid to approximately 3,930 former employees.million. The planned merger-related program for workforce reductions was substantially completed in the third quarter of 2002. Complete disclosures related to the program and the activity in the merger-related special charge reserve can be found in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2002.

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        During the fourth quarter of 2002, althoughan additional charge of $34 million was recorded for merger-related severance. Under this revised severance program, $55 million was paid to 668 former employees in the first quarter of 2003.

        Additional reductions in headcount may continue as the Corporation continues its restructuring efforts. The Corporation will account for future workforce reductions as they occur.

        The special charge included $41 million for transaction costs, which consisted primarily of investment banking, legal and accounting fees. All of these costs had been paid at March 31, 2001.Other Restructuring

        The special charge included $605 million for the write-down of duplicate assets and facilities directly related to the Dow merger. Included in the write-down were charges of $292 million for assets and facilities that were rendered redundant as a result of the merger, $81 million for lease abandonment reserves, $138 million for asset impairments, and $94 million for losses on divestitures required for regulatory approval of the merger. Duplicate assets consisted principally of capitalized software costs, information technology equipment and research and development facilities and equipment, all of which were written off duringIn the first quarter of 2001. The fair values2003, certain studies regarding non-strategic or under-performing assets (initiated following the appointment of a new CEO at Dow in late 2002) were completed and management made decisions relative to certain assets. These decisions resulted in the write-down of the impaired assets,net book value of three manufacturing facilities totaling $24 million (the largest of which include production facilities and transportation equipment, were determined based on discounted cash flows and an appraisal, respectively. These components of the special charge will require limited future cash outlays, and will result in a decrease in annual depreciation of approximately $62 million. In November 2001, the decision to close a research and development facility in Bound Brook, New Jersey was reversed, in light of difficult economic conditions; the facility will now remain open until at least 2005. Consequently, $55$16 million of the special charge was reversed during the fourth quarter of 2001. At December 31, 2001, $77 million of the reserve remained for the abandonment of leased facilities and demolition costs; at September 30, 2002, $65 million of the reserve remained. The leased facilities will remain open until at least 2005.

        The following table summarizes the activity in the special charge reserve:

(1)

Upon completion of the program, the outstanding merger-related reserve for employee-related costs associated with pension and postretirement benefit plans is considered part of the Corporation's regular

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pension and other postretirement obligations. The reserve for leased facilities is included in "Other noncurrent obligations."

Note D—Related Party Transactions

        In the second quarter of 2001, the Corporation commenced selling products to Dow to simplify the customer interface process. Products are sold to and purchased from Dow in accordance with the terms of Dow's longstanding intercompany pricing policies. The application of these policies results in products being sold to Dow at market-based prices. The Corporation procures certain commodities and raw materials through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in "Sundry income (expense)—net" in the consolidated statement of income. Purchases from that Dow subsidiary were approximately $289 million during the third quarter of 2002 and $801 million for the first nine months of 2002.

        Subsequent to the merger, the Corporation entered into a master services agreement with Dow whereby Dow provides services, including, but not limited to, accounting, legal, treasury (investments, cash management, risk management, insurance), procurement, human resources, environmental, health and safety, and business management for UCC. Under the master services agreement with Dow, for general administrative and overhead type services that Dow routinely allocates to various businesses, UCC is charged the cost of those services based on the Corporation's and Dow's relative manufacturing conversion costs. This arrangement results in a quarterly charge of approximately $5 million (included in "Sundry income (expense)—net"). For services that Dow routinely charges based on effort, UCC is charged the cost of such services on a fully absorbed basis, which includes direct and indirect costs. Additionally, certain Dow employees are contracted to UCC, and Dow is reimbursed for all direct employment costs of such employees. Management believes the method used for determining expenses charged by Dow is reasonable. Dow provides these services by leveraging its centralized functional service centers to provide services at a favorable cost that management believes provides an advantage to the Corporation.

        As part of Dow's cash management process, UCC is a party to revolving loans with Dow that have LIBOR-based interest rates with varying maturities. The reduction in noncurrent receivables from related companies primarily reflects a $483 million repayment of a note receivable associated with the fundingimpairment and shutdown of the ethylene production facilities in Seadrift, Texas, by year-end 2003) and polyethylene plants in Canada, owned by Dow Chemical Canada Inc.,the impairment of a chemical transport vessel (to be sold in the second quarter of 2002.

        The Corporation declared and paid a dividend2003) of approximately $257 million to its shareholder on April 15, 2002.

        In April 2002, the Corporation sold its ownership interest in a subsidiary in China to a Dow subsidiary also located in China for approximately $20$11 million. Accordingly, the consolidated balance sheet at September 30, 2002 does not include the assets and liabilities of the subsidiary, and the consolidated income statement includes the subsidiary's results of operations from January 1, 2002 through March 31, 2002.

Note E—Goodwill and Other Intangible AssetsNOTE D    INVENTORIES

        The Corporation ceased amortizing goodwill upon adoption of SFAS No. 142 (see Note B) on January 1, 2002. Accumulated amortization for goodwill upon adoption of SFAS No. 142 was $50 million.        The following table provides pro forma results fora breakdown of inventories at March 31, 2003 and December 31, 2002:

        The reserves reducing inventories from the threefirst-in, first-out ("FIFO") basis to the last-in, first-out ("LIFO") basis amounted to $150 million at March 31, 2003 and nine months ended September 30, 2001, compared with actual results for the three and nine months ended September 30, 2002, as if the non-amortization provisions of SFAS No. 142 had been applied in 2001:$81 million at December 31, 2002.

10NOTE E    OTHER INTANGIBLE ASSETS

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

        Amortization expense for other intangible assets (not including software) was $1 million in the thirdfirst quarter of 2002,2003, compared with $0.5$1 million for the same period last year. Year to date, amortization expense for other intangible assets (not including software) was $3 million, compared with $4.5 million for the nine months ended September 30, 2001. Amortization expense for

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software, which is included in cost of sales, totaled $1 million in the third quarterfirst quarters of 2002both 2003 and 2001. Year to date, amortization expense for software was $3 million in 2002 and 2001.2002. Total estimated amortization expense for 2002 and the next five succeeding fiscal years is as follows:

Note F—Commitments and Contingent LiabilitiesNOTE F    COMMITMENTS AND CONTINGENT LIABILITIES

Environmental

        Accruals for environmental matters are recorded when it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated, based on current law and existing technologies. The Corporation had accrued obligations of $132$130 million at September 30,December 31, 2002 for environmental matters,remediation and restoration costs, including $30$35 million for the remediation of Superfund sites. At March 31, 2003, the Corporation had accrued obligations of $125 million for environmental remediation and restoration costs, including $34 million for the remediation of Superfund sites. This is management's best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. Inherent uncertainties exist in these estimates primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies for handling site remediation and restoration. It is the opinion of the Corporation's management that the possibility is remote that costs in excess of those accrued or disclosed will have a material adverse impact on the Corporation's consolidated financial statements.

Litigation

        The Corporation and its subsidiaries are involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes. In some of these legal proceedings and claims, the cost of remedies that may be sought or damages claimed is substantial.

        Separately, the Corporation is and has been involved in a large number of asbestos-related suits filed for the most part,primarily in various state courts at various times overduring the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both generalactual and punitive damages, often in very large amounts. The alleged claims primarily relate to products that UCC sold in the past;past, alleged

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exposure to asbestos-containing products located on UCC's premises;premises, and UCC's responsibility for asbestos suits filed against a divested subsidiary—former subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation's products.

        The rate at which plaintiffs filed asbestos-related suits against various companies, including the Corporation and Amchem, increased in both 2001 and 2002, influenced by the bankruptcy filings of

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numerous defendants in asbestos-related litigation. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future. The Corporation will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

        Typically, the Corporation is only one of many named defendants, many of which, including UCC and Amchem, were members of the Center for Claims Resolution ("CCR") which sought to resolve, an entity that defended and resolved asbestos cases on behalf of its members. As members of the CCR, the Corporation's and Amchem's strategy was to resolve the claims against them at the relatively small percentage allocated to them pursuant to the CCR's collective defense. The CCR ceased operating in this manner in February 2001, although it still administersexcept to administer certain settlements. The Corporation then began utilizingusing Peterson Asbestos Claims Enterprise, but only for claims processing and insurance invoicing.

        The rate at which plaintiffs file asbestos-related suits againstCorporation is a wholly owned subsidiary of Dow, and certain members of Dow's legal department and certain Dow management personnel have been retained to provide their experience in mass tort litigation to assist the Corporation and Amchem has been influenced byin responding to asbestos-related matters. In early 2002, the bankruptcy filingsCorporation hired new outside counsel to serve as national trial counsel. In connection with these actions, aggressive defense strategies were designed to reduce the cost of numerous defendants inresolving all asbestos-related litigationclaims, including several former CCR members. Thethe elimination of claims that lack demonstrated illness or causality.

        At the end of 2001 through the third quarter of 2002, the Corporation expects morehad concluded it was not possible to estimate its cost of disposing of asbestos-related suits toclaims that might be filed against it and Amchem in the future. At this time,future due to a number of reasons, including its lack of sufficient comparable loss history from which to assess either the number or value of future asbestos-related claims. During the third and fourth quarters of 2002, the Corporation cannotworked with Analysis, Research & Planning Corporation ("ARPC"), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, including asbestos, to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against the Corporation and Amchem.

        The Corporation provided ARPC with all relevant data regarding asbestos-related claims filed against UCC and Amchem through November 6, 2002. ARPC concluded that it was not possible to estimate the full range of the cost of resolving future asbestos-related claims against UCC and Amchem, because of various uncertainties associated with the litigation of those claims. These uncertainties, which hindered the Corporation's ability to project future claim volumes and resolution costs, included the following:

•

Until a series of bankruptcies led to the CCR ceasing operations in early 2001, UCC and Amchem generally settled claims filed against CCR members according to a sharing formula that would not necessarily reflect the cost of resolving those claims had they been separately litigated against UCC or Amchem.



•

The bankruptcies in the years 2000 to 2002 of other companies facing large asbestos liability were a likely contributing cause of a sharp increase in filings against many defendants, including UCC and Amchem.



•

It was not until the CCR ceased operating in early 2001 that will resultUCC took direct responsibility for the defense of claims against itself and Amchem.



•

New defense counsel for UCC and Amchem implemented more aggressive defense strategies in mid-2002.

        Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised the Corporation 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 the Corporation and Amchem, if certain assumptions were made. Specifically, ARPC advised the

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Corporation that for purposes of determining an estimate it is reasonable to assume that in the near term asbestos-related claims filed against UCC 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 the Corporation 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 UCC and Amchem. ARPC also advised 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 the 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 UCC and Amchem and multiplied the number of such claims by the mean values paid by UCC and Amchem, respectively, to dispose of such claims in 2001 and 2002. In estimating the 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 UCC 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, the Corporation 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. The Corporation will aggressively defend or reasonably resolve, as appropriate, bothconcluded that it is probable that the undiscounted cost of disposing of its asbestos-related pending and future cases. To date, substantially all ofclaims ranges from $2.2 billion to $2.4 billion, which is the amounts paidrange for the 15-year period ending in 2017 as estimated by ARPC using both methodologies. Accordingly, the Corporation increased its asbestos-related liability for pending and future claims at December 31, 2002 to resolve$2.2 billion, excluding future defense and processing costs. At March 31, 2003, the asbestos-related suits are covered by third-party insurance.liability for pending and future claims was $2.1 billion.

        For pending claims,The Corporation 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 of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002. At March 31, 2003, the receivable for insurance recoveries related to the Corporation's asbestos liability was $1.3 billion. The insurance receivable related to the asbestos liability was determined after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. In addition, the Corporation had asbestos-related litigation accrualsreceivables for insurance recoveries for defense and resolution costs of $233 million and related insurance recovery receivables of $223$219 million at December 31, 2001. At September 30, 2002 and $249 million at March 31, 2003.

        The amounts recorded for the Corporation had asbestos-related litigation accruals of $362 millionliability and related insurance recovery receivablesreceivable described above were based upon currently known facts. However, projecting future events, such as the number of $344 million. In addition, at September 30, 2002,new claims to be filed each year, the average cost of disposing of each such claim, coverage issues

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among insurers, and the continuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded. The Corporation expenses defense and processing costs as incurred. Accordingly, defense and processing costs incurred in the future for asbestos-related litigation, net of insurance, will impact results of operations in future periods.

        Because of the uncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related claims facing the Corporation had other litigation accruals, unrelated to environmental or asbestos litigation,and Amchem. Management believes that it is reasonably possible that the cost of $25 milliondisposing of the Corporation's asbestos-related claims, including future defense and related insurance recovery receivablesprocessing costs, could have a material adverse impact on the results of $25 million.operations and cash flows for a particular period and on the consolidated financial position of the Corporation.

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

Purchase Commitments

        The Corporation has purchase agreements, including one major agreement in 2002 and 2001 (two in 2000), for the purchase of ethylene-related products in the United States. Total purchases under these agreements were $62 million in 2002, $63 million in 2001 and $171 million in 2000. The fixed and determinable portion of obligations under these purchase commitments at December 31, 20012002 are presented in the following table:

Guarantees

        The Corporation provides a variety of guarantees, which are described more fully below.

OtherGuarantees

        The Corporation had additional contingenthas undertaken obligations relating primarily to guarantee the performance agreementsof a nonconsolidated affiliate and a former subsidiary of the Corporation (via delivery of cash or other assets) if specified triggering events occur. Non-performance under a contract for commercial obligations by the guaranteed party triggers the obligation of the Corporation.

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Residual Value Guarantees

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

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

NOTE G    VARIABLE INTEREST ENTITIES

        UCC has an operating lease with a special purpose entity that qualifies as a variable interest entity ("VIE") under FIN No. 46, "Consolidation of Variable Interest Entities." Based on the current terms of the lease agreement and the residual value guarantee UCC provides to the lessor, the Corporation expects to be the primary beneficiary of the VIE. As a result, if the facts and circumstances remain the same, UCC will be required to consolidate the assets and liabilities held by the VIE in the third quarter of 2003.

        The VIE, established in 2000, is a U.S. trust that leases railcars to UCC for use in the United States. The lease expires in 2005. The value of the leased railcars and corresponding approximate amount of debt of the VIE was $100 million at March 31, 2003 and December 31, 2002. The Corporation has not determined the carrying amount of the assets that will be included in the consolidated balance sheet upon consolidation of the VIE. Accordingly, the Corporation has not determined the cumulative effect adjustment that will be required upon adoption of FIN No. 46.

        Upon termination or expiration of the lease, UCC may return the assets to the lessor, renew the lease, or purchase the assets for an amount based on a fair market value determination. UCC has provided a residual value guarantee of $82 million at March 31, 2003 and December 31, 2002 to the lessor. Given the productive nature of the assets, it is probable they will have continuing value to UCC or another company in excess of the residual value guarantees.

NOTE H    RELATED PARTY TRANSACTIONS

        The Corporation sells products to Dow to simplify the customer interface process. Products are sold to and purchased from Dow in accordance with the terms of Dow's longstanding intercompany pricing policies. The application of these policies results in products being sold to and purchased from Dow at market-based prices. The Corporation also procures certain commodities and raw materials through a Dow subsidiary and pays a commission to that Dow subsidiary based on the volume and type of commodities and raw materials purchased. The commission expense is included in "Sundry income (expense)—net" in the consolidated statements of operations. Purchases from that Dow subsidiary were approximately $489 million during the first quarter of 2003 and $236 million during the first quarter of 2002.

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        The Corporation has a master services agreement with Dow whereby Dow provides services, including, but not limited to, accounting, legal, treasury (investments, cash management, risk management, insurance), procurement, human resources, environmental, health and safety, and business management for UCC. Under the master services agreement with Dow, for general administrative and overhead type services that Dow routinely allocates to various businesses, UCC is charged the cost of those services based on the Corporation's and Dow's relative manufacturing conversion costs. This arrangement results in a quarterly charge of approximately $5 million (included in "Sundry income (expense)—net").

        For services that Dow routinely charges based on effort, UCC is charged the cost of such services on a fully absorbed basis, which includes direct and indirect costs. Additionally, certain Dow employees are contracted to UCC and Dow is reimbursed for all direct employment costs of such employees. Management believes the method used for determining expenses charged by Dow is reasonable. Dow provides these services by leveraging its centralized functional service centers to provide services at a cost that management believes provides an advantage to the Corporation.

        The monitoring and execution of risk management policies related to interest rate, foreign currency and equity price risks, which are based on Dow's risk management philosophy, are provided as a service to UCC.

        As part of Dow's cash management process, UCC is a party to revolving loans with Dow that have LIBOR-based interest rates with varying maturities. On March 24, 2003, the revolving loan agreement with Dow that allowed the Corporation to borrow up to $1.5 billion was terminated and replaced on March 25, 2003 with a one-year note payable of approximately $65 million for the outstanding balance on the terminated revolving loan agreement, and a new revolving loan agreement with Dow that allows the Corporation to borrow up to $1.0 billion. The new revolving loan agreement is secured, pursuant to a collateral agreement, by various assets, including UCC's deposit accounts, intercompany obligations, and equity interests in various subsidiaries and joint ventures. The maturity date of the new revolving loan agreement is March 25, 2004; however, Dow may demand repayment with 30 days written notice to the Corporation.

        In April 2002, the Corporation sold its ownership interest in a subsidiary in China to a Dow subsidiary also located in China for approximately $20 million. Accordingly, the consolidated balance sheet at December 31, 2001 totaling $173 million, of which $19 million related to guarantees of debt.

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Note G—Inventories

        The following table provides a breakdown of inventories at September 30, 2002 does not include the assets and December 31, 2001:

        The reserves required to adjust inventories from the first-in, first-out ("FIFO") basis to the last-in, first-out ("LIFO") basis amounted to a decrease of $113 million at September 30, 2002, and a decrease of $198 million at December 31, 2001.

        During the quarter ended June 30, 2001, certain inventory quantities were reduced which resulted in a liquidation of certain LIFO inventory layers carried at lower costs which prevailed in prior years. The effectliabilities of the liquidation was to decrease costsubsidiary, and the consolidated statements of goods sold by $51 million and increase after-tax earnings by $33 million.operations include the subsidiary's results of operations from January 1, 2002 through March 31, 2002.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        Pursuant to General Instruction H of Form 10-Q "Omission of Information by Certain Wholly-Owned Subsidiaries",Subsidiaries," this section includes only management's narrative analysis of the results of operations for the three and nine month periodsperiod ended September 30, 2002,March 31, 2003, the most recent periods,period, compared with the three and nine month periodsperiod ended September 30, 2001,March 31, 2002, the corresponding periodsperiod in the preceding fiscal year.

        References below to "Dow" refer to The Dow Chemical Company and its consolidated subsidiaries.

Disclosure Regarding Forward-Looking InformationDISCLOSURE REGARDING FORWARD-LOOKING INFORMATION

        The Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for forward-looking statements made by or on behalf of Union Carbide Corporation (the "Corporation" or "UCC"). This section covers the current performance and outlook of the Corporation. The forward-looking statements contained in this section and in other parts of this document involve risks and uncertainties that may affect the Corporation's operations, markets, products, services, prices and other factors as more fully discussed elsewhere and in filings with the U.S. Securities and Exchange Commission ("SEC")(SEC). These risks and uncertainties include, but are not limited to, economic, competitive, legal, governmental and technological factors. Accordingly, there is no assurance that the Corporation's expectations will be realized. The Corporation assumes no obligation to provide revisions to any forward-looking statements should circumstances change, except as otherwise required by securities and other applicable laws.

Results of OperationsRESULTS OF OPERATIONS

        The Corporation reported net income of $33 million for the third quarter of 2002, compared with a net loss of $12$59 million for the samefirst quarter of 2001. Year to date2003 compared with net income for 2002 was $127 million, compared with a net loss of $844$37 million for 2001.the first quarter of 2002. The year to date results for 2001the first quarter of 2003 were negatively impacted by a special chargesignificantly higher hydrocarbon feedstocks and energy costs, in addition to asset write-downs and impairments of $1,262$35 million ($829 million after tax) related to the Dow merger (see Note C to the Consolidated Financial Statements). The Corporation recorded an additional special charge of $13 million for employee severancerestructuring activities in the thirdfirst quarter of 2002.2003.

        Total net sales for the first quarter of $1,1792003 were $1,289 million compared with $1,119 million for the thirdfirst quarter of 2002. Selling prices to Dow are based on market prices for the related products. Increases in average selling prices occurred for most products in the first quarter of 2003 compared with the first quarter of 2002, were flat compared with $1,177 millionled by polyethylene and ethylene glycol ("EG"), the Corporation's principal products. The Corporation also reported substantial volume gains for the third quarter last year. Year to date, total net sales decreased 22 percent to $3,444 million from $4,409 million for 2001. Year to date results were impacted by a decline in selling prices which more than offset increased volumes. The decline in net sales this year was also partially attributable to the absence of sales from former wholly owned entities in Europe, Latin AmericaEG, vinyl acetate monomer, and Canada that were contributed to wholly owned subsidiaries of Dow on various dates in 2001 in exchange for ownership interests in those subsidiaries. Since the second quarter of 2001, sales to Dow have been replacing trade sales in order to simplify the customer interface process.oxo products.

        Cost of sales declined $78increased $301 million (7(30 percent) in the thirdfirst quarter of 2003 compared with the first quarter of 2002, compared withdue primarily to a $250 million increase in hydrocarbon feedstock and energy costs, reflecting a 65 percent increase in costs of these raw materials over the thirdfirst quarter last year, primarily dueof 2002. In addition, asset write-downs and impairments of $24 million related to merger synergies. As a result, gross margin for the quarter improved to 12.1 percent from 5.3 percent last year. Year to daterestructuring activities were included in cost of sales for the first quarter of 2003. Gross margin declined $1,080 million (26 percent) in 2002 compared with last year, which is consistent with the related decreasefirst quarter of 2003, as the substantial increase in sales for 2002, as well as decreases due to merger synergies.raw material costs were not entirely recovered by the higher selling prices.

        Research and development expenses declined $6$7 million in the thirdfirst quarter of 20022003 compared with the same quarter last year and declined $24 million for the first three quarters of 2002 compared with the first three quarters of 2001.year. Selling, general and administrative expenses declined $21$4 million in the thirdfirst quarter of 20022003 compared with the same quarter last year and declined $101 million for the first nine months of 2002 compared with the first nine months of 2001.year. These declines are attributable to the realizationcost containment efforts begun in late 2002, as well as the impact of cost synergies associated with the merger.workforce reductions that occurred during 2002.

        Equity in earnings of nonconsolidated affiliates decreased slightly from $19increased to $10 million in the thirdfirst quarter of 2001 to $172003 from $3 million in the thirdfirst quarter of 2002. Year to date, equity earnings decreased $23 million compared with the first three quarters of 2001. The decline in year to date 2002, results is primarily due to lower earnings in 2002 compared to 2001 fromreflecting a strong performance by EQUATE Petrochemical

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Company K.S.C., a Kuwait-based joint venture, and UOP LLC,that was partially offset by increased losses at the Corporation's joint ventures in Malaysia due to a joint venture with Honeywell that recorded a restructuring charge in the second quarter of 2002, as well as the absence of earnings from two former equity companies in Canada (Alberta & Orient Glycol Company Limited and Petromont and Company, Limited Partnership) owned by Dow Chemical Canada Inc. since October 1, 2001.scheduled plant turnaround.

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        Sundry income (expense)—net includes a variety of income and expense items such as the gain or loss on foreign currency exchange, dividends from investments, commissions, charges for management services provided by Dow, and gains and losses on sales of investments and assets. Sundry income (expense)—net for the thirdfirst quarter of 20022003 was expense of $16$15 million, compared with incomeexpense of $7$3 million for the thirdfirst quarter last year. Results for the thirdfirst quarter of 20012003 included a gainexpense of $11 million fromassociated with the saleimpairment of certain available for sale securities and assets. Yeara chemical transport vessel to date, sundry income (expense)—net was incomebe sold in the second quarter of $14 million compared with income of $31 million last year. The year to date 2001 results included a gain of $23 million from the sale of investments.2003.

        Interest income for the thirdfirst quarter of 2002 increased slightly2003 declined to $4$2 million from $3$15 million in the thirdfirst quarter of last year. Interest income for the first three quarters of 2002 increased to $31 million from $7 million in the first three quartersquarter of last year. The year2002 included $9 million related to date increase is primarily due to interest earned on the noncurrenta $483 million related company note receivable from related companies whichthat was repaid in the second quarter of 2002.

Interest expense and amortization of debt discount for the thirdfirst quarter of 20022003 was $33$34 million compared with $45$33 million in the thirdfirst quarter of last year. Year to date, interest expense and amortization of debt discount decreased to $99 million from $143 million in 2001. This reduction is consistent with the lower debt levels at September 30, 2002 compared with September 30, 2001.

        The effective tax rate for the thirdfirst quarter of 20022003 was 49.235.8 percent compared with 42.119.6 percent for the same quarter last year. Year to date, theThe effective tax rate was 38.7 percent versus 36.2 percent last year.fluctuates based on, among other factors, where income is earned and the level of income relative to tax credits available.

Asbestos-Related Matters

        The Corporation is and its subsidiaries are involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; taxes; and commercial disputes. In some of these legal proceedings and claims, the cost of remedies that may be sought or damages claimed is substantial.

        Separately, the Corporation ishas been involved in a large number of asbestos-related suits filed for the most part,primarily in various state courts at various times overduring the past three decades. These suits principally allege personal injury resulting from exposure to asbestos-containing products and frequently seek both generalactual and punitive damages, often in very large amounts. The alleged claims primarily relate to products that UCC sold in the past;past, alleged exposure to asbestos-containing products located on UCC's premises;premises, and UCC's responsibility for asbestos suits filed against a divested subsidiary—former subsidiary, Amchem Products, Inc. ("Amchem"). In many cases, plaintiffs are unable to demonstrate that they have suffered any compensable loss as a result of such exposure, or that injuries incurred in fact resulted from exposure to the Corporation's products.

        The rate at which plaintiffs filed asbestos-related suits against various companies, including the Corporation and Amchem, increased in both 2001 and 2002, influenced by the bankruptcy filings of numerous defendants in asbestos-related litigation. The Corporation expects more asbestos-related suits to be filed against it and Amchem in the future. The Corporation will aggressively defend or reasonably resolve, as appropriate, both pending and future claims.

        Typically, the Corporation is only one of many named defendants, many of which, including UCC and Amchem, were members of the Center for Claims Resolution ("CCR") which sought to resolve, an entity that defended and resolved asbestos cases on behalf of its members. As members of the CCR, the Corporation's and Amchem's strategy was to settleresolve the claims as twoagainst them at the relatively small (percentage wise) members ofpercentage allocated to them pursuant to the CCR group.CCR's collective defense. The CCR ceased operating in this manner in February 2001, although it still administersexcept to administer certain settlements. The Corporation then began utilizingusing Peterson Asbestos Claims Enterprise, but only for claims processing and insurance invoicing.

        The rate at which plaintiffs file asbestos-related suits against the Corporation is a wholly owned subsidiary of Dow, and Amchem has been influenced by the bankruptcy filingscertain members of numerous defendants in asbestos-related litigation including several former CCR members. Cases filed against the CorporationDow's legal department and Amchem contain a large percentage of claims that do not allege a particular injury ("Non-Specific Claims").

certain Dow now owns 100 percent of the stock of the Corporation and hasmanagement personnel have been retained to provide itstheir experience in mass tort litigation to manageassist the Corporation's responseCorporation in responding to asbestos-related liability. Thematters. In early 2002, the Corporation has hired new outside counsel to serve as national trial counselcounsel. In connection with these actions, aggressive defense strategies were designed to aggressively defendreduce the cost of resolving all asbestos-related claims, including the elimination of claims that lack demonstrated illness or reasonably resolve, as appropriate, both pending and future cases. Thecausality.

        At the end of 2001 through the third quarter of 2002, the Corporation expects morehad concluded it was not possible to estimate its cost of disposing of asbestos-related suits toclaims that might be filed against it and

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Amchem in the future. At this time, the Corporation cannot estimate the liability that will result from future claims. Asdue to a consequencenumber of allreasons, including its lack of the above-stated facts, the Corporation lacks sufficient comparable loss history from which to assess either the number of or the value of future asbestos-related claims. To date, substantiallyDuring the third and fourth quarters of 2002, the Corporation worked with Analysis, Research & Planning Corporation ("ARPC"), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, including asbestos, to explore whether it would be possible to estimate the cost of disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against the Corporation and Amchem.

        The Corporation provided ARPC with all relevant data regarding asbestos-related claims filed against UCC and Amchem through November 6, 2002. ARPC concluded that it was not possible to estimate the full range of the amountscost of resolving future asbestos-related claims against UCC and Amchem, because of various uncertainties associated with the litigation of those claims. These uncertainties, which hindered the Corporation's ability to project future claim volumes and resolution costs, included the following:

•

Until a series of bankruptcies led to the CCR ceasing operations in early 2001, UCC and Amchem generally settled claims filed against CCR members according to a sharing formula that would not necessarily reflect the cost of resolving those claims had they been separately litigated against UCC or Amchem.



•

The bankruptcies in the years 2000 to 2002 of other companies facing large asbestos liability were a likely contributing cause of a sharp increase in filings against many defendants, including UCC and Amchem.



•

It was not until the CCR ceased operating in early 2001 that UCC took direct responsibility for the defense of claims against itself and Amchem.



•

New defense counsel for UCC and Amchem implemented more aggressive defense strategies in mid-2002.

        Despite its inability to estimate the full range of the cost of resolving future asbestos-related claims, ARPC advised the Corporation 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 the Corporation and Amchem, if certain assumptions were made. Specifically, ARPC advised the Corporation that for purposes of determining an estimate it is reasonable to assume that in the near term asbestos-related claims filed against UCC 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 the Corporation 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 UCC and Amchem. ARPC also advised 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 the 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 UCC and Amchem and multiplied the number of such claims by the mean values paid by UCC and Amchem, respectively, to dispose of such claims in 2001 and 2002. In estimating the cost of resolving

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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 UCC 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, the Corporation 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. The Corporation concluded that it is probable that the undiscounted cost of disposing of its asbestos-related pending and future claims ranges from $2.2 billion to resolve asbestos-related suits are covered$2.4 billion, which is the range for the 15-year period ending in 2017 as estimated by third-party insurance.

        For pending claims,ARPC using both methodologies. Accordingly, the Corporation hadincreased its asbestos-related litigation accruals of $233 millionliability for pending and future claims at December 31, 20012002 to $2.2 billion, excluding future defense and processing costs. At March 31, 2003, the asbestos-related liability for pending and future claims was $2.1 billion.

        The Corporation 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 of $828 million, $522 million on an after-tax basis, in the fourth quarter of 2002. At March 31, 2003, the receivable for insurance recovery receivables of $223 million. At September 30, 2002,recoveries related to the Corporation had asbestos-related litigation accruals of $362 million and related insurance recovery receivables of $344 million. The litigation accruals were determined by considering the number of claims pending against the Corporation and

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Amchem, taking into account claims administration records indicating the severity of the alleged injury. Because many of the pending claims are Non-Specific Claims, 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 at September 30, 2002 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. The Corporation's asbestos litigation accrual at September 30, 2002 reflected all claims for which the Corporation had received notification through the end of the third quarter of 2002, and the use of average resolution values to calculate probable outcomes. The accrual also included settled claims that had not yet been paid. The number of claims filed in the third quarter of 2002 remained relatively consistent with the number of claims filed in the first and second quarters of 2002, but below the high level of claims filed in the middle of last year.

liability was $1.3 billion. The insurance receivables for asbestos-relatedreceivable related to the asbestos liability werewas determined after a thorough review of applicable insurance policies and the 1985 Wellington Agreement, to which the Corporation and many of its liability insurers are signatory parties, as well as other insurance settlements, with due consideration given to applicable deductibles, retentions and policy limits, and taking into account the solvency and historical payment experience of various insurance carriers. The insurance receivable associated with the most reasonable probable liability outcome for pending claims is $344 million and has been recorded at September 30, 2002. This resulted in a net income statement impact toIn addition, the Corporation had receivables for insurance recoveries for defense and resolution costs of $5.0$219 million for asbestos-related expense in the third quarter ofat December 31, 2002 bringing the year to date impact to $8.5 million. In all of the probable outcomes for pending claims, sufficient insurance coverage exists to provide a similar percentage of coverage for the accrued liability. If the maximum probable outcome for pending claims of $455and $249 million were in fact to materialize, the impact would be an additional charge of $15 million to income, which is not material to the consolidated financial statements. In addition, insurance is available for future claims.at March 31, 2003.

        The amounts recorded for the litigation accrualasbestos-related liability and related insurance receivable aredescribed above were based upon currently known facts. IfHowever, projecting future events, such as the number of new claims to be filed each year, the average cost of disposing of each such claim, coverage issues among insurers, and the costcontinuing solvency of various insurance companies, as well as the numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to resolve such claims differ frombe higher or lower than those projected or those recorded. The Corporation expenses defense and processing costs as incurred. Accordingly, defense and processing costs incurred in the current assumptions used by managementfuture for asbestos-related litigation, net of insurance, will impact results of operations in arriving at its estimates for the recorded amounts, this may impact management's future assessmentsperiods.

        Because of the ultimate outcomeuncertainties described above, management cannot estimate the full range of the cost of resolving pending and future asbestos-related legal proceedings.

        Whileclaims facing the Corporation and Amchem. Management believes that it is notreasonably possible at this time to determine with certaintythat the ultimate outcomecost of anydisposing of the legal proceedingsCorporation's asbestos-related claims, including future defense and claims referred to in this filing, management believes that adequate provisions have been made for probable losses with respect to pending claims and proceedings, and that the ultimate outcome of all known and future claims, after provisions for insurance, will notprocessing costs, could have a material adverse effectimpact on the results of operations and cash flows for a particular period and on the consolidated financial position of the Corporation, but could have a material effect on the consolidated results of operations in a given quarter or year. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions provided and available insurance, they will be charged to income when determinable.Corporation.

OTHER MATTERS

Accounting Changes

        See Note B to the Consolidated Financial Statements for a discussion of accounting changes.changes and recently issued accounting pronouncements.

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Critical Accounting Policies

        The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States of America ("GAAP") requires management to make judgments, assumptions and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note A to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001,2002, describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. Following are some of the Corporation's critical accounting policies impacted by judgments, assumptions and estimates.estimates:

Litigation

The Corporation is subject to legal proceedings and claims arising out of the normal course of business. The Corporation routinely assesses the likelihood of any adverse judgments or outcomes to these matters, as well as ranges of probable losses. A determination of the amount of the reserves required, if any, for these contingencies is made after thoughtful analysis of each known issue and an analysis of historical claims

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experience for incurred but not reported matters. The Corporation has an active risk management program consisting of numerous insurance policies secured from many carriers. These policies provide coverage that is utilized to minimize the impact, if any, of the legal proceedings. The required reserves may change in the future due to new developments in each matter. For further discussion, see Note F to the Consolidated Financial Statements.

Asbestos-Related Matters

The Corporation is and has been involved in a large number of asbestos-related suits. For pending claims,suits filed primarily in state courts during the past three decades. At the end of 2001 and through the third quarter of 2002, the Corporation had concluded it was not possible to estimate its cost of disposing of asbestos-related claims that might be filed against it and Amchem in the future due to a number of reasons, including its lack of sufficient comparable loss history from which to assess either the number or value of future asbestos-related claims. During the third and fourth quarters of 2002, the Corporation worked with Analysis, Research & Planning Corporation ("ARPC"), a consulting firm with broad experience in estimating resolution costs associated with mass tort litigation, accrualsincluding asbestos, to explore whether it would be possible to estimate the cost of $362disposing of pending and future asbestos-related claims that have been, and could reasonably be expected to be, filed against UCC and Amchem.

        In projecting the Corporation's resolution costs for future asbestos-related claims, ARPC applied two methodologies that have been widely used for forecasting purposes. As of December 31, 2002, ARPC estimated the undiscounted cost of resolving pending and future asbestos-related claims against UCC 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, the Corporation 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. The Corporation concluded that it is probable that the undiscounted cost of disposing of its 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, the Corporation increased its asbestos-related liability for pending and future claims at December 31, 2002 to

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---




$2.2 billion, excluding future defense and processing costs. At March 31, 2003, the asbestos-related liability for pending and future claims was $2.1 billion.

        The Corporation also increased the receivable for insurance recoveries related to its asbestos liability to $1.35 billion at December 31, 2002. At March 31, 2003, the receivable for insurance recoveries related to the Corporation's asbestos liability was $1.3 billion. In addition, the Corporation had receivables for insurance recoveries for defense and resolution costs of $219 million at December 31, 2002 and $249 million at March 31, 2003. The amounts recorded for the asbestos-related liability and related insurance recovery receivables of $344 million at September 30, 2002. The litigation accrual was determined by consideringreceivable described above were based upon currently known facts. However, projecting future events, such as the number of pendingnew claims taking into account claims administration records indicatingto be filed each year, the severityaverage cost of disposing of each such claim, coverage issues among insurers, and the alleged injury. Because manycontinuing solvency of various insurance companies, as well as the pending claims do not allege a particular injury,numerous uncertainties surrounding asbestos litigation in the United States, could cause the actual costs and insurance recoveries to be higher or lower than those projected or those recorded. The Corporation has calculated several probable liability outcomes based on estimatesexpenses defense and historic distributionsprocessing costs as incurred. Accordingly, defense and processing costs incurred in the future for asbestos-related litigation, net of personal injury claim types and settlement and resolution amounts. The liability estimates ranged from a lowinsurance, will impact results 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. At this time, the Corporation cannot estimate the liability that will result fromoperations in future claims.periods. For additional information, see Asbestos-Related Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations and Note F to the Consolidated Financial Statements.

Environmental Matters

The Corporation determines the costs of environmental remediation of its facilities and formerly owned facilities based on evaluations of current law and existing technologies. Inherent uncertainties exist in such evaluations primarily due to unknown conditions, changing governmental regulations and legal standards regarding liability, and evolving technologies. The recorded liabilities are adjusted periodically as remediation efforts progress or as additional technical or legal information becomes available. The Corporation had accrued obligations of $132$130 million at September 30,December 31, 2002, for environmental matters.remediation and restoration costs, including $35 million for the remediation of Superfund sites. At March 31, 2003, the Corporation had accrued obligations of $125 million for environmental remediation and restoration costs, including $34 million for the remediation of Superfund sites. This is management's best estimate of the costs for remediation and restoration with respect to environmental matters for which the Corporation has accrued liabilities, although the ultimate cost with respect to these particular matters could range up to twice that amount. For further discussion, see Note F to the Consolidated Financial Statements in this filing and Environmental Matters in Management's Discussion and Analysis of Financial Condition and Results of Operations in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001.2002.

Merger-Related Expenses and Restructuring

On February 6, 2001, the Corporation merged with a wholly owned subsidiary of Dow and became a wholly owned subsidiary of Dow. On March 29, 2001, management made certain decisions relative to employment levels, duplicate assets and facilities and excess capacity resulting from the merger. These decisions were based on management's assessment of the actions necessary to achieve synergies as a result of the merger. The economic effects of these decisions, combined with merger-related transaction costs and certain asset impairments, resulted in a pretax special charge of $1,275 million in the first quarter of 2001. Subsequent periodic reviews of the integration plans resulted in minor revisions to the reserve. The planned merger-related program for workforce reductions was substantially completed in the third quarter of 2002, although additional reductions may continue as the Corporation continues its restructuring efforts. The Corporation will account for future workforce reductions as they occur. Upon completion of the program, the outstanding merger-related reserve for employee-related costs associated with pension and postretirement benefit plans is considered part of the Corporation's regular pension and other postretirement obligations. The reserve related to the abandonment of leased facilities is included in "Other noncurrent obligations." For further discussion and information regarding the merger-related expenses and restructuring, see Note C to the Consolidated Financial Statements.

Pension and Other Postretirement Benefits

The amounts recognized in the consolidated financial statements related to pension and other postretirement benefits are determined from actuarial valuations. Inherent in these valuations are assumptions including discount rates, expected return on plan assets, discount rates at which the liabilities could be settled at December 31, 2002, rate of increase in future compensation levels, mortality rates

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and health care cost trend rates. These assumptions are updated annually and wereare disclosed in Note OL to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001.2002. In accordance with accounting principles generally accepted in the United States,GAAP, actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect expense recognized expense and obligations recorded obligations in future periods. While management believes that

        The expected long-term rate of return on assets is developed with input from the assumptionsCorporation's actuarial firm, which includes the actuary's review of the asset class return expectations of several respected consultants and economists, based on broad equity and bond indices. The Corporation's historical experience with the pension fund asset performance and comparisons to expected returns of

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peer companies with similar fund assets is also considered. The long-term rate of return assumption used are appropriate, differences infor determining net periodic pension expense for 2002 was 9.25 percent. This assumption was reduced to 9 percent for determining 2003 net periodic pension expense. Lowering the expected long-term rate of return of the U.S. qualified plan assets by 0.25 percent (from 9.25 percent to 9 percent) would have reduced the pension income of the U.S. qualified plans for 2002 by approximately $10 million. Future actual experience orpension income will depend on future investment performance, changes in assumptions may affectfuture discount rates and various other factors related to the population of participants in the Corporation's pension plans.

        The Corporation bases the determination of pension expense or income on a market-related valuation of plan assets, which reduces year-to-year volatility. This market-related valuation recognizes investment gains or losses over a five-year period from the year in which they occur. Investment gains or losses for this purpose represent the difference between the expected return calculated using the market-related value of plan assets and the actual return based on the market value of plan assets. Since the market-related value of plan assets recognizes gains or losses over a five-year period, the future value of plan assets will be impacted when previously deferred gains or losses are recorded. Over the life of the plan, both gains and losses have been recognized and amortized. For the year ending December 31, 2002, $460 million of losses remain to be recognized in the calculation of the market-related value of plan assets. These losses will result in decreases in future pension income as they are recognized.

        The discount rate utilized for determining future pension obligations is based on long-term bonds receiving an AA- or better rating by a recognized rating agency. The resulting discount rate decreased from 7 percent at December 31, 2001, to 6.75 percent at December 31, 2002.

        For 2003, the Corporation left its assumption for the long-term rate of increase in compensation levels unchanged at 5 percent.

        Based on the revised pension assumptions and the actual investment performance of the plan assets in 2002, the Corporation expects to record approximately $40 million less in income for pension and other postretirement benefits in 2003 than it did in 2002.

        The value of the U.S. qualified plan assets decreased from $3.8 billion at December 31, 2001, to $3.4 billion at December 31, 2002. The investment performance and declining discount rates reduced the funded status of the U.S. qualified plans, net of benefit obligations, and future expense.by $690 million from December 31, 2001 to December 31, 2002. The Corporation is currently reviewingdoes not expect significant cash contributions to be required for the pension assumptions forU.S. qualified plans in 2003. Based on the current state of the financial markets and the market performance of the Corporation's pension portfolio in 2002, the Corporation is considering reducing its assumptions regarding the return on plan assets and discount rates, which would result in additional pension expense in 2003 and possibly a charge to other comprehensive income.

Income Taxes

Deferred tax assets and liabilities are determined using enacted tax rates for the effects of net operating losses and temporary differences between the book and tax bases of assets and liabilities. The Corporation records a valuation allowance on deferred tax assets when appropriate to reflect the expected future tax benefits to be realized. In determining the appropriate valuation allowance, certain judgments are made relating to recoverability of deferred tax assets, use of tax loss carryforwards, level of expected future taxable income and available tax planning strategies. These judgments are routinely reviewed by management. At September 30, 2002,March 31, 2003, the Corporation had deferred tax assets, of $511 million, net of adeferred tax liabilities, of $1.1 billion, net of valuation allowanceallowances of $59 million based on projected excess foreign tax credits.million. For further discussion, see Note DR to the Consolidated Financial Statements in the Corporation's Annual Report on Form 10-K for the year ended December 31, 2001.2002.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

        Omitted pursuant to General Instruction H of Form 10-Q.

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ITEM 4. CONTROLS AND PROCEDURES

        Within the 90 days prior to the date of filing this Quarterly Report on Form 10-Q, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation's Disclosure Committee and the Corporation's management, including the President (Chief Executive Officer) and the Treasurer (Chief Financial Officer), of the effectiveness of the design and operation of the Corporation's disclosure controls and procedures pursuant to Exchange Act Rule 15d-14. Based upon that evaluation, the President (Chief Executive Officer) and the Treasurer (Chief Financial Officer) concluded that the Corporation's disclosure controls and procedures are effective in timely alerting them to material information relating to the Corporation (including its consolidated subsidiaries) required to be included in the Corporation's periodic SEC filings. Subsequent to the date of that evaluation, there have been no significant changes in the Corporation's internal controls or in other factors that could significantly affect internal controls, nor were any corrective actions required with regard to significant deficiencies and material weaknesses.

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PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

        No material developments in any legal proceedings, including asbestos-related matters, occurred during the thirdfirst quarter of 2002.2003. For a summary of the history and current status of legal proceedings, including asbestos-related matters, see Management's Discussion and Analysis of Financial Condition and Results of Operations, Asbestos-Related Matters; and Note F to the Consolidated Financial Statements.

Environmental Matters

        On September 27, 2002, the United States Environmental Protection Agency, Region 6 (the "EPA"), filed an administrative complaint against the Corporation charging civil fines of $185,458 for certain alleged violations of the Clean Air Act and the Resource Conservation and Recovery Act at its Texas City Operations. The EPA has proposed to settle these civil fines for $129,818 plus an additional civil fine of $130,753 for other alleged Clean Air Act violations at Texas City Operations that were voluntarily disclosed by the Corporation.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a)

Exhibits.

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(b)

Reports on Form 8-K.

        No Current Reports on Form 8-K were filed by the Corporation during the thirdfirst quarter of 2002.2003.

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SIGNATUREUnion Carbide Corporation and Subsidiaries
Signatures

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

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Union Carbide Corporation and Subsidiaries
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, John R. Dearborn, President (Chief Executive Officer) of Union Carbide Corporation, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Union Carbide Corporation;

2.

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

3.

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

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

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

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

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

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

2125

Union Carbide Corporation and Subsidiaries
Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

I, Edward W. Rich, Vice President and Treasurer (Chief Financial Officer) of Union Carbide Corporation, certify that:

1.

I have reviewed this quarterly report on Form 10-Q of Union Carbide Corporation;

2.

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

3.

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

4.

The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

a)

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

b)

evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c)

presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

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

a)

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b)

any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6.

The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

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EXHIBIT INDEX

QuickLinks

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 4. CONTROLS AND PROCEDURES
PART II—OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K