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

Cautionary Statements About Forward-Looking Statements This report contains forward-looking statements which may be identified by their use of words like "plans," "expects," "will," "anticipates," "intends," "projects," "estimates" or other words of similar meaning. All statements that address expectations or projections about the future, including statements about the company's strategy for growth, product development, market position, expenditures and financial results, are forward-looking statements. Forward-looking statements are based on certain assumptions and expectations of future events. The company cannot guarantee that these assumptions and expectations are accurate or will be realized. For some of the important factors that could cause the company's actual results to differ materially from those projected in any such forward-looking statements see the Risk Factors discussion set forth under Part II, Item 1A beginning on page 32. Additional risks and uncertainties not presently known to the company or that the company currently believes to be immaterial also could affect its businesses. Results of Operations
Overview
Results of operations in the third quarter of 2008 were affected by two major hurricanes, Ike and Gustav, that struck the Gulf Coast of the United States. For the third quarter 2008 sales increased 9 percent, but net income declined 30 percent reflecting continuing high costs for key raw materials, energy and transportation, in addition to the impact of hurricanes. A pre-tax charge of $227 million was recorded in the third quarter primarily for required clean up and restoration of manufacturing operations, as well as the write-off of inventory and plant assets that were damaged as a result of the hurricanes. In addition, management expects to make capital expenditures of approximately $120 million to replace damaged plant assets.
Strong sales and earnings improvement continued for the Agriculture & Nutrition segment. Total company sales outside the United States grew 16 percent, reflecting significant Agriculture & Nutrition sales in Brazil and expansion of other key businesses into emerging markets, most notably those in Eastern Europe, China, and India. The company continued to benefit from its cost productivity improvement programs, while spending increased for future growth in key markets, product development, and capacity expansions. Management estimates that the company lost sales of about $80 million in the third quarter due to the hurricanes. Until the company's plants and the facilities of affected suppliers and customers are restored to pre-hurricane capacity, operating results will be affected.
Net Sales
Net sales for the third quarter 2008 were $7.3 billion versus $6.7 billion in the prior year, up 9 percent, with a 9 percent increase in local selling prices, and a 4 percent favorable currency exchange, partly offset by a 4 percent reduction in worldwide sales volume. Higher local selling prices principally reflect increased sales of agricultural and other value-in-use products, as well as recovery of higher raw material costs. Four percent lower worldwide sales volume reflects a 1 percent increase outside the United States driven by growth in emerging markets, more than offset by significantly lower demand for non-agriculture related product lines in the United States and Western European markets, particularly those related to motor vehicle production and residential construction, and the impact of hurricanes Ike and Gustav.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued The table below shows a regional breakdown of net sales based on location of customers and percentage variances from the prior year: Three Months Ended September 30, 2008 Percent Change Due to: 2008 Net Sales Percent Local Currency ($ Billions) Change vs. 2007 Price Effect Volume Portfolio Worldwide $ 7.3 9 9 4 (4 ) - U.S. 2.3 (2 ) 12 - (13 ) (1 ) Europe 2.2 14 5 11 (2 ) - Asia Pacific 1.5 15 9 2 5 (1 ) Canada & Latin America 1.3 20 13 4 3 -

For the nine months ended September 30, 2008, net sales were $24.7 billion versus $22.4 billion in the prior year, up 10 percent with a 7 percent increase in local selling prices, a 5 percent favorable currency exchange, partly offset by a 1 percent lower volume and a 1 percent reduction resulting from portfolio changes. Worldwide sales volumes reflect a 3 percent increase outside the United States driven by growth in emerging markets, with significantly lower U.S. sales volumes for non-agriculture related product lines.

Nine Months Ended September 30, 2008 Percent Change Due to: 2008 Percent Net Sales Change Local Currency ($ Billions) vs. 2007 Price Effect Volume Portfolio Worldwide $ 24.7 10 7 5 (1 ) (1 ) U.S. 9.1 1 9 - (7 ) (1 ) Europe 7.8 17 5 11 2 (1 ) Asia Pacific 4.3 15 6 4 7 (2 ) Canada & Latin America 3.5 17 8 7 2 -

Other Income, Net
Third quarter 2008 other income, net, totaled $420 million as compared to $365 million in the prior year, an increase of $55 million. The increase is largely attributable to increases of $70 million in net pre-tax exchange gains and $23 million in Cozaar®/Hyzaar® income, partially offset by a $24 million reduction in income from asset sales and the absence of a $25 million contract termination payment received in 2007.
For the nine months ended September 30, 2008, other income, net, was $1,057 million as compared to $1,045 million last year, an increase of $12 million. The increase was primarily attributable to a $51 million litigation settlement and an increase of $69 million in equity in earnings of affiliates, partially offset by additional net pre-tax exchange losses of $93 million. Additional information related to the company's other income, net, is included in Note 3 to the interim Consolidated Financial Statements.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Cost of Goods Sold and Other Operating Charges (COGS) COGS totaled $5.9 billion in the third quarter 2008 versus $5.2 billion in the prior year, an increase of 15 percent. COGS as a percent of net sales was 81 percent versus 77 percent for the third quarter 2007. The 4 percentage point increase principally reflects a $227 million charge for hurricane-related damages, significant increases in raw material, energy and freight costs, partly offset by the absence of a $40 million charge in 2007 for litigation related to a discontinued business.
COGS for the nine months ended September 30, 2008 was $18.3 billion, an increase of 12 percent versus $16.4 billion in the prior year. COGS was 74 percent of net sales, an increase of 1 percentage point from the prior year, reflecting the above-referenced charge for hurricane damages and significant increases in raw material, energy and freight costs, partly offset by the absence of a $55 million charge in 2007 for litigation related to a discontinued business. Selling, General and Administrative Expenses (SG&A) SG&A totaled $873 million for the third quarter 2008 versus $804 million in the prior year. SG&A was approximately 12 percent of net sales for the three-month periods in 2008 and 2007. Year-to-date SG&A totaled $2,794 million versus $2,534 million in 2007. As a percent of net sales, SG&A was 11 percent, essentially unchanged from the prior year. The increase in SG&A was primarily due to increased global commissions and selling and marketing investments related to the company's seed business and an unfavorable foreign currency impact.
Research and Development Expense (R&D)
R&D totaled $360 million and $332 million for the third quarter 2008 and 2007, respectively. R&D was approximately 5 percent of net sales for the three-month periods in 2008 and 2007. For the nine months ended September 30, 2008, R&D was $1,050 million versus $979 million last year. The increase principally reflects the growth investment in the seed business within the Agriculture & Nutrition segment.
Interest Expense
Interest expense totaled $98 million in the third quarter 2008 compared to $113 million in 2007. For the nine months ended September 30, 2008, interest expense decreased from $320 million in 2007 to $272 million in 2008. The decrease in interest expense for the three- and nine-month periods is due to lower average interest rates, partially offset by higher average borrowings. Provision for Income Taxes
The company's effective tax rate for the third quarter 2008 was 20.9 percent as compared to 16.2 percent in 2007. The higher effective tax rate in 2008 versus 2007 principally relates to the impact of tax associated with the company's policy of hedging the foreign currency-denominated monetary assets and liabilities of its operations, partially offset by the tax benefit related to the hurricane related charge.
The company's effective tax rate for year-to-date 2008 was 21.1 percent as compared to 24.7 percent in 2007. The lower effective tax rate principally relates to a favorable geographic mix of pre-tax earnings and favorable tax settlements. See Note 5 to the interim Consolidated Financial Statements for additional information.
Net Income
Net income for the third quarter of 2008 was $367 million versus $526 million in the third quarter 2007, a 30 percent decrease. The decrease in net income principally reflects a $146 million hurricane charge, higher raw material and energy costs, lower sales volume, and increased spending for growth initiatives and strategic capacity expansions. Partly offsetting these factors were higher local selling prices in addition to favorable currency and tax positions.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued For the nine months ended September 30, 2008, net income was $2.6 billion, compared to $2.4 billion in the prior year, up 8 percent. The increase in net income principally reflects 10 percent sales growth, primarily from higher local selling prices and volume growth outside the U.S., in addition to increased pharmaceuticals income, fixed cost productivity gains, and a favorable foreign currency exchange impact.
Corporate Outlook
The company expects fourth quarter 2008 earnings to be in the range of $.20 to $.25 per share. The outlook includes estimated earnings impact of about $.10 per share from hurricane-related business interruptions, principally the loss of production and sales from the company's Orange, Texas plant. The outlook also reflects expected weakening demand in North American and Western European markets.
Accounting Standards Issued Not Yet Adopted See Note 1 to the interim Consolidated Financial Statements for a description of recent accounting pronouncements.
Segment Reviews
Summarized below are comments on individual segment sales and PTOI for the three- and nine-month periods ended September 30, 2008 compared with the same periods in 2007. Segment sales include transfers. Segment PTOI is defined as operating income/(loss) before income taxes, minority interests, exchange gains/(losses), corporate expenses and interest.
Agriculture & Nutrition - Third quarter 2008 sales of $1.3 billion were 22 percent higher than the same period in 2007, reflecting 19 percent higher USD selling prices and 5 percent volume growth, partly offset by a 2 percent reduction from portfolio changes. The volume growth reflects strong global demand for fungicides and insecticides, higher sales of corn and soybeans in Brazil, and market share gains for oilseeds in Europe. The higher USD selling prices reflect higher value product mix, pricing actions to offset the increases of raw materials costs and favorable currency impacts in Europe, Latin America and Canada. Pretax operating loss for the third quarter was $21 million, an improvement of $75 million when compared to the same period in the prior year. The improvement for the quarter was primarily due to higher sales, partially offset by growth investments and higher commodity prices. In addition, third quarter 2008 results include a $49 million net gain from mark-to-market valuation of soybean contracts. Third quarter 2007 includes $25 million of income from a contract termination.
Year-to-date sales were $6.7 billion, a 20 percent increase versus the prior year, reflecting 15 percent higher USD selling prices and 6 percent higher volume, partially offset by a 1 percent reduction from portfolio changes. The increase in sales was primarily a result of higher corn seed sales in Europe and Brazil, higher soybean seed sales in North America on increased acreage shift from corn, and strong demand for corn and cereal herbicides and cereal fungicides in Europe. Year-to-date PTOI for 2008 was $1,269 million, up 29 percent versus $983 million in the same period last year, principally driven by higher sales and continued progress on fixed cost productivity efforts while continuing to fund strategic growth investments in research and development and sales and marketing.
Coatings & Color Technologies - Third quarter 2008 sales of $1.8 billion were up 7 percent compared to the same period in 2007, reflecting 10 percent higher USD selling prices, partially offset by a 3 percent volume decrease. The decrease in volume was primarily due to lower sales of products sold to automotive original equipment manufacturers in North America and Europe, partially offset by strong sales in emerging markets. The higher USD selling prices primarily reflect favorable currency impact in Europe and Latin America and pricing actions to offset the increases of raw materials costs. Third quarter PTOI of $190 million decreased 7 percent when compared to $204 million in the third quarter 2007, primarily due to lower sales volumes and significantly higher distribution and raw materials costs during the quarter, which were partially offset by price increases.
Year-to-date 2008 sales were $5.3 billion, up 7 percent from the same period last year, reflecting 10 percent higher USD selling prices, partially offset by a 3 percent volume decline. Year-to-date PTOI was

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued $627 million as compared to $624 million last year. Year over year improvement in PTOI reflects pricing programs that offset higher raw material costs, positive currency impact, and strong sales in emerging markets.
Electronic & Communication Technologies - Sales in the third quarter 2008 of $1.1 billion increased 13 percent from the third quarter 2007, reflecting 12 percent higher USD selling prices and 2 percent increase due to portfolio changes, partially offset by a 1 percent decrease in volume. Sales reflect lower demand for fluoroproducts in North America, partially offset by higher sales of electronic materials in emerging markets and increased demand for photovoltaic products. The higher USD selling prices reflect higher value product mix, pricing actions to offset the increases of raw materials costs and favorable currency impacts in Europe and Asia Pacific. Third quarter 2008 PTOI was $137 million as compared to $138 million in the third quarter 2007, as higher prices offset the impact of the increase in raw material costs. Year-to-date sales of $3.2 billion were up 11 percent, reflecting 9 percent higher USD selling prices, 1 percent volume growth and a 1 percent increase from portfolio changes. The volume growth was mainly driven by higher sales in emerging markets. Year-to-date PTOI was $482 million for 2008 up 10 percent versus $438 million in the same period during last year. The improvement in PTOI was driven by higher sales of electronic products and strong demand in emerging markets.
Performance Materials - Third quarter 2008 sales of $1.7 billion were up 3 percent compared to sales in the third quarter 2007. During the third quarter, manufacturing operations and distribution centers along the Gulf Coast, particularly the Orange, Texas manufacturing site, were disrupted by a major hurricane. As a result, the company declared force majeure for its ethylene copolymers and certain other ethylene-based product lines impacting sales volumes in third quarter. Cleanup and recovery work is underway. Force majeure will remain in effect until the company's operations and supply chains are restored to pre-hurricane capacity. The decrease in volume also reflects lower sales of Neoprene due to the capacity reduction associated with the shutdown of the Louisville, Kentucky plant and lower sales volumes in most regions due to economic softness. Higher USD selling prices during the quarter, mainly driven by pricing actions to offset the increases of raw materials costs, were not sufficient to offset the impact of sharply rising ingredient costs. Third quarter 2008 pre-tax operating loss was $91 million compared to PTOI of $196 million in the third quarter 2007. The decline in PTOI was mainly due to a pre-tax charge of $216 million for costs associated with required clean-up, restoration of manufacturing operations and lost inventory from hurricanes, lower sales volumes associated with economic weakness and impact of hurricanes, and a rapid acceleration of ingredient costs during the quarter, which were partially offset by price increases.
Year-to-date sales were $5.2 billion versus $4.9 billion in the prior year. The 6 percent increase in sales reflects 13 percent higher USD prices, partially offset by a 6 percent decrease in volume and a 1 percent reduction related to portfolio changes. The decrease in volume reflects economic softness and lower sales volume of Neoprene and ethylene due to a scheduled maintenance shutdown and the hurricane impacts. Year-to-date PTOI for 2008 was $351 million compared to $573 million in 2007. The decreased earnings were primarily due to a hurricane-related pre-tax charge of $216 million, lower sales volumes associated with the economic slowdown, and higher ingredient costs, partially offset by fixed cost productivity improvements and higher selling prices. Additionally, 2007 year-to-date PTOI included a $52 million charge in connection with elastomers antitrust matters.
Safety & Protection - Third quarter sales of $1.5 billion in 2008 were up 9 percent when compared to the same period in 2007, reflecting 13 percent higher USD selling prices, partly offset by a 4 percent decline in volume. The higher USD selling prices primarily reflect pricing actions, mostly in specialty chemicals, to offset increases of raw materials costs. The decrease in volume was mainly due to lower sales to U.S. residential construction markets, partially offset by strong demand in aramids and higher sales in emerging markets. Third quarter 2008 PTOI was $251 million compared to $313 million in the third quarter 2007. The decline in PTOI was primarily due to higher spending in aramids growth initiatives and the impact of lower sales to U.S. residential construction markets.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Year-to-date sales of $4.5 billion were 5 percent higher than last year, due to 10 percent higher USD selling prices, offset by a 3 percent decline in volume and a 2 percent reduction from a divested business. Decreased volume primarily reflects lower sales of products for U.S. residential construction markets. The higher USD selling prices primarily reflect pricing actions to offset the increases of raw materials costs and positive currency impact in Europe and Latin America. Year-to-date PTOI was $825 million compared to $922 million in 2007. The decreased earnings were primarily due to higher production costs and the impact of lower volumes related to U.S. residential construction markets. Pharmaceuticals - Third quarter 2008 PTOI of $260 million compared to $237 million in the third quarter 2007. Year-to-date 2008 PTOI was $760 million compared to $703 million in the prior year.
Other - The company includes embryonic businesses not included in growth platforms, such as applied biosciences and nonaligned businesses, in Other. Sales in the third quarter 2008 were $45 million compared to $43 million in the third quarter 2007. Pretax operating loss for the third quarter 2008 was $44 million compared to a loss of $76 million in the third quarter 2007. The improvement for the quarter was mainly due to the absence of a $40 million charge recorded in 2007 for litigation related to a discontinued business. Year-to-date sales of $129 million compared to $136 million in the third quarter 2007. Year-to-date pretax operating loss of $69 million compared to pretax operating loss of $169 million in 2007. The improvement for the year was mainly due to a benefit of $51 million from a litigation settlement in 2008 and the absence of a $55 million charge recorded in 2007 for litigation related to a discontinued business.
Liquidity & Capital Resources
While the global capital markets recently experienced unprecedented adverse conditions, management continues to believe that the company's ability to generate cash and access the capital markets will be adequate to meet anticipated cash requirements to fund working capital, capital spending, dividend payments and other cash needs. The company's liquidity needs can be met through a variety of sources, including: cash provided by operating activities, cash and cash equivalents, marketable securities, commercial paper, syndicated credit lines, bilateral credit lines, equity and long-term debt markets and asset sales. The company's current strong financial position, liquidity and credit ratings provide access to the capital markets despite the current crisis. The company is closely monitoring its liquidity as well as the condition of the capital markets and can not predict with any certainty the impact on the company of further disruption in these markets.
Accounting for employee benefit plans involves numerous assumptions and estimates. Discount rate and expected return on plan assets are two critical assumptions in measuring the cost and benefit obligation of the company's pension and other long-term employee benefit plans. While the company is closely monitoring the capital markets, management reviews these two key assumptions annually as of December 31st. By law no contributions are currently required to be made to the principal U.S. pension plan in 2008 and no contributions are currently anticipated. Contributions beyond 2008 are not currently determinable since the amount of any contribution is heavily dependent on the future economic environment and investment returns on pension trust assets.
Pursuant to its cash discipline policy, the company seeks first to maintain a strong balance sheet and second, to return excess cash to shareholders unless the opportunity to invest for growth is compelling. Cash and cash equivalents and marketable securities balances of $2.1 billion as of September 30, 2008, provide primary liquidity to support all short-term obligations. In the unlikely event that the company would not be able to meet its short-term liquidity needs, the company has access to approximately $2.7 billion in credit lines with several major financial institutions. These credit lines are primarily multi-year facilities.
The company continually reviews its debt portfolio for appropriateness and occasionally may rebalance it to ensure adequate liquidity and an optimum debt maturity schedule.
On April 29, 2008, Moody's Investors Service changed the company's credit outlook to "Stable" from "Negative".
Cash provided by operating activities was $494 million for the nine months ended September 30, 2008 versus $1,426 million provided during the same period ended in 2007. The $932 million reduction is primarily due to higher inventories in most of the platforms and an increase in payments associated with the Agriculture & Nutrition segment's accrued growers compensation for harvested parent seed.
Cash used for investing activities was $1,682 million for the nine months ended September 30, 2008 compared to $1,020 million for the same period last year. The $662 million increase was mainly due to increased capital expenditures.

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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, Continued Purchases of property, plant and equipment (PP&E) for the nine months ended September 30, 2008 totaled $1,406 million, an increase of $387 million compared to the prior year. Most of the increase is attributable to higher spending in the Agriculture & Nutrition and Safety & Protection segments. The company expects full-year purchases of PP&E to be higher than the $1.6 billion spent in 2007.
Cash provided by financing activities was $1,908 million for the nine months ended September 30, 2008 compared to cash used for financing activities of $1,043 million in the prior year. The $2,951 million difference was primarily due to the increase in the net proceeds from borrowings and the absence of the purchase of common stock, which were partly offset by the decrease in the proceeds from the exercise of stock options.
Dividends paid to shareholders during the nine months ended September 30, 2008 totaled $1,123 million. In July 2008, the company's Board of Directors declared a third quarter common stock dividend of $0.41 per share. The third quarter dividend was the company's 416thconsecutive quarterly dividend since the company's first dividend in the fourth quarter 1904. Cash and Cash Equivalents and Marketable Securities Cash and cash equivalents and marketable securities were $2.1 billion at September 30, 2008, an increase of $0.7 billion from the $1.4 billion at December 31, 2007. The increase reflects the net cash generated from borrowings and earnings less expenditures for working capital, capital projects and dividends.
Debt . . .