<PAGE>

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM 10-K

                                  ANNUAL REPORT
                       PURSUANT TO SECTION 13 OR 15(d) OF
                       THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2001         Commission file number 1-496

                                   ----------

                              HERCULES INCORPORATED

                             A DELAWARE CORPORATION
                  I.R.S. EMPLOYER IDENTIFICATION NO. 51-0023450
                                 HERCULES PLAZA
                            1313 NORTH MARKET STREET
                         WILMINGTON, DELAWARE 19894-0001
                             TELEPHONE: 302-594-5000

           Securities registered pursuant to Section 12(b) of the Act
         (Each class is registered on the New York Stock Exchange, Inc.)

                               Title of each class
                               -------------------

                       Common Stock ($25/48 Stated Value)
           8% Convertible Subordinated Debentures due August 15, 2010
                  9.42% Trust Originated Preferred Securities
              ($25 liquidation amount), issued by Hercules Trust I
                     and guaranteed by Hercules Incorporated
                         Preferred Share Purchase Rights

      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 |X| No | |

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|

      As of March 15, 2002, registrant had 109,157,515 shares of common stock,
$25/48 stated value ("Common Stock") outstanding, which is registrant's only
class of common stock.

      The aggregate market value of registrant's Common Stock held by
non-affiliates based on the closing price on March 15, 2002 was approximately
$1.3 billion.

                       DOCUMENTS INCORPORATED BY REFERENCE
 (SPECIFIC PAGES INCORPORATED ARE IDENTIFIED UNDER THE APPLICABLE ITEM HEREIN.)

      Portions of the registrant's definitive Proxy Statement (the "Proxy
Statement"), when filed, will be incorporated by reference in Part III of this
Report. Other documents incorporated by reference in this report are listed in
the Exhibit Index (see page 84).
<PAGE>

                                     PART I

FORWARD-LOOKING STATEMENT

      This Annual Report on Form 10-K includes forward-looking statements, as
defined in the Private Securities Litigation Reform Act of 1995, reflecting
management's current analysis and expectations, based on reasonable assumptions.
Forward-looking statements may involve known and unknown risks, uncertainties
and other factors, which may cause the actual results to differ materially from
those projected, stated or implied depending on such factors as: inability to
generate cash and reduce debt, the result of the pursuit of strategic
alternatives, ability to execute work process redesign and reduce costs,
business climate, business performance, economic and competitive uncertainties,
failure to complete transactions or to achieve benefit from transactions,
inability to monetize certain identified businesses, higher manufacturing costs,
reduced level of customer orders, changes in strategies, risks in developing new
products and technologies, environmental and safety regulations and clean-up
costs, foreign exchange rates, adverse legal and regulatory developments,
including increases in the number or financial exposures of claims, lawsuits,
settlements or judgments, or the inability to eliminate or reduce such financial
exposures by collecting indemnity payments from insurers, and adverse changes in
economic and political climates around the world. Accordingly, there can be no
assurance that the Company will meet future results, performance or achievements
expressed or implied by such forward-looking statements. As appropriate,
additional factors are contained in reports filed with the Securities and
Exchange Commission, including the Form S-4 Registration Statement filed October
31, 2001. This paragraph is included to provide safe harbor for forward-looking
statements, which are not generally required to be publicly revised as
circumstances change.

ITEM 1. BUSINESS:

      Hercules Incorporated is a leading manufacturer and marketer of specialty
chemicals and related services for a broad range of business, consumer and
industrial applications. The Company is focused on maximizing cash flow and
delivering stockholder value by concentrating on managed growth in its core
businesses as well as ongoing improvements in its manufacturing processes.
Hercules operates on a global scale, with significant operations in North
America, Europe, Asia and Latin America. Product sales occur in over 50
countries with significant revenue streams generated in four continents.

      The Company's principal products are chemicals used by the paper industry
to increase product performance and enhance the manufacturing process; chemicals
which improve water treatment and industrial process chemicals; water-soluble
polymers; resins and polypropylene and polyethylene fibers. These products
impart such qualities as durability, water-resistance and improved aesthetics
for everyday consumer goods such as writing paper, toothpaste and diapers. The
primary markets the Company serves include pulp and paper, personal care,
petroleum refining, oil and gas drilling and recovery, paints and coatings,
construction materials, adhesives and pharmaceuticals.

      While the Company's products have a low cost impact on its customers'
total product costs, they frequently possess characteristics important to the
functionality and aesthetics of the finished product or the efficient operation
of the manufacturing process. Examples of the Company's products in consumer
end-uses include strength additives for tissue and toweling, sizing agents for
milk and juice cartons, fibers that comprise the inner and outer linings of
disposable diapers and feminine hygiene products, thickeners in products such as
toothpaste, shampoos and water-based paints and water control additives for
building products such as tile cements, grouts, stuccos, plasters and joint
compounds. The Company also offers products and related services that improve
and reduce the cost of a variety of manufacturing processes, including water
management programs that are designed to protect and maintain equipment and
reduce operating costs.

      Although price is important to the Company's competitive strategy, the
Company primarily competes based on the performance and quality of its products.
The Company strives to continually improve its products by investing in
technology and research and development and has committed substantial resources
to its research and development efforts. Research and development expenditures
totaled approximately $67 million in 2001. Such expenditures enable the Company
to consistently bring to market products which have improved functional
properties or which offer similar properties at a lower cost. This area has
become increasingly important, as customers have come to rely more on Hercules
to provide new solutions to improve their product offerings and processes.
Additionally, the Company strives to make its products more price-competitive by
effectively managing its production costs and sharing savings with customers.

      The Company continually reviews its corporate strategy and directives in
order to compete most effectively in its changing markets.


                                       2
<PAGE>
Prior to 1995, the Company focused primarily on increasing its return on equity
and reducing operating costs. From 1995 through 2000, the Company implemented
internal and external initiatives to achieve growth. The Company has divested a
number of businesses that did not fit into its portfolio and acquired other
businesses that complement its strategy and product offerings. In 1998, Hercules
made five major acquisitions. The largest of these was the purchase of
BetzDearborn Inc., a global specialty company providing water and process
treatment to a variety of commercial and industrial processes. Additionally, the
Company acquired Houghton International's paper chemicals group; Citrus
Colloids, a pectin manufacturer; Alliance Technical Products ("ATP"), a
manufacturer of resins serving the water-based adhesives industry; and the 49%
share of FiberVisions owned by Hercules' joint venture partner, making
FiberVisions a wholly-owned subsidiary.

      Starting in 2000, the Company implemented a program designed to refocus
its business by monetizing certain non-core assets, thereby generating cash to
reduce its debt, while concentrating on improving the efficiency, profitability
and growth potential of the Company's core businesses. As part of this strategy,
the Company has actively sold non-core businesses in the last 18 months. In
September 2000, the Food Gums business, including Citrus Colloids, was sold to
CP Kelco; in May 2001, the hydrocarbon resins business and select portions of
its rosin resins business, including ATP, were sold to Eastman Chemical Company
and the peroxy chemicals business was sold to GEO Specialty Chemicals Inc. The
Company received in excess of $730 million in gross proceeds in consideration
for these sales, which was used to reduce debt. In the fourth quarter of 2000,
the Company announced its intention to pursue a sale or merger of all or part of
the Company.

      In 2001, the strategy was expanded to include an aggressive and
comprehensive cost reduction and work process redesign program to improve return
on capital, streamline organizational structure, improve work processes and
consolidate manufacturing and non-manufacturing resources. The objective was to
achieve fixed costs reductions of $100 million on an annualized basis (as
compared to 2000 results, excluding divested businesses) by June 2002.
Approximately 975 employees have been or will be terminated pursuant to this
initiative. At the end of 2001, the Company has achieved the $100 million
annualized cost reduction target. In 2002, the cost reduction target to be
achieved by December 2002 was increased to $200 million in annualized fixed cost
reductions (as compared to 2000 results, excluding divested businesses),
including $125 million for the remaining businesses and $75 million for the
BetzDearborn Division.

      On February 12, 2002, the Company entered into an agreement to sell the
BetzDearborn Division businesses and certain Pulp and Paper Division treatment
businesses (the "Water Treatment Business") to GE Specialty Materials ("GESM"),
a unit of General Electric Company (the "GE Transaction"). The transaction is
subject to regulatory and other customary approvals, and is expected to close in
the second quarter of 2002. The selling price is $1.8 billion in cash, with net
after tax proceeds available for debt reduction of approximately $1.665 billion.
The sale of the Water Treatment Business will enable the Company to
significantly reduce its debt, provide greater financial flexibility, permit
better support of the Company's remaining businesses and enhance shareholder
value. The Company will then focus on the future of its remaining businesses.
See Part II, Item 7 for additional discussion.

      In order to facilitate the GE transaction, the Company was required to
obtain amendments to its senior credit facility and ESOP credit facility (the
"Facilities"). Effective March 6, 2002, the Facilities were amended (the
"Amendments") to (i) modify certain financial covenants (ii) change the
mandatory prepayment provisions; (iii) permit the reorganization of the Company
in order to effect the separation of the Water Treatment Business; and (iv)
permanently reduce the revolving committed amount under the credit facility to
$200 million. The amendment to the


                                       3
<PAGE>
Facilities also included provisions that are effective only upon the
consummation of the sale of the Water Treatment Business and the prepayment of
the Facilities. These additional provisions include the following: (i) the
release of the subsidiary stock pledged to the collateral agent; (ii) the
elimination of the requirement that stock of any additional subsidiaries be
pledged in the future; and (iii) the revision of the permitted amount of asset
purchases and dispositions. If the GE Transaction does not close by July 15,
2002, the financial covenants set forth in the Fifth Amendment revert back to
the previously established levels.

      Over the long term, the Company is focused on improving profitability
through net sales growth, new product offerings, cost improvements and superior
customer service and cross-selling of products.

REPORTABLE SEGMENTS

      The reportable segments of the Company are Process Chemicals and Services
(comprised of Pulp and Paper and BetzDearborn); Functional Products (comprised
of Aqualon); and Chemical Specialties (comprised of FiberVisions and Resins).
The financial information regarding these segments, which includes net sales and
profit from operations for each of the three years ended December 31, 2001, 2000
and 1999 and capital employed as of December 31, 2001, 2000 and 1999, is
provided in Note 23 to the Consolidated Financial Statements (See Part II, Item
8).

PROCESS CHEMICALS AND SERVICES (PULP AND PAPER AND BETZDEARBORN)

      Products and services in this segment are designed to enhance customers'
profitability by improving production yields and overall product quality, and to
better enable customers to meet their environmental objectives and regulatory
requirements.

      The Company believes its Pulp and Paper Division is one of the largest
suppliers of functional, process and water management chemicals for the pulp and
paper industry. Pulp and Paper offers a wide and highly-sophisticated range of
technology and applications expertise with in-mill capabilities which run from
the boilers, through the paper machine, to the finished paper on the winder. The
Company is the only true broad-based supplier able to offer a complete portfolio
of products to its paper customers.

      The Company believes BetzDearborn is the world's second largest supplier
of advanced-engineered chemical treatment programs for water, wastewater and
process systems operating in a wide range of industries. BetzDearborn has
extensive experience in lowering water and energy consumption, maximizing plant
efficiency and productivity, solving complex environmental problems and
improving the yield and quality of customer processes.

      The Company has entered into an agreement to sell the Water Treatment
Business to GESM. The paper process chemicals business, currently representing
approximately one-third of the business that Hercules acquired when it purchased
BetzDearborn in 1998, will remain with Hercules. In addition, Hercules will have
an agreement with GESM to distribute and service BetzDearborn's water treatment
products to the pulp and paper industry.

      At December 31, 2001, the principal products and primary markets of this
segment were:

<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
DIVISION               PRINCIPAL PRODUCTS                     PRIMARY MARKETS
--------------------------------------------------------------------------------
<S>              <C>                                        <C>
                 Performance chemicals:

                 Wet strength, dry strength,
                 sizing and surface treatments,             Makers of tissues,
                 creping adhesives and release.             paper towels,
                 ----------------------------------------   packaging, beverage
                 Process treatment chemicals:               containers,
                                                            newsprint, papers
PULP AND         Deposit, contaminant,                      for magazines and
  PAPER          microbiological and foam                   books, printing and
                 control, clarification,                    writing paper and
                 retention/drainage, felt                   other stationery
                 conditioning, deinking, fiber              items such as labels
                 recovery and water closure.                and envelopes,
                 ----------------------------------------   health care and skin
                 Water treatment chemicals(1):              care products,
                                                            household products
                 Influent water, effluent                   and pharmaceuticals.
                 water, cooling towers and
                 utility systems.
--------------------------------------------------------------------------------
                 Water treatment(1):                        Industrial,
                                                            commercial and
                 Influent water, boilers,                   institutional
                 cooling systems and                        establishments.
                 wastewater.
                 ---------------------------------------------------------------
                 Process treatment(1):

  BETZ           Antifoulants, emulsion
DEARBORN         breakers, antifoams, finished              Petroleum
                 additives, polymerization                  refineries, chemical
                 inhibitors, deposit and                    plants,
                 corrosion control, cleaners                manufacturers of
                 and sterilizers, clarifying                metals and plastics,
                 aids, leaching and                         automobile assembly
                 agglomeration aids, polymers,              plants, mineral
                 dust control, membrane                     processors and
                 cleaners, conversion coatings,             makers of food and
                 sealers, paint detackifiers,               beverages.
                 strippers and grate cleaners.
--------------------------------------------------------------------------------
</TABLE>

(1)   Included in the GE Transaction.


                                       4
<PAGE>

FUNCTIONAL PRODUCTS (AQUALON)

      Products in this segment modify the physical properties of aqueous
(water-based) and non-aqueous systems. These products are principally derived
from renewable natural raw materials and are sold as key ingredients to other
manufacturers where they are used as small-quantity additives to provide
functionality for thickening, water retention, rheology control, film formation,
suspending and emulsifying action and binding power. Aqualon's ability to offer
its customers a broad sophisticated product line has earned it the number one or
two market position across most of its market sectors. Major end uses for
Aqualon's products include personal care products, food additives,
pharmaceutical products, construction, paints, coatings and oil recovery, where
Aqualon's polymers are used to modify viscosity, gel strength, and/or fluid
loss.

      In June 2000, Aqualon sold its nitrocellulose operations, which it had
decided to exit in December 1999 due to economic conditions brought on by a
persistent worldwide over-supply.

      At December 31, 2001, the principal products and primary markets of this
segment were:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
DIVISION                      PRINCIPAL PRODUCTS                                PRIMARY MARKETS
------------------------------------------------------------------------------------------------------------
<S>           <C>                                                   <C>
              Water-soluble polymers:
                                                                    Manufacturers of interior and exterior
              Hydroxyethylcellulose (HEC), Carboxymethylcellulose   architectural paints, oilfield service
              (CMC), Methylcellulouse (MC) and derivatives,         companies for oil and gas drilling and
              Hydroxypropylcellulous (HPC) and Guar                 recovery, paper mills, constructions material
              and its derivatives.                                  manufacturers and makers of oral hygiene
AQUALON                                                             products and personal care products.
              ----------------------------------------------------------------------------------------------
              Solvent-soluble polymers:
                                                                    Producers of coating resins, printing
              Pentaerythritol (PE) and Ethylcellulose (EC).         inks and aviation fluids.
------------------------------------------------------------------------------------------------------------
</TABLE>

CHEMICAL SPECIALTIES (FIBERVISIONS AND RESINS)

      FiberVisions is a manufacturer of thermal-bond polypropylene fine denier
staple fibers used in hygienic products like disposable diapers. FiberVisions
produces monocomponent polypropylene fibers and bicomponent fibers comprised of
a polypropylene core and a polyethylene sheath. FiberVisions also produces
olefin fiber and yarn for the domestic textile and industrial markets used in
fabrics, residential upholstery and geotextiles, carpets and asphalt.

      The Resins Division, which consists of the rosin and terpenes specialty
business, is the remaining portion of the Resins Division after the divestitures
of the hydrocarbon resins, select portions of the rosin resins, toner resins and
peroxy chemicals businesses in 2001. Resins manufactures wood and gum rosin
resins and terpene resins and specialties. Product applications include
adhesives, rubber and plastic modifiers, food and beverages and aroma chemicals.


                                       5
<PAGE>

      At December 31, 2001, the principal products and primary markets of this
segment were:

<TABLE>
<CAPTION>
DIVISION                     PRINCIPAL PRODUCTS                            PRIMARY MARKETS
-------------------------------------------------------------------------------------------------
<S>           <C>                                                   <C>
-------------------------------------------------------------------------------------------------
              Hygiene fibers: for disposable hygiene products.      Makers of nonwoven and woven
              -------------------------------------------------     fabrics for applications
 FIBER        Textile fibers: for decorative and fabric             including baby care, feminine
VISIONS       applications.                                         care, adult incontinence,
              -------------------------------------------------     wipes, geotextile,
              Industrial fibers: for geotextile fabrics, wipes      construction and upholstery.
              and industrial products.
------------------------------------------------------------------------------------------------
              Rosin resins: for adhesives, food, rubber and         Makers of consumer and
              plastics.                                             industrial products such as
              -------------------------------------------------     masking, packaging, arts and
RESINS        Terpene resins: for chewing gum and adhesives.        duct tape, construction
              -------------------------------------------------     materials, beverages, chewing
              Terpene specialties: for flavor and fragrance in      gum, plastics, adhesives,
              household and industrial products.                    fragrances and flavors.
-------------------------------------------------------------------------------------------------
</TABLE>

RAW MATERIALS AND ENERGY SUPPLY

      Raw materials and supplies are purchased from a variety of industry
sources, including agricultural, forestry, mining and petroleum and chemical
industries.

      Important raw materials for the Process Chemicals and Services segment are
cationic and anionic polyacrylamides and emulsions, biocides, amines,
surfactants, rosin, adipic acid, epichlorohydrin, fumaric acid, stearic acid,
diethylenetriamine, phosphorus trichloride, wax and starch, kathon 886F,
bromicide, dequest 2010, age, aetac, antimicrobial 7287, piror 850, aromatic
solvent, acrylic acid and TKPP.

      Raw materials important to the Functional Products segment are cellulose
(derived from wood pulp and cotton linters), guar, ethylene chloride, caustic
soda, monochloroacetic acid, methanol, methyl chloride, acetaldehyde and valeric
acids.

      The important raw materials for the Chemical Specialties segment are
polyethylene and polypropylene resins, ketones, alcohols, phenol, adipic acid,
fumaric acid, stearic acid, phosphorus trichloride, wax, casein, starch,
pigments, antioxidants, d-limonene, turpentine, rosin, pine wood stumps,
catalysts, toluene, clay and process oils.

      FiberVisions purchases polypropylene and other polymers based on market
prices as indicated domestically by the CDI and internationally by the Platts
Indices. FiberVisions has been susceptible to supplier pricing power because a
major processing line requires polypropylene in flake form, which is not as
readily available as pellets. FiberVisions has recently undertaken initiatives
to expand its qualified flake suppliers.

      Major requirements for key raw materials and fuels are typically purchased
pursuant to multi-year contracts. Hercules is not dependent on any one supplier
for a material amount of its raw material or fuel requirements, but certain
important raw materials are obtained from sole-source or a few major suppliers.

      While temporary shortages of raw materials and fuels may occur
occasionally, these items are currently readily available. However, their
continuing availability and price are subject to domestic and world market and
political conditions as well as to the direct or indirect effect of governmental
action or regulations. The impact of any future raw material and energy
shortages on the Company's business as a whole or in specific world areas cannot
be accurately predicted. Operations and products may, at times, be adversely
affected by governmental action, shortages or international or domestic events.

COMPETITION

      The specialty chemicals industry is highly fragmented and its participants
offer a broad array of product lines and categories, representing many different
products designed to meet specific customer requirements. Individual product or
service offerings compete on a global, regional and local level due to the
nature of the businesses and products, as well as the end-markets and customers
served. The industry has become increasingly global as participants focus on
establishing and maintaining leadership positions in relatively narrow market
niches. Many of the Company's mature product lines face the competitive domestic
and international pressures discussed above, including industry consolidation,
pricing pressures, and competing technologies. In Pulp and Paper, for example,
the end-markets are consolidating and many of the Company's


                                       6
<PAGE>
competitors are attempting to enhance their product offerings on a worldwide
basis through alliances and distributor arrangements. In the water treatment
industry (BetzDearborn), large suppliers have increasingly aligned themselves
with single suppliers. Customer stability in Resins is expected to remain strong
due to the fact that the majority of the Resin Division's products are unique
and have strong brand recognition. In addition, certain of the Company's
businesses are subject to intense pricing pressures in various product lines,
such as fibers in its hygiene products line. FiberVisions, as a hygienic fibers
manufacturer for carded non-woven applications, faces competition from spunbond
(SB) and spunbond/melt blown/spunbond (SMS) technologies. SB/SMS products may
offer cost savings compared to the products of FiberVisions; however,
FiberVisions believes that its carded products provide improved softness,
uniformity and liquid management properties preferred by certain segments of the
disposable diaper and other hygiene products markets. The threat of new
producers in the thermal-bonded hygienic product line is relatively low due to
high entry barriers as the production process involves significant investment in
plant and equipment.

PATENTS AND TRADEMARKS

      Patents covering a variety of products and processes have been issued to
the Company's assignees. The Company is licensed under certain other patents
held by other parties covering its products and processes. The Company's rights
under these patents and licenses constitute a valuable asset. The Company
currently has over 3,500 patents worldwide covering its products.

      The Company and its wholly owned subsidiaries also have many global
trademarks covering its products. Some of the more significant trademarks
include: Aquapel(R) sizing agent, Hercon(R) sizing emulsions, Aqualon(R)
water-soluble polymers, Natrosol(R) hydroxyethylcellulose, Culminal(R)
methylcellulose, Klucel(R) hydroxypropylcellulose, Natrosol FPS(R) water-soluble
polymer suspension, Precis(R) sizing agent, Novus(R) polymer, Dianodic(R)
cooling water products, Continuum(R) cooling water products, Kymene(R) resin,
Herculon(R) fiber, Presstige(R) deposit control additives, Spectrum(R)
microbiocides, Ultra-pHase(R) sizing agent, Hercobond(R) dry strength resin,
Chromaset(R) surface size, ProSoft(R) tissue softeners and Zenix(R) contaminant
control.

      The Company does not consider any individual patent, license or trademark
to be of material importance to Hercules taken as a whole.

RESEARCH AND DEVELOPMENT

      The Company is heavily focused on product innovation as one of its key
growth strategies. Research and development efforts are directed toward the
discovery and development of new products and processes, the improvement and
refinement of existing products and processes, the development of new
applications for existing products and cost improvement initiatives. Hercules
spent $67 million on research activities during 2001, as compared to $80 million
in 2000 and $85 million in 1999. The decrease in the amounts spent for research
and development activities is largely due to business divestitures that occurred
in the last two years (see Part I Item I Business).

      Process Chemicals and Services currently focuses its research and
development efforts on growth (innovative high-value product development),
technical sales and services (incremental improvements to existing products and
services) and cost reduction programs to meet diverse customer needs worldwide.
The Company's state-of-the-art facilities located in Europe and the U.S. are
large and sophisticated research and development laboratories with pilot plant
capabilities that simulate actual operating conditions in its customer
facilities. This allows an accurate assessment of the potential impact of new
products on plant performance.

      New product development for performance chemicals is focused on improving
end-use properties. Understanding the product end uses is a critical step in the
development of strength additives and internal and surface sizes, as well as in
the design of products for tissue creping, release and softeners.

      In four regional operations centers located in Europe, Asia Pacific, South
America and the U.S., the Company's scientists conduct research and customer
optimization studies focused on solving water and process treatment challenges
by using sophisticated techniques and equipment to provide high level analytical
testing and advanced technical support to customers worldwide.

      Aqualon focuses its research and development efforts on targeted,
market-oriented technology programs, process technology and responsive technical
service to customers. New product development is focused on products with
water-based applications to satisfy the market demand to find alternatives to
solvent-based systems.


                                       7
<PAGE>
      Aqualon has a number of applications and development laboratories
positioned in Europe, Asia and the Americas that provide technical support to
its major customers. At these laboratories, teams work as a network to develop
products, identify new product applications and solve customer problems.

      Much of the research and development efforts in FiberVisions are primarily
focused on developing new hygiene fiber applications. The major focus is to
improve fiber strength while enhancing hygiene product properties for loft,
softness and stretch, thereby creating a competitive platform that is equal to
or better than spunmelt products. Other research is directed toward the binding,
dusting and bonding functions of bicomponent fibers. The industrial and textile
product units are investigating the use of specific fibers for new applications
in the upholstery, wipes, geotextiles and construction industries.

      FiberVisions has research and development facilities in the U.S. and
Europe designed to serve the business needs of its customers. Pilot spinning and
processing lines are used to examine new polymers and processing concepts such
as monocomponent or bicomponent fibers from single filament spinning to
full-scale production facilities.

      The Resins Division focuses a significant portion of its research and
development efforts primarily on cost improvement techniques in its production
processes.

ENVIRONMENTAL MATTERS

      The Company believes it is in compliance, in all material respects, with
applicable federal, state and local environmental laws and regulations.
Expenditures relating to environmental cleanup costs have not materially
affected, and are not expected to materially affect, capital expenditures or
competitive position. Additional information regarding environmental matters is
provided in Item 3.

EMPLOYEES

      As of December 31, 2001, the Company had 9,665 employees worldwide, of
which approximately 3,800 were employees of the Water Treatment Business.
Approximately 4,878 of worldwide employees were located in the United States, of
which about 14% were represented by various local or national unions. Total
worldwide employment at December 31, 2000 was 11,913.

INTERNATIONAL OPERATIONS

      Information on net sales and long-lived assets by geographic areas, for
each of the three years ended December 31, 2001, 2000 and 1999 appears in Note
23 to the Consolidated Financial Statements (See Part II, Item 8). Direct export
sales from the United States to unaffiliated customers were $216 million, $253
million and $278 million for 2001, 2000 and 1999, respectively. The Company's
operations outside the United States are subject to the usual risks and
limitations related to investments in foreign countries, such as fluctuations in
currency values, exchange control regulations, wage and price controls,
employment regulations, effects of foreign investment laws, governmental
instability (including expropriation or confiscation of assets) and other
potentially detrimental domestic and foreign governmental policies affecting
United States companies doing business abroad.

ITEM 2. PROPERTIES:

      The Company's corporate headquarters and major research center are located
in Wilmington, Delaware, while the administrative headquarters of BetzDearborn
is located in Trevose, Pennsylvania. The Company also owns a number of plants
and facilities worldwide, in locations strategic to the sources of raw materials
or to customers. All of the Company's principal properties are owned by the
Company, except for its corporate headquarters, which is leased. The following
are the Company's major worldwide plants:

Process Chemicals and Services

            BETZDEARBORN - Addison, Illinois; Bakersfield, California;
            Bangalore, India; Beaumont, Texas; Buenos Aires, Argentina; Chalon,
            France; Edmonton, Alberta, Canada; Ferentino, Italy; Garland, Texas;
            Helsingborg, Sweden*; Herentals, Belgium; Iksan City, Korea;
            Ingelburn, Australia; Jurong Town, Singapore; Langhorne,
            Pennsylvania; Macon, Georgia*; New Philadelphia, Ohio; Orange,
            Texas; Point-Claire, Quebec, Canada; Pudahuel, Santiago, Chile;
            Santa Fe de Bogota, Colombia; Sorocaba, Brazil; Valencia, Venezuela;
            Washougal, Washington; and Widnes, Cheshire, United Kingdom.


                                       8

*Excluded from GE Transaction.
<PAGE>
            PULP AND PAPER - Aberdeen, Scotland; Beringen, Belgium; Burlington,
            Ontario, Canada; Busnago, Italy; Chicopee, Massachusetts; Franklin,
            Virginia; Hattiesburg, Mississippi; Kalamazoo, Michigan; Kimcheon,
            Korea; Milwaukee, Wisconsin; Nantou, Taiwan; Pandaan, Indonesia;
            Paulinia, Brazil; Pendlebury, United Kingdom; Portland, Oregon; St.
            Jean, Quebec, Canada; Sandarne, Sweden; Sara, Mexico; Savannah,
            Georgia; Shanghai, China; Sobernheim, Germany; Tampere, Finland;
            Tarragona, Spain; Traun, Austria; Voreppe, France; and Zwijndrecht,
            The Netherlands.

Functional Products

            AQUALON - Alizay, France; Doel, Belgium; Hopewell, Virginia; Kenedy,
            Texas; Louisiana, Missouri; Parlin, New Jersey; and Zwijndrecht, The
            Netherlands.

Chemical Specialties

            FIBERVISIONS - Athens, Georgia; Covington, Georgia; Suzhou, China;
            and Varde, Denmark.

            RESINS - Brunswick, Georgia; Hattiesburg, Mississippi; and Savannah,
            Georgia.

      The Company's plants and facilities, which are continually added to and
modernized, are generally considered to be in good condition with adequate
capacity for projected business operations. From time to time the Company
discontinues operations at, or disposes of, facilities that have for one reason
or another become unsuitable.

      During 2001, the Company completed the following major expansion projects
designed to strengthen its market position in key growth areas while continuing
to improve its manufacturing efficiencies:

      -     A 7,000 metric ton methylcellulose capacity increase in Doel,
            Belgium;
      -     A 1,000 metric ton expansion of the Kenedy, Texas facility to
            manufacture a newly developed rheology modifier;
      -     A 400 metric ton hydroxypropylcellulose capacity increase in
            Hopewell, Virginia; and
      -     A 7,000 metric ton capacity increase in Pendlebury, United Kingdom
            for production of kymene.

ITEM 3. LEGAL PROCEEDINGS:

ENVIRONMENTAL

      In the ordinary course of its business, the Company is subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites, past
spills, disposals and other releases of hazardous substances. Changes in these
laws and regulations may have a material adverse effect on the Company's
financial position and results of operations. Any failure by the Company to
adequately comply with such laws and regulations could subject the Company to
significant future liabilities.

      Hercules has been identified as a potentially responsible party (PRP) by
U.S. federal and state authorities, or by private parties seeking contribution,
for the cost of environmental investigation and/or cleanup at numerous sites.
The estimated range of the reasonably possible share of costs for the
investigation and cleanup is between $81 million and $256 million. The Company
believes that the actual cost will more likely approximate $81 million based on
its estimation methods and prior experience. The actual costs will depend upon
numerous factors, including the number of parties found responsible at each
environmental site and their ability to pay; the actual methods of remediation
required or agreed to; outcomes of negotiations with regulatory authorities;
outcomes of litigation; changes in environmental laws and regulations;
technological developments; and the years of remedial activity required, which
could range from 0 to 30 years.

      Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency or other government agencies or from previously
named PRPs, who either request information or notify the Company of its
potential liability. The Company has established procedures for identifying
environmental issues at its plant sites. In addition to environmental audit
programs, the Company has environmental coordinators who are familiar with
environmental laws and regulations and act as a resource for identifying
environmental issues.

      United States, et al. v. Vertac Corporation, et al., USDC No. LR-C-80-109
and LR-C-80-110 (E.D. Ark.)

      This case, a cost-recovery action based upon the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA, or the Superfund
statute), as well as other statutes, has been pending since 1980, and involves


                                       9
<PAGE>
liability for costs expended and to be expended in connection with the
investigation and remediation of the Vertac Chemical Company (Vertac) site in
Jacksonville, Arkansas. Hercules owned and operated the site from December 1961
until 1971. The site was used for the manufacture of certain herbicides and, at
the order of the United States, Agent Orange. In 1971, the site was leased to
Vertac's predecessor. In 1976, Hercules sold the site to Vertac. The site was
abandoned by Vertac in 1987, and Vertac was subsequently placed into
receivership by the Court. Both prior to and following the abandonment of the
site, the U.S. Environmental Protection Agency (EPA) and the Arkansas Department
of Pollution Control and Ecology (ADPC&E) were involved in the investigation and
remediation of contamination at and around the site. Pursuant to several orders
issued pursuant to CERCLA, Hercules actively participated in many of these
activities. The cleanup is essentially complete, except for certain on-going
maintenance and monitoring activities. This litigation primarily concerns the
responsibility for and the allocation of liability for the costs incurred in
connection with these activities.

      Although the case initially involved many parties, as a result of various
United States District Court rulings and decisions, as well as a trial, Hercules
and Uniroyal were held jointly and severally liable for the approximately $100
million in costs allegedly incurred by the EPA, as well as costs to be incurred
in the future. That decision was made final by the District Court on September
13, 1999. Both Hercules and Uniroyal timely appealed that judgment to the United
States Court of Appeals for the Eighth Circuit.

      On February 8, 2000, the District Court issued a final judgment on the
allocation between Hercules and Uniroyal finding Uniroyal liable for 2.6 percent
and Hercules liable for 97.4 percent of the costs at issue. Hercules timely
appealed that judgment. Oral argument in both appeals was held before the Eighth
Circuit on June 12, 2000.

      On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the consolidated appeals described above. In that
opinion, the Appeals Court reversed the District Court's decision which had held
Hercules jointly and severally liable for costs incurred and to be incurred at
the Jacksonville site, and remanded the case back to the District Court for a
determination of whether the harms at the site giving rise to the government's
claims were divisible, as well as other findings of the District Court. The
Appeals Court also vacated the District Court's allocation decision holding
Hercules liable for 97.4 percent of the costs at issue, ordering that these
issues be revisited following further proceedings with respect to divisibility.
Finally, the Appeals Court affirmed the judgment of liability against Uniroyal.

      The trial on remand commenced on October 8, 2001 and continued through
October 19, 2001, and resumed on December 11, 2001, concluding on December 14,
2001. At the trial, the Company presented both facts and law to the District
Court in support of its belief that the Company should not be liable under
CERCLA for some or all of the costs incurred by the government in connection
with the site because those harms are divisible. Should the Company prevail on
remand, any liability to the government will be either eliminated or reduced.

      Hercules Incorporated v. Aetna Casualty & Surety Company, et al., Del.
      Super., C.A. No. 92C-10-105 and 90C-FE-195-1-CV (consolidated)

      In 1992, Hercules brought suit against its insurance carriers for past and
future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas, site (see
discussion above) was completed. The jury returned a "Special Verdict Form" with
findings that, in conjunction with the Court's other opinions, were used by the
Court to enter a judgment in August 1999. The judgment determined the amount of
Hercules' recovery for past cleanup expenditures and stated that Hercules is
entitled to similar coverage for costs incurred since September 30, 1997 and in
the future. Hercules has not included any insurance recovery in the estimated
range of costs above. Since entry of the Court's August 1999 order, Hercules has
entered into settlement agreements with several of its insurance carriers and
has recovered certain settlement monies. The terms of those settlements and
amounts recovered are confidential. On August 15, 2001, the Delaware Supreme
Court issued a decision in Hercules Incorporated v. Aetna Casualty & Surety
Company, et al., Del. Super., C.A. No. 92C-10-105 and 90C-FE-195-1-CV
(consolidated). In its decision, the Delaware Supreme Court affirmed the trial
court in part, reversed the trial court in part and remanded the case for
further proceedings. The specific basis upon which the Delaware Supreme Court
reversed the trial court was the trial court's application of pro rata
allocation to determine the extent of the insurers' liability. At this time,
proceedings at the trial court have not yet commenced.

      The Allegany Ballistics Laboratory ("ABL") is a government owned facility
which was operated by Hercules from 1945 to 1995. The United States Department
of the Navy has notified Hercules that the Navy would like to negotiate with
Hercules with respect to certain environmental liabilities which, the Navy
alleges, are attributable to Hercules' past operations at ABL. The Navy alleges
that, pursuant to CERCLA, it has spent a total of $24.8 million and that it
expects to spend an additional $60 million over the next 10 years. The Company
is currently investigating the Navy's allegations, including the basis of the
Navy's claims, and whether the Company's contracts with the government pursuant
to which the Company operated ABL may insulate the Company from some or all of
the amounts sought. At this time, however, the


                                       10
<PAGE>
Company cannot reasonably estimate its liability, if any, with respect to ABL
and, accordingly, has not included this site in the range of its environmental
liabilities reported above.

      At December 31, 2001, the accrued liability of $81 million for
environmental remediation represents management's best estimate of the probable
and reasonably estimable costs related to environmental remediation. The extent
of liability is evaluated quarterly. The measurement of the liability is
evaluated based on currently available information, including the progress of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules, and the resolution of any of these matters during a specific period
could have a material effect on the quarterly or annual results of that period.

LITIGATION

      The Company is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to asbestos
fibers from resin-encapsulated pipe and tank products which were sold by one of
the Company's former subsidiaries to a limited industrial market ("products
claims"). The Company is also a defendant in lawsuits alleging exposure to
asbestos at facilities formerly or presently owned or operated by the Company
("premises claims"). Claims are received and settled or otherwise resolved on a
regular basis. In late December 1999, the Company entered into a settlement
agreement to resolve the majority of the claims then pending. In connection with
that settlement, the Company also entered into an agreement with several of the
insurance carriers which sold that former subsidiary primary and first level
excess insurance policies. Under the terms of that agreement, the majority of
the amounts paid to resolve those products claims will be insured, subject to
the limits of the insurance coverage provided by those policies. The terms of
both settlement agreements are confidential.

      Since entering into those agreements, the Company has continued to receive
and settle or otherwise resolve claims on a regular basis, with the number of
new claims averaging approximately 2,200 per year during the past two years. As
of February 2002, the Company had pending approximately 5,170 unresolved claims,
of which approximately 625 are premises claims. In addition, as of February
2002, there were pending approximately 5,830 unpaid claims which have been
settled or are subject to the terms of a settlement agreement. In accordance
with the terms of the previously mentioned agreement with several insurance
carriers, as well as agreements with two other excess insurance carriers, the
majority of the amounts paid and to be paid to resolve those claims will be
insured.

      The Company anticipates that the primary and first level excess insurance
policies referenced above will exhaust over the next 12 to 24 months, assuming
that the rate of settlements and payments remains relatively consistent with the
Company's past experience. Nonetheless, based on the current number of claims
pending, the amounts the Company presently pays to resolve those claims, and
anticipated future claims (the Company's assumption being that the number of
future claims filed per year and claim resolution payments remain relatively
consistent with the Company's past experience, and that these matters cease to
be an ongoing liability after ten years), the Company believes that it and its
former subsidiary together have sufficient additional insurance to cover the
majority of its current and future asbestos-related liabilities. The Company is
seeking defense and indemnity payments or an agreement to pay from those
carriers responsible for excess coverage whose levels of coverage have been or
will soon be reached. Although those excess carriers have not yet agreed to
defend or indemnify it, the Company believes that it is likely that they will
ultimately agree to do so, and that the majority of future asbestos related
costs will ultimately be paid or reimbursed by those carriers. However, if the
Company is not able to reach satisfactory agreements with those carriers prior
to exhaustion of the primary and first level excess insurance policies now
covering the majority of its current asbestos related claims, then beginning as
early as sometime in 2003, the Company might be required to completely fund
these matters while it seeks reimbursement from its carriers.

      Based on the assumptions set forth in the preceding paragraph, the
reasonably possible future financial exposure for these matters is estimated to
be less than $200 million. As stated above, the Company presently believes that
the majority of this financial exposure will be funded by insurance proceeds.
Cash payments related to this exposure are expected to be made over an extended
number of years.

      Due to the dynamic nature of asbestos litigation and the present
uncertainty concerning the participation of its excess insurance carriers,
however, the Company's estimates are inherently uncertain, and these matters may
present significantly greater and longer lasting financial exposures than
presently anticipated. As a result, the Company's liability with respect to
asbestos-related matters could exceed the amount noted above. If the Company's
liability does exceed that amount, the Company presently believes that the
majority of any additional liability it may reasonably anticipate will be paid
or reimbursed by its insurance carriers.


                                       11
<PAGE>
      The Company has estimated and, therefore, recorded a gross liability for
asbestos-related matters in its December 31, 2001 balance sheet of $80 million.
The Company believes that it is probable that $66 million of that amount will be
funded by or recovered from insurance carriers. Accordingly, the Company has
recorded an asset in this amount in its December 31, 2001 balance sheet.

      In June 1998, Hercules and David T. Smith Jr., a former Hercules employee
and a former plant manager at the Brunswick plant, along with Georgia-Pacific
Corporation and AlliedSignal Inc., were sued in Georgia State Court by 423
plaintiffs for alleged personal injuries and property damage. This litigation is
captioned Coley, et al. v. Hercules Incorporated, et al., No. 98 VSO 140933 B
(Fulton County, Georgia). Plaintiffs allege they were damaged by the discharge
of hazardous waste from the companies' plants. On February 11, 2000, the Georgia
State Court dismissed Georgia-Pacific Corporation and AlliedSignal Inc., without
prejudice. In September 2000, David T. Smith Jr., was dismissed by the Georgia
State Court with prejudice. On July 18, 2000, the Company was served with a
complaint in a case captioned Erica Nicole Sullivan, et al. v. Hercules
Incorporated and David T. Smith, Jr., Civil Action File No. 00-1-05463-99 (Cobb
County, Georgia). Based on the allegations contained in the complaint, this
matter is very similar to the Coley litigation, and is brought on behalf of
approximately 700 plaintiffs for alleged personal injury and property damage
arising from the discharge of hazardous waste from Hercules' plant. Although
venue had been removed to the United States District Court for the Northern
District of Georgia, the case was ultimately remanded back to state court. Both
the Coley and the Erica Nicole Sullivan cases are in the early stages of motion
practice and discovery. The Company denies any liability to plaintiffs, and it
will vigorously defend both of these cases.

      In August 1999, the Company was sued in an action styled as Cape
Composites, Inc. v. Mitsubishi Rayon Co., Ltd., Case No. 99-08260 (U.S. District
Court, Central District of California), one of a series of similar purported
class action lawsuits brought on behalf of purchasers (excluding government
purchasers) of carbon fiber and carbon prepreg in the United States from the
named defendants from January 1, 1993 through January 31, 1999. The lawsuits
were brought following published reports of a Los Angeles federal grand jury
investigation of the carbon fiber and carbon prepreg industries. In these
lawsuits, plaintiffs allege violations of Section 1 of the Sherman Antitrust Act
for alleged price fixing. In September 1999, these lawsuits were consolidated by
the Court into a case captioned Thomas & Thomas Rodmakers v. Newport Adhesives
and Composites, Case No. CV-99-07796-GHK (CTx) (U.S. District Court, Central
District of California), with all related cases ordered dismissed. This lawsuit
is in the early stages of motion practice and discovery. On March 11, 2002, the
Court tentatively granted plaintiffs' Motion to Certify Class. The Company is
named in connection with its former Composites Products Division, which was sold
to Hexcel Corporation in 1996, has denied liability and will vigorously defend
this action.

      Beginning in September 2001, Hercules, along with the other defendants in
the Thomas & Thomas Rodmakers action referred to above, has been sued in nine
California state court purported class actions brought on behalf of indirect
purchasers of carbon fiber. In January 2002, these were consolidated into a case
captioned Carbon Fiber Cases I, II, and III, Judicial Council Coordination
Proceedings Nos. 4212, 4216 and 4222, Superior Court of California, County of
San Francisco. These actions all allege violations of the California Business
and Professions Code relating to alleged price fixing of carbon fiber and unfair
competition. The Company denies liability and will vigorously defend each of
these actions.

      In connection with the grand jury investigation noted above, in January
2000, the United States Department of Justice (DOJ), Antitrust Division, served
a grand jury subpoena duces tecum upon Hercules. The Company has been advised
that it is one of several manufacturers of carbon fiber and carbon prepreg that
have been served with such a subpoena.

      In December 1999, an action was filed in the U.S. District Court for the
Eastern District of Pennsylvania on behalf of two classes of individuals: (1)
veterans of the South Korean military who claim they were exposed to Agent
Orange and other chemical defoliants used in the demilitarized zone between
North and South Korea between 1967 and 1970 and (2) veterans of the United
States military who claim to have been similarly exposed. This case is captioned
Chang Ok-Lee, Individually and as Representative of a Class, and Thomas Wolfe,
Individually and as Representative of a Class v. Dow Chemical Co., et al., Civil
Action No. 99-6127 (U.S. District Court, Eastern District of Pennsylvania).
During 2000, this case was transferred by the Multi-District Litigation (MDL)
Panel to the United States District Court for the Eastern District of New York,
where Agent Orange cases have previously been consolidated. In late 2001, this
case was dismissed voluntarily by the plaintiffs, with plaintiffs retaining the
right to re-file in the future.

      In 1999, the Company was sued by Hexcel Corporation (Hexcel) in a case
captioned Hexcel Corporation v. Hercules Incorporated, Index No. 602293/99,
Supreme Court of New York, County of New York. In that case, Hexcel sought
recovery of a total of approximately $8,422,000 (plus interest) in alleged
"post-closing" adjustments to the purchase price paid by Hexcel for Hercules'
former Composite Products Division. The basis for these alleged "adjustments"
derive from the Sale and Purchase Agreement between Hercules and Hexcel dated as
of April 15, 1996. In June 2000, the Court granted Hexcel's motion for summary
judgment as to liability, finding the Company liable to Hexcel on technical
grounds, but reserved ruling on the amount of damages. The Court then referred
the damages determination to a Special Referee. In


                                       12
<PAGE>
January 2001, the Special Referee issued a report, recommending that the Company
be found liable to Hexcel for a total of approximately $7,300,000 plus interest,
costs and expenses. In February 2001, Hexcel moved to confirm the Special
Referee's Report and the Company moved to confirm in part and reject in part the
Special Referee's Report. The Company specifically challenged the majority of
the Special Referee's findings, and argued that a $2,000,000 indemnity "basket"
established by the terms of the April 1996 Sale and Purchase Agreement should
apply, reducing any award to Hexcel by $2,000,000. In May 2001, the Court
accepted the Special Referee's Report and rejected the Company's position. As a
result, judgment was entered against the Company in the amount of $10,219,685,
which included pre-judgment interest, costs and expenses. The Company appealed
to the Supreme Court, Appellate Division, First Department. On February 5, 2002,
the Supreme Court of New York, Appellate Division, First Department, affirmed
the decision of the trial court, entering judgment in favor of Hexcel in the
full amount. Interest continues to accrue. The Company continues to believe that
the decision of the trial and intermediate appellate courts is incorrect, and
has filed a Motion for Reargument or for Leave to Appeal to the Court of
Appeals. That motion was denied on March 19, 2002. Hercules will be filing a
motion for Leave to Appeal to the New York Court of Appeals directly with the
Court of Appeals. The granting of a motion for an appeal to the Court of Appeals
is discretionary and there can be no assurance that it will be granted. In
addition to the foregoing, in October 2000, Hexcel brought an action against
Hercules to compel arbitration to determine the proper "Working Capital
Adjustment" under the terms of the Sale and Purchase Agreement. Hexcel claimed
it was owed approximately $1,500,000, while the Company claimed that the Company
was owed approximately $129,000. In late 2001, this matter was submitted to
binding arbitration. In December 2001, the arbitrator found in the Company's
favor and awarded damages to the Company of $129,000.

      In December 1999, BetzDearborn and Bill Blythe, its employee, were sued by
M.C. Dixon Lumber Company, Inc. (M.C. Dixon Lumber Company, Inc. v. BetzDearborn
and Bill Blythe, Circuit Court of Barbour County, Alabama, Case No. 99-0177). In
this lawsuit, M.C. Dixon sought recovery for alleged damage to wood drying kilns
and other equipment, as well as lost production and other consequential damages.
M.C. Dixon alleged that these damages were caused by BetzDearborn's negligence
and breach of contract in the administration of the water treatment program at
M.C. Dixon's plant. On September 4, 2001, this case went to trial. During the
course of the trial, the Company agreed to settle this case for an amount which
is confidential. In connection with that settlement, the Company reached an
agreement with one of BetzDearborn's insurance carriers whereby the total amount
paid by BetzDearborn towards the settlement was $1.75 million.

      On September 28, 2000, the Company sold its Food Gums Division to CP Kelco
ApS, a joint venture that the Company entered into with Lehman Brothers Merchant
Banking Partners II, L.P. CP Kelco also acquired the biogums business of
Pharmacia Corporation (formerly Monsanto Company). In April 2001, CP Kelco U.S.,
Inc., a wholly-owned subsidiary of CP Kelco ApS, sued Pharmacia (CP Kelco U.S.,
Inc. v. Pharmacia Corporation, U.S. District Court for the District of Delaware,
Case No. 01-240-RRM) alleging federal securities fraud, common law fraud, breach
of warranties and representations, and equitable fraud. In essence, the lawsuit
alleges that Pharmacia misrepresented the value of the biogums business,
resulting in damages to CP Kelco U.S., including the devaluation of CP Kelco
U.S.'s senior debt by the securities markets. The complaint seeks over $430
million in direct damages, as well as punitive damages. In June 2001, Pharmacia
filed a third-party complaint against the Company and Lehman. That complaint
seeks contribution and indemnification from the Company and Lehman, jointly and
severally, for any damages that may be awarded to CP Kelco U.S. in its action
against Pharmacia. This lawsuit is in early discovery. The Company believes that
the third-party lawsuit against it and Lehman is without merit. The Company has
denied any liability to Pharmacia and is vigorously defending this action.

      At December 31, 2001, the consolidated balance sheet reflects a current
liability of approximately $50 million and a long-term liability of
approximately $51 million for litigation and claims. These amounts represent
management's best estimate of the probable and reasonably estimable losses
related to litigation or claims. The extent of the liability and recovery is
evaluated quarterly. While it is not feasible to predict the outcome of all
pending suits and claims, the ultimate resolution of these matters could have a
material effect upon the financial position of Hercules, and the resolution of
any of the matters during a specific period could have a material effect on the
quarterly or annual operating results for that period.

EXECUTIVE OFFICERS OF THE REGISTRANT:

      The name, age and current position of each executive officer of Hercules
as of March 15, 2002 are listed below.

There are no family relationships among executive officers.

<TABLE>
<CAPTION>
NAME                     AGE     CURRENT POSITION
<S>                      <C>     <C>
William H. Joyce         66      Chairman and Chief Executive Officer

Fred G. Aanonsen         54      Vice President and Controller
</TABLE>


                                       13
<PAGE>
<TABLE>
<S>                      <C>     <C>
Edward V. Carrington     59      Vice President, Human Resources and Corporate Resources

Richard G. Dahlen        62      Chief Legal Counsel

Robert C. Flexon         43      Vice President, Corporate Affairs, Strategic Planning and Work Processes

Israel J. Floyd          55      Corporate Secretary and General Counsel

Bruce W. Jester          50      Vice President, Taxes

Stuart C. Shears         51      Vice President and Treasurer
</TABLE>

      William H. Joyce joined Hercules as Chief Executive Officer in May 2001.
Dr. Joyce had been Chairman, President and Chief Executive Officer of Union
Carbide Corporation since 1996. From 1995 to 1996, Dr. Joyce was President and
Chief Executive Officer and from 1993 to 1995, he was President. Prior to that,
Dr. Joyce had been Chief Operating Officer since 1992. Dr. Joyce holds a B.S.
degree in Chemical Engineering from Pennsylvania State University and an M.B.A.
and Ph.D. from New York University. Dr. Joyce received the National Medal of
Technology Award in 1993 and the Plastics Academy's Industry Achievement Award
in 1994 and Lifetime Achievement Award in 1997. In 1997, he was inducted into
the National Academy of Engineering. Dr. Joyce is a director of CVS Corporation.
Dr. Joyce is also a trustee of the Universities Research Association, Inc. and
Co-Chairman of the Government-University-Industry Research Round Table of the
National Academies.

      Fred G. Aanonsen joined Hercules in July 2001. Prior to joining Hercules,
he spent 25 years at Union Carbide Corporation, where most recently he had been
the Director of Accounting and Financial Processing since 1998. Mr. Aanonsen is
a Certified Public Accountant and a member of the American Institute of
Certified Public Accountants, the New York State Society of Certified Public
Accountants and the Financial Executives Institute.

      Edward V. Carrington originally joined Hercules when it acquired Radiant
Color in 1969 and assumed his current position in June 2001. Prior to that, he
had served in a consulting role since October 2000. From 1997 until 2000, he was
Vice President of Buttonwood Cottages, Inc., a vacation resort complex, and
President of Rentals in Paradise, Inc., a vacation home rental business. From
1992 until his retirement from Hercules in 1997, he was Vice President, Human
Resources.

      Richard G. Dahlen originally joined Hercules in 1996. Mr. Dahlen assumed
his current position in June 2001. Prior to that, he had served in a consulting
role since October 2000. From 1999 until 2000, he was retired and from 1996
until his retirement in 1999, he served as Vice President, Law and General
Counsel. Mr. Dahlen is a member of the Personnel Committee and Board of
Directors of the Delaware Theatre Company.

      Robert C. Flexon joined Hercules in 2000 and has held his current position
since February 2002. He had been Vice President, Work Processes, since June 2001
and Vice President, Business Analysis and Controller since 2000. Previously, he
was with Atlantic Richfield Company for more than ten years, serving in several
capacities that included: General Auditor, ARCO, from 1998 to 2000; Franchise
Manager, ARCO Products Company, from 1996 to 1998; and Controller, ARCO Products
Company, from 1995 to 1996.

      Israel J. Floyd joined Hercules in 1973 and has held his current position
since 2001. He had been Vice President, Secretary and General Counsel since 1999
and, prior to that, was Secretary and Assistant General Counsel from 1992 to
1999.

      Bruce W. Jester joined Hercules in 1980 and has held his current position
since 1997. He was Assistant Treasurer and Director, Taxes, from 1994 to 1997.

      Stuart C. Shears joined Hercules in 1978 and has held his current position
since 1999. He was Assistant Treasurer from 1997 to 1999 and, prior to that, was
Director, Finance & Credit from 1991 to 1997.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS:

      No matter was submitted to a vote of security holders during the fourth
quarter of 2001, through the solicitations of proxies or otherwise.


                                       14
<PAGE>
                                     PART II

ITEM 5. MARKET FOR HERCULES' COMMON STOCK AND RELATED STOCKHOLDER MATTERS:

      The Company's common stock is listed on the New York Stock Exchange
(ticker symbol HPC), The Stock Exchange, London, and the Swiss Stock Exchange.
It is also traded on the Philadelphia, Midwest and Pacific Stock Exchanges.

      The approximate number of holders of record of its common stock ($25/48
stated value) as of March 15, 2002 was 18,113.

<TABLE>
<CAPTION>
2000                                                      High           Low
                                                          ----           ---
<S>                                                     <C>            <C>
     First Quarter .............................        $ 28.00        $ 13.94
     Second Quarter ............................        $ 17.88        $ 13.88
     Third Quarter .............................        $ 16.19        $ 11.38
     Fourth Quarter ............................        $ 20.19        $ 13.75
2001
     First Quarter .............................        $ 20.00        $ 12.15
     Second Quarter ............................        $ 14.45        $ 11.00
     Third Quarter .............................        $ 12.00        $  6.50
     Fourth Quarter ............................        $ 10.94        $  7.43
</TABLE>

      On December 31, 2001, the closing price of the common stock was $10.00.

      The payment of quarterly dividends was suspended in the fourth quarter of
2000, subject to reconsideration by the Board in its discretion, when warranted
under appropriate circumstances and subject to restrictions in the indenture
governing the Company's 11 1/8% senior notes due 2007. Quarterly dividends of
$0.27 per share were declared and paid for each of the first two quarters of
2000 and a quarterly dividend of $.08 per share was declared and paid for the
third quarter 2000. In addition, payment of future dividends is significantly
restricted by the indenture governing the 11 1/8% senior notes.

      In November 2000, Hercules issued $400 million aggregate principal amount
of 11 1/8% senior notes due 2007 to Donaldson, Lufkin & Jenrette and Credit
Suisse First Boston (the "Initial Purchasers"). The underwriting commissions
totaled approximately $23 million. The maturity date of the 11 1/8% senior notes
is November 15, 2007. The Company is obligated to pay interest semi-annually at
a rate of 11 1/8% per year commencing May 15, 2001.

      The 11 1/8% senior notes were issued and sold in transactions exempt from
registration requirements of the Securities Act of 1933, as amended (the
"Securities Act"), to persons reasonably believed by the Initial Purchasers to
be "Qualified Institutional Buyers" ("QIBs"), as defined in Rule 144A under the
Securities Act, or institutional accredited investors or sophisticated buyers.

      The 11 1/8% senior notes were subject to a registration rights agreement
that required Hercules to file an exchange offer registration statement with the
Securities and Exchange Commission within 270 days (no later than August 11,
2001) and to use its best efforts to have the registration statement declared
effective within 330 days. On August 9, 2001, Hercules filed a Registration
Statement on Form S-4 (the "Registration Statement") with the Securities and
Exchange Commission, pursuant to which the Company offered to exchange all of
its $400 million aggregate principal amount of 11 1/8% senior notes due 2007
("old notes") for $400 million aggregate principal amount of 11 1/8% senior
notes due 2007 ("new notes"). The form and terms of the new notes are the same
as the form and terms of the old notes except that, because the issuance of the
new notes was registered under the Securities Act, the new notes do not bear
legends restricting their transfer and are not entitled to certain registration
rights under the registration rights agreement. The new notes evidence the same
debt as the old notes and the new notes and the old notes are governed by the
same indenture. On October 31, 2001, Hercules filed Amendment No. 1 to the
Registration Statement on Form S-4 with the Securities and Exchange Commission
and the Registration Statement became effective. Hercules did not receive any
proceeds from the exchange offer. When the exchange offer expired on December 7,
2001, $375.3 million of the old notes had been tendered for a like amount of new
notes.


                                       15
<PAGE>

      At any time prior to November 15, 2003, Hercules may on any one or more
occasions, redeem up to 35% of the aggregate principal amount of the 11 1/8%
senior notes issued at a redemption price of 111.125% of the principal amount,
plus accrued and unpaid interest and liquidated damages, if any, to the
redemption date, with the net cash proceeds of one or more public equity
offerings; provided that (i) at least 65% of the aggregate principal amount of
the 11 1/8% senior notes issued under the indenture remains outstanding
immediately after the occurrence of such redemption (excluding notes held by
Hercules and its subsidiaries); and (ii) the redemption occurs within 45 days of
the date of the closing of such public equity offering. Except as described
above, the 11 1/8% senior notes will not be redeemable at Hercules' option prior
to maturity. Hercules is not required to make mandatory redemption or sinking
fund payments with respect to the 11 1/8% senior notes. If a change of control
occurs, each holder of the notes will have the right to require Hercules to
repurchase all or any part of that holder's notes pursuant to a change of
control offer on the terms set forth in the indenture. In the change of control
offer, Hercules is required to offer a change of control payment in cash equal
to 101% of the aggregate principal amount of the notes repurchased plus accrued
and unpaid interest and liquidated damages, if any, on the notes repurchased, to
the date of purchase.

ITEM 6. SELECTED FINANCIAL DATA:

      A summary of selected financial data for Hercules for the years and as of
the end of years specified is set forth in the table below. See Part I, Item 1
Business for a description of significant acquisitions and divestitures that
affect the comparability of the following data.

<TABLE>
<CAPTION>
                                                                               (Dollars and shares in millions, except per share)
                                                                                     2001      2000     1999     1998     1997
      ===========================================================================================================================
<S>                                                                               <C>        <C>      <C>      <C>      <C>
      Net sales                                                                   $ 2,620    $3,152   $3,309   $2,145   $1,866
      Profit from operations                                                          287       444      480      192      228
      (Loss) income before effect of change in accounting principle                   (58)       98      168        9      324
      Net (loss) income                                                               (58)       98      168        9      319

      Dividends                                                                        --        66      111      104       98

      Per share of common stock
        Basic:
          (Loss) earnings before effect of change in accounting principle           (0.54)     0.91     1.63     0.10     3.27
          (Loss) earnings                                                           (0.54)     0.91     1.63     0.10     3.22
        Diluted:
          (Loss) earnings before effect of change in accounting principle           (0.54)     0.91     1.62     0.10     3.18
          (Loss) earnings                                                           (0.54)     0.91     1.62     0.10     3.13
      Dividends declared                                                               --      0.62     1.08     1.08     1.00

      Total assets                                                                $ 5,049    $5,528   $5,896   $5,833   $2,411
      Long-term debt                                                                1,959     2,342    1,777    3,096      419
      Company-obligated preferred securities of subsidiary trusts                     624       622      992      200       --
</TABLE>

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
        OF OPERATIONS:

      Hercules is a leading manufacturer and marketer of specialty chemicals and
related services for a broad range of business, consumer and industrial
applications. Hercules operates on a global scale, with significant operations
in


                                       16
<PAGE>

North America, Europe, Asia and Latin America. The Company's principal products
are chemicals used by the paper industry to increase product performance and
enhance the manufacturing process; chemicals which improve the efficiency of
various water treatment and industrial processes; water-soluble polymers; resins
and polypropylene and polyethylene fibers. The Company operates through three
reportable segments and five divisions: Process Chemicals and Services (Pulp and
Paper and BetzDearborn), Functional Products (Aqualon) and Chemical Specialties
(FiberVisions and Resins).

      On February 12, 2002, the Company entered into an agreement to sell the
BetzDearborn Division businesses and certain Pulp and Paper Division treatment
business (the "Water Treatment Business") to GE Specialty Materials ("GESM"), a
unit of General Electric Company (the "GE Transaction"). The selling price is
$1.8 billion in cash, with net after tax proceeds available for debt reduction
of approximately $1.665 billion. The transaction is subject to regulatory and
other customary approvals, and is expected to close in the second quarter of
2002. Hercules acquired the Water Treatment Business in 1998 when it acquired
BetzDearborn. The Paper Process Chemicals business, currently representing
approximately one-third of the business that the Company acquired from
BetzDearborn in 1998, will remain with Hercules. In addition, Hercules will have
an agreement with GE to distribute and service BetzDearborn's water treatment
products to the pulp and paper industry. The Water Treatment Business had net
assets, including goodwill and identifiable intangibles from the BetzDearborn
acquisition, of approximately $2.0 billion at December 31, 2001. Although the
Company has not completed its transitional impairment analysis required by
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets", ("SFAS 142"), it anticipates that initial adoption of this
standard will result in recording a loss ranging from $200 to $300 million
related to impaired goodwill of the Water Treatment Business in the quarter
ending March 31, 2002. The Water Treatment Business had net sales, excluding
sales to be covered under the supply and distribution agreements prospectively,
of approximately $844 million in 2001. Proceeds from the divestiture will be
used to pay down debt in accordance with bank agreements and to provide
collateral for currently outstanding letters of credit.

      The following discussion should be read in connection with the information
contained in the Consolidated Financial Statements and Notes thereto. All
references to individual Notes refer to Notes to the Consolidated Financial
Statements. Certain statements contained herein may constitute forward-looking
statements as defined in the Private Securities Litigation Reform Act of 1995.

CRITICAL ACCOUNTING POLICIES

      The Company's discussion and analysis of its financial condition and
results of operations is based on its consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States. The preparation of these financial statements requires
Hercules to make estimates and assumptions that affect the amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. Hercules evaluates its estimates on a regular basis, including
those related to sales returns and allowances, bad debts, inventories,
intangible assets, income taxes, restructuring, contingencies, including
litigation and environmental, and pension and other benefit obligations.
Hercules bases its estimates on various factors including historical experience,
consultation and advice from third party subject matter experts and on various
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions and
circumstances.

      Hercules believes the following critical accounting policies affect its
more significant judgments and estimates used in the preparation of its
consolidated financial statements.

            Hercules records estimated reductions to revenue for customer
      returns and other allowances, including volume-based incentives and
      pricing adjustments.

            The Company maintains allowances for doubtful accounts for estimated
      losses resulting from the inability of its customers to make required
      payments. Allowances for doubtful accounts are based on historical
      experience and known factors regarding specific customers and industries
      in which the customers operate. If the financial condition of the
      Company's customers were to deteriorate, resulting in an impairment of
      their ability to make payments, additional allowances would be required.

            Hercules writes down its inventories for estimated slow moving and
      obsolete goods equal to the difference between the carrying cost of the
      inventory and the estimated market value based upon assumptions about
      future demand and market conditions.


                                       17
<PAGE>

            The Company records an impairment loss on its long-lived assets,
      including goodwill and intangibles, based on the excess of the carrying
      amount over fair value, when expected future cash flows are insufficient
      to recover the carrying amount of the asset. Deterioration in future
      economic conditions or poor operating results in a business could result
      in losses or the inability to recover the carrying value of the asset,
      thereby possibly requiring an impairment in the future.

            Hercules records a valuation allowance to reduce its deferred tax
      assets to an amount that is more likely than not to be realized after
      consideration of future taxable income and prudent and reasonable tax
      planning strategies. In the event Hercules were to determine that it would
      not be able to realize all or part of its deferred tax assets in the
      future, an adjustment to the deferred tax asset would be charged to income
      in the period such determination was made.

            Hercules has recorded restructuring charges for the estimated costs
      of employee severance and other exit costs. In the event that it is
      determined that additional employees must be involuntarily terminated
      pursuant to work process redesign and other cost reduction initiatives,
      additional restructuring reserves would be required which would result in
      an additional charge against earnings in the period that Hercules has
      authorized and committed to a plan and significantly all actions have been
      identified. In the event that the number of employees involuntarily
      terminated pursuant to restructuring plans is less than anticipated due to
      greater than anticipated voluntary resignations, an adjustment to reduce
      excess restructuring reserves would increase income in the period that the
      determination was made.

            Hercules establishes reserves for environmental matters, asbestos
      claims, litigation and other contingencies when it is probable that a
      liability has been incurred and the amount of the liability is reasonably
      estimable. If the contingency is resolved for an amount greater or less
      than has been accrued, or Hercules' share of the contingency increases or
      decreases, or other assumptions relevant to the development of the
      estimate were to change, Hercules would recognize an additional expense or
      benefit in income in the period such determination was made.

            Pension and other post employment benefit obligations and the
      related expense (income) are determined based upon assumptions regarding
      mortality, medical inflation rates, discount rates, long-term return on
      assets, salary increases, Medicare availability and other factors (the
      "Variables"). The actual return on plan assets currently being earned in
      2002 is, and the historical return on plan assets earned in 2000 and 2001
      was, less than the corresponding assumption. If actual results differ from
      the assumptions for some or all of the Variables, the Company may be
      required to recognize additional benefit expense and possibly recognize
      additional liabilities for accumulated benefit obligations in excess of
      funded benefits. At December 31, 2001, the funded benefits in the U.S.
      defined benefit pension plan marginally exceeded the accumulated benefit
      obligation ("ABO") for this plan. Based on current economic conditions and
      anticipated benefit payments, it is reasonably possible the ABO will
      exceed the funded benefits at December 31, 2002. If this occurs at
      December 31, 2002, (or at an earlier date if an interim valuation is
      required), the Company will be required to recognize an additional
      liability equal to the sum of such excess plus the prepaid pension asset
      balance, with a corresponding net-of-tax charge to other comprehensive
      income in stockholders' equity. The prepaid pension asset balance for the
      U.S. plan is approximately $250 million at December 31, 2001.


ACQUISITIONS, DIVESTITURES AND UNUSUAL ITEMS

      During May 2001, in a series of unrelated transactions, the Company
completed the divestiture of a significant portion of its Resins Division (the
"Resins Divestitures"). On May 1, 2001, Hercules completed the sale of its
hydrocarbon resins business and select portions of its rosin resins business to
a subsidiary of Eastman Chemical Company, receiving proceeds of approximately
$244 million (the "Eastman Transaction"). On May 31, 2001, Hercules completed
the sale of its peroxy chemicals business to GEO Specialty Chemicals, Inc.,
receiving proceeds of approximately $92 million (the "Peroxide Transaction").
Additionally, on May 25, 2001, the Company completed the sale of its interest in
Hercules - Sanyo, Inc., a toner resin joint venture, to Sanam Corporation, a
wholly owned subsidiary of Sanyo Chemicals Industries, Ltd., its joint venture
partner. The Company realized net gains from these dispositions of $74 million
(see Note 16).

      In June 2001, the Company announced an aggressive and comprehensive cost
reduction and work process redesign program to improve return on capital,
streamline organizational structure, improve work processes and consolidate
manufacturing and non-manufacturing resources. The objective was to achieve
fixed cost reductions of $100 million on an annualized basis (as compared to
2000 results, excluding divested businesses) by June 2002. Approximately 975
employees have left or will leave the company (see Note 14) under this plan.
Pursuant to this program, the Company incurred restructuring charges totaling
$51 million during the third and fourth quarters of 2001. The plan includes
reductions throughout the Company with the majority of them from support
functions as well as the Process Chemicals and Services segment. The cost
reductions are being implemented as the sale of the Water Treatment Business
awaits regulatory and


                                       18
<PAGE>
other customary approvals. After the divestiture has been completed, this cost
reduction program will continue in 2002 for the remaining businesses. In 2002,
the cost reduction target to be achieved by December 2002 was then increased to
$200 million in annualized fixed cost reductions (as compared to 2000 results,
excluding divested business).

      During 2001, the Company recognized a pension curtailment gain of $5
million related to the Eastman Transaction. As a result of resolving issues
relating to a prior year divestiture, an additional gain of $5 million was
recognized. The Company recognized $10 million in net environmental expense, $5
million of executive severance charges, $5 million in pre-payment penalties
relating to the ESOP credit facility, $3 million in non-recurring fees related
to the 2001 proxy contest and other matters and $4 million in other costs.

      During 2000, the Company monetized certain non-core assets, completing the
divestitures of its nitrocellulose and Food Gums businesses. In May 2000,
Hercules acquired the paper chemicals business of Quaker Chemical Corporation.
In September 2000, the Company announced the formation of a strategic marketing
alliance with National Starch and Chemical Company for the sale of over 300
million pounds of National Starch's papermaking chemicals starch product line.
These transactions are consistent with the Company's announced strategy to
monetize non-core businesses and grow core businesses. In the fourth quarter of
2000, Hercules announced its intention to pursue a sale or merger of the Company
in the belief that, over the long term, becoming part of a larger enterprise is
the best strategic path for the Company. To that end, the Company retained
Goldman, Sachs & Co. and Credit Suisse First Boston to assist the Board of
Directors in its identification and evaluation of various alternatives.

      The Company incurred a loss of $25 million (see Note 16), including $4
million for termination benefits in connection with the June 2000 sale of the
nitrocellulose business. The Company completed the sale of its Food Gums
division to CP Kelco, a joint venture with Lehman Brothers Merchant Banking II,
L.P., in the third quarter 2000, realizing a net gain on the sale of
approximately $168 million. The Company received approximately $395 million in
cash proceeds, recorded certain selling and tax expenses of approximately $77
million and retained a 28% equity position in CP Kelco. CP Kelco simultaneously
acquired the Kelco biogums business of Pharmacia Corporation (formerly Monsanto
Company).

      During 2000, the Company recognized $66 million in asset impairment
charges and write-offs, primarily in the FiberVisions business. Restructuring
charges of $18 million, including the previously noted $4 million related to the
nitrocellulose divestiture, were incurred for 2000 restructuring plans,
primarily relating to severance and termination benefits for approximately 212
employee terminations in its Process Chemicals and Services segment and
corporate realignment due to the divestitures of its non-core businesses.
Offsetting these restructuring charges was $4 million of reversals relating to
prior year plans. Environmental charges of $8 million were incurred, offset by
$11 million in recoveries of insurance and environmental claims. Profit from
operations also included $16 million in severance charges and compensation
expense not associated with restructuring plans. Additionally, the Company
incurred $5 million of integration charges, primarily for consulting and other
costs associated with the BetzDearborn acquisition and $1 million for other
items. The asset impairments were triggered by significantly higher raw material
costs and the loss of a facility's major customer (see Note 16). Selling,
general and administrative expenses increased in 2000 as a result of a $21
million increase to the Company's reserve for doubtful accounts.

      In 1999, the Company incurred $39 million of integration charges ($3
million reflected in cost of sales), primarily for employee incentive and
retention, consulting, legal and other costs associated with the acquisition of
BetzDearborn partly offset by a $4 million restructuring charge reversal.
During the fourth quarter of 1999, the Company decided to exit the
nitrocellulose business, part of the Functional Products segment, and to take
steps to address the performance of some of the specialty product lines in the
Chemical Specialties segment. As a result of these decisions, the Company
incurred $28 million of pre-tax costs, consisting of $25 million of asset
write-downs and disposal costs ($9 million related to the Functional Products
segment and $16 million related to a Chemical Specialties segment plant) and $3
million of severance benefits for approximately 20 manufacturing employees at a
Chemical Specialties segment plant (see Note 16). The 1999 profit from
operations also included a net $5 million charge related to legal and
environmental matters. Additionally, a production facility fire, a works
accident and the impact of Hurricane Floyd added approximately $8 million to
cost of sales and an executive transition agreement increased selling, general
and administrative expense by $8 million. In 1999, the Company sold its Chilean
Agar business, part of the Functional Products segment, for a pre-tax gain of
$16 million (see Notes 1 and 16).

      The impairment losses recognized in all three years are calculated
pursuant to the Company's policy for accounting for long-lived assets (see
Summary of Significant Accounting Policies).

      The above-mentioned unusual items are primarily included in Reconciling
items in each of the respective years in the segment footnote disclosure (see
Note 23).


                                       19
<PAGE>

RESULTS OF OPERATIONS

      (All comparisons are with the previous year unless otherwise stated.).

      The table below reflects Net sales and Profit from operations for the
years ended December 31, 2001, 2000 and 1999.


<TABLE>
<CAPTION>
                                                        (Dollars in millions)
                                                    2001         2000         1999
                                                    ----         ----         ----
<S>                                              <C>          <C>          <C>
      Net Sales:
              Process Chemicals and Services     $ 1,654      $ 1,717      $ 1,725
              Functional Products                    541          742          875
              Chemical Specialties                   425          695          711
              Reconciling Items                       --           (2)          (2)
                                                 -------      -------      -------
                 Consolidated                    $ 2,620      $ 3,152      $ 3,309
                                                 =======      =======      =======

      Profit from Operations:
              Process Chemicals and Services     $   295      $   297      $   338
              Functional Products                    123          176          218
              Chemical Specialties                    38           59           89
              Reconciling Items                     (169)         (88)        (165)
                                                 -------      -------      -------
                  Consolidated                   $   287      $   444      $   480
                                                 =======      =======      =======
</TABLE>

2001 vs. 2000:

      Consolidated net sales were $2,620 million for 2001, a decrease of $532
million, or 17%. Approximately $57 million of this decrease is attributable to
the strength of the U.S. dollar in 2001, principally versus the Euro that
continued to weaken throughout the year. Approximately $219 million of the
decrease is attributable to the businesses comprising the Resins Divestitures
(see Note 1). Sales from continuing businesses decreased by approximately $256
million in 2001, excluding currency effects. Contributing to the decline is
reduced volume in all business divisions, except BetzDearborn, versus 2000.
Excluding divested businesses, volumes declined 3%. Regionally, net sales
declined 4% in North America, 8% in Europe, 3% in Asia Pacific and 1% in Latin
America. Weak market demand negatively impacted the Company's sales. The sale of
Water Treatment Business is expected to reduce sales by approximately 36%. The
Company expects sales from continuing businesses to remain relatively flat in
2002 assuming market conditions remain the same.

      Consolidated profit from operations decreased $157 million, or 35%. Of
this decrease, $51 million was attributable to business divestitures, $29
million, net, related to non-recurring items and $13 million was due to foreign


                                       20
<PAGE>
currency. Excluding divested businesses, non-recurring items and foreign
currency, consolidated profit from operations decreased approximately $64
million, or 20%. Unallocated corporate expenses increased $53 million,
principally reflecting stranded corporate overhead costs of approximately $30
million previously absorbed by the divested businesses coupled with higher costs
incurred in complying with new regulatory reporting requirements resulting from
the Company's debt refinancing in the fourth quarter of 2000 and higher ESOP
expenses. Additionally, operating profit improvements in BetzDearborn and
FiberVisions were completely negated by lower profit from operations in Pulp and
Paper and Aqualon. Pulp and Paper and Aqualon continue to experience weakness in
the industries they service. Pursuant to the comprehensive cost reduction and
work process redesign program (see Note 14) initiated in 2001, the Company began
reducing its fixed cost structure and saw cost improvements in the fourth
quarter operating profit. Non-recurring items impacting 2001 profit from
operations included $51 million in restructuring charges associated with the
cost reduction program and $6 million, net, of other gains. Offsetting these
charges were $74 million of pre-tax non-recurring gains from the Resins
Divestitures. The Company has targeted $200 million in annualized savings for
implementation by the end of 2002, including $125 million for the remaining
businesses and $75 million for the BetzDearborn Division. On an annualized
basis, savings of approximately $100 million in cost savings were achieved as of
December 31, 2001. The sale of the Water Treatment Business will allow the
Company to further simplify work processes and overall corporate structure to
support a less complex organization. This simplification is expected to yield an
additional $25 million in net annual savings, primarily relating to unallocated
corporate costs, which it will begin to implement upon the closing of the sale
of the Water Treatment Business. Profit from operations in 2000 was favorably
impacted by a $168 million non-recurring gain associated with the sale of the
Food Gums business, partially offset by the following non-recurring charges:
loss associated with the divestiture of the nitrocellulose business, asset
impairment charges, restructuring charges and executive severance charges not
associated with the restructuring plans.

      Process Chemicals and Services segment revenues were down $63 million, or
4%. Excluding the impact of the stronger dollar, revenues decreased $16 million
or less than 1% with relatively flat volumes year over year. Continuing weak
demand in the global paper industry primarily drove the decline in segment
revenues. Profit from operations decreased $2 million, or less than 1%. Profit
from operations benefited from cost reduction initiatives commenced in 2001,
especially in the BetzDearborn Division.

      The Pulp & Paper Division is a large and technically advanced provider of
pulp and paper chemicals and technical paper process solutions. In the Pulp and
Paper Division, both Net sales and Profit from operations declined year over
year. The business continued to be impacted by weak global demand. Sales and
Profit from operations were negatively impacted by volume declines of 5% from
last year. Higher energy and transportation costs, partially offset by lower
overhead costs and bad debt expenses, contributed to the lower Profit from
operations. The division began to see benefits from the cost reduction and work
process redesign program in the fourth quarter in lower overhead costs. The
division anticipates further improvement in Profit from operations in 2002 as it
moves to fully implement cost reductions and work process redesign. The industry
in which the Pulp and Paper Division competes is projected to experience average
growth rates of 2% - 5% through 2004. Demand for sizing agents, retention aids
and strength resins has increased as the high quality pulp in paper products has
been reduced. However, the industry has become increasingly competitive as
consolidation continues within the pulp and paper customer base.

      BetzDearborn is a supplier of chemical treatment programs and products for
water, wastewater and process systems. Its expertise is lowering water and
energy consumption, maximizing plant efficiency and solving complex
environmental problems for chemical, metals, automobile, oil refinery and food
and beverage companies. Net sales in the BetzDearborn Division declined slightly
while Profit from operations improved significantly for the year. Excluding the
impact of the stronger dollar, revenues increased marginally year over year.
Volumes in BetzDearborn increased approximately 6%, however the sales product
mix was unfavorable in comparison to 2000. Profit from operations benefited from
lower overhead costs attributable to the cost reduction and work process
redesign program, price increases in the North American region and lower bad
debt expenses. The BetzDearborn Division achieved $61 million in cost reductions
on an annualized basis as of December 31, 2001. The water treatment industry is
a mature industry, and is not expected to grow beyond GDP in developed
countries. Large customers have increasingly aligned themselves with single
suppliers.

      Functional Products segment revenues decreased $201 million, or 27%, and
Profit from operations decreased $53 million, or 30%. Aqualon is a supplier of
products that manage the properties of aqueous (water-based) systems. Aqualon's
products are mostly derived from renewable natural raw materials, including
cellulose and guar, and are used in paints and coatings, personal care products
such as toothpaste and shampoo, oil and gas well drilling to provide fluid


                                       21
<PAGE>
loss control and as a strengthening agent in mortar and plaster, among other
uses. Volumes for this segment decreased approximately 18%. The decline in
volumes, revenue and Profit from operations all reflect by the full year effect
of the Food Gums and nitrocellulose divestitures in 2000. Excluding the divested
businesses, segment revenues decreased $18 million, or 3%, Profit from
operations decreased $23 million, or 16%, and volumes decreased 2%. Division
results continue to be hampered by the currency effects of a strong dollar,
principally versus the Euro, which was particularly evident in the first half of
2001. Excluding the impact of the stronger dollar, revenues were down $11
million, or about 2%, and Profit from operations was down $20 million, or 14%.
Profit from operations was negatively impacted by volume declines, higher raw
material and energy costs, competitive pricing issues and unfavorable fixed cost
absorption at lower production levels. These negative drivers were partially
offset by lower overhead costs attributable to the cost reduction and work
process redesign program. Volume declines are reflective of weak general
economic conditions. The water-soluble polymer industry is mature, growing at
rates near or slightly higher than GDP. Mergers and the withdrawal of marginal
producers have improved profitability.

      Chemical Specialties segment revenues decreased $270 million, or 39%, and
Profit from operations decreased $21 million, or 36%. In May 2001, Hercules sold
its hydrocarbon resins and select portions of its rosin resins businesses, its
peroxy chemicals business and its interest in a toner resin joint venture. The
Resins division, including the businesses that the Company sold, had
approximately $450 million in net sales in 2000. Excluding the divested
businesses, segment volumes declined 10% and revenues decreased $51 million, or
14%, while Profit from operations increased $2 million or 4%.

      FiberVisions is a global supplier of synthetic non-woven fibers made from
polypropylene and used primarily in disposable diapers and other hygienic
products. Net sales declined while profit from operations increased
significantly. The decline in Net sales is primarily due to 9% lower volumes for
the full year attributable to the exit from the low margin automotive segment
and increased usage of lower basis weight hygiene fabrics combined with adverse
economic conditions in the decorative fiber segment, contractual customer pass
through of lower polymer costs, the impact of the stronger dollar and
competitive pricing issues. Operating performance was positively impacted by
lower polymer costs, lower overhead costs attributable to the cost reduction and
work process redesign program and lower depreciation expense as a result of
assets impairments in 2000.

      The Resins Division offers products that generally are custom made to fit
a particular use in an industry and impart or improve the properties of a
variety of compounded substances. Net sales and Profit from operations in the
Resins Division significantly declined in 2001 as a result of the Resins
Divestitures (see Note 1). Volumes were down approximately 60%. Excluding
divested businesses, Net sales and Profit from operations still experienced
deterioration in 2001, with volumes decreasing 14% for the full year. Operating
performance was primarily impacted by unfavorable fixed cost absorption at lower
production levels and weak overall demand, the most significant in the Terpenes
product line.

2000 vs. 1999:

      Consolidated net sales were $3,152 million for 2000, a decrease of $157
million or 5% from 1999. Approximately $135 million of this decrease is
attributable to the strength of the U.S. dollar in 2000, principally versus the
Euro which weakened dramatically throughout the year. Excluding the impact of
the stronger dollar, consolidated revenues decreased approximately $22 million
or 1%. Additionally, consolidated revenues decreased approximately $111 million
when compared to 1999 as a result of the loss of revenues attributable to the
divested Food Gums, nitrocellulose and agar businesses. Revenues relating to
Hercules' ongoing businesses (excluding Food Gums, nitrocellulose and agar)
increased by approximately $89 million in 2000 after adjusting for currency
effects. Consolidated profit from operations decreased $36 million or 8%.
Excluding divested businesses, consolidated profit from operations decreased
$140 million. The Euro adversely impacted operating profit by approximately $36
million. Raw material and energy costs escalated significantly in 2000 and were
difficult to recover in a timely manner. As 2000 ended, demand slowed in several
of the Company's key markets. Excluding the foreign currency effects,
consolidated profit from operations decreased approximately $104 million or 21%.

      Process Chemicals and Services segment revenues were down $8 million or
less than 1%. Excluding the impact of the stronger dollar, revenues were up $51
million or 3%, reflecting a 2% increase in volumes over 1999. Profit from
operations decreased $41 million or 12%. Excluding the impact of the stronger
dollar, profit from operations was down $26 million or 8%. During 2000, the
Company increased its reserve for doubtful accounts by $21 million.

      Functional Products segment revenues were down $133 million or 15% and
profit from operations decreased $42 million or 19%. Excluding the divested Food
Gums and nitrocellulose businesses, segment revenues were down $22 million


                                       22
<PAGE>
or 4% and profit from operations decreased $33 million or 18%. The strengthening
U.S. dollar vis-a-vis the Euro was the primary variant in year on year operating
results. Excluding the impact of the stronger dollar, revenues were up $16
million or 3% and profit from operations was down $16 million or 9%. Higher raw
material and energy costs, combined with unfavorable product mix changes
negatively impacted operating profit towards the end of the year. Demand in the
paint and construction markets normally slows at year-end; however, the Company
saw a more significant slowdown in demand than is typical in these markets.
Business in the oilfield industry remained strong in the fourth quarter. Volumes
for this segment were up almost 7% year over year.

      Chemical Specialties segment revenues were down $16 million or 2% and
profit from operations decreased $30 million or 34%. Excluding the impact of the
stronger dollar, revenues were up $22 million or 3%, and profit from operations
was down $27 million or 30%. Operating performance was negatively impacted by
significantly higher polypropylene feed stock costs and lower volumes. Volumes
for this segment were down just under 1%. The slowdown in the adhesives end
market was a primary driver in lower volumes.

Interest and Debt Expense and Preferred Security Distributions; Equity Income;
------------------------------------------------------------------------------
Provision for Income Taxes:
---------------------------

      Interest and debt expense and preferred security distributions of
subsidiary trusts decreased $6 million or 2% in 2001 versus 2000. Interest and
debt expense increased $32 million in 2001 versus 2000 reflecting higher
borrowing costs, partially offset by lower debt as a result of the application
of proceeds from the sale of businesses. Preferred security distributions of
subsidiary trusts decreased $38 million in 2001 versus 2000 reflecting the
repayment of $370 million of these securities in the latter part of 2000.

      Equity in income of affiliated companies declined over the three-year
period ended December 31, 2001 principally as a result of the equity losses
relating to CP Kelco in 2001 and 2000.

      Provision for income taxes reflects effective tax rates of 310% in
2001, 40% in 2000 and 31% in 1999. The increase in the effective tax rate for
the year 2001 reflects the effect of non-deductible goodwill amortization and
other provisions on a lower pre-tax income base. The primary cause of the
increase in the effective tax rate for the year 2000 was the effect of
non-deductible goodwill amortization on a lower pre-tax income base, offset by
the benefit of the utilization of research and development credits, favorable
audit settlements and utilization of a capital loss. The 1999 rate was
favorably impacted by the utilization of a capital loss and other adjustments
related to prior years' assessments.

FINANCIAL CONDITION

      Liquidity and financial resources: Net cash flow from operations was $109
million in 2001, $70 million in 2000 and $280 million in 1999. Hercules has
improved its operating cash flow in 2001 by significantly reducing its working
capital requirements. The 2000 decrease versus 1999 reflects lower net income,
the payment of legal settlements, net of insurance recoveries, and higher
working capital requirements. The 1999 increase reflects higher profit from
operations, primarily from acquired businesses, and lower tax payments offset by
higher interest payments, cash expenditures for integration, termination
benefits and other exit costs, along with higher working capital requirements.

      Net cash provided by (used in) investing activities was $284 million in
2001, $213 million in 2000 and ($193) million in 1999. Hercules has improved its
cash flow from investing activities in 2001 by significantly reducing its
capital expenditures. Capital expenditures were $63 million, $179 million and
$204 million in 2001, 2000 and 1999, respectively. The decrease in capital
expenditures in 2001 and 2000 was primarily due to the completion of the plant
expansion in Doel, Belgium and stringent capital spending controls instituted
during the latter part of 2000 and into the year 2001. Additionally, cash flow
from investing activities in both 2001 and 2000 have benefited from the
monetization of certain non-core assets. In May 2001, the Company completed the
sale of its hydrocarbon resins business and select portions of its rosin resins
business to a subsidiary of Eastman Chemical Company, receiving proceeds of
approximately $244 million,and the sale of its peroxy chemicals business to GEO
Specialty Chemicals, Inc., receiving proceeds of approximately $92 million. In
September 2000, the Company sold its Food Gums business to CP Kelco receiving
proceeds of approximately $395 million. After recording certain selling and tax
expenses of $77 million, the net proceeds of approximately $318 million were
applied to repay term loan tranche C.

      Management remains focused on minimizing capital expenditures and working
capital needs for the year 2002.


                                       23
<PAGE>
      Net cash used in financing activities was $368 million, $290 million and
$88 million, respectively, in 2001, 2000 and 1999. The Company has used cash
from business divestitures in 2001 and 2000 to pay down long-term debt.

      The Company regularly reviews its financial structure to appropriately
support the organization. In March 1999, Hercules Trust I, a wholly owned
consolidated subsidiary trust of Hercules, completed a public offering of $362
million of Trust Originated Preferred Securities (TOPrS) (see Note 7). Proceeds
of the offering were used to repay long-term debt. Hercules Trust I's
obligations are guaranteed by the Company.

      During the second quarter of 1999, the Company amended its credit
agreement to allow for borrowing in euros, as well as in U.S. dollars.
Approximately $950 million of U.S. dollar denominated debt was converted to euro
indebtedness.

      In July 1999, the Company completed a public offering of 5,000,000 shares
of its common stock, which provided the Company with net proceeds of $171.5
million (see Note 9). On the same date, the Company and Hercules Trust II, a
wholly owned consolidated subsidiary trust of the Company, completed a public
offering of 350,000 CRESTS Units (see Note 7). Each CRESTS Unit consists of one
preferred security of Hercules Trust II and one warrant to purchase 23.4192
shares of Hercules common stock at an initial exercise price of $1,000
(equivalent to $42.70 per share). The warrants may be exercised, subject to
certain conditions, at any time before March 31, 2029, unless there is a reset
and remarketing event. This transaction provided net proceeds to Hercules of
$340.4 million. Proceeds of the offerings were used to repay long-term debt.
Hercules Trust II's obligations are guaranteed by the Company.

      On December 23, 1999, Hercules Trust VI, a wholly owned consolidated
subsidiary trust of Hercules, completed a private placement of 170,000 Floating
Rate Preferred Securities (Floating Rate Preferred) (see Note 7). The Company
repaid the Floating Rate Preferred with a portion of the proceeds of the
November 2000 11 1/8% senior notes offering on December 29, 2000.

      On November 14, 2000, the Company completed a refinancing and modification
of its existing debt. In conjunction with and conditioned upon the effectiveness
of the amendment to its credit facilities, the Company borrowed $375 million
under the senior credit facility (term loan tranche D) and also issued $400
million of 11 1/8% senior notes due 2007. Concurrently with, and as a condition
to, term loan tranche D and the offering of the 11 1/8% senior notes, the senior
credit facility and ESOP credit facility were amended to: (i) modify the
Company's financial covenants; (ii) change the mandatory prepayment provisions;
and (iii) provide for security, among other things.

      Term loan tranche D initially bore interest at LIBOR + 2.75%, matures on
November 15, 2005 and will require only nominal principal payments prior to
maturity. The senior notes accrue interest at 11 1/8% per annum, payable
semi-annually. The senior notes are guaranteed by each of Hercules' current and
future wholly owned domestic restricted subsidiaries. The 11 1/8% senior notes
were subject to a registration rights agreement that required Hercules to file
an Exchange Offer Registration Statement with the Securities and Exchange
Commission within 270 days (no later than August 11, 2001) and to use its best
efforts to have it declared effective within 330 days. On August 9, 2001,
Hercules filed a Registration Statement on Form S-4 with the Securities and
Exchange Commission, pursuant to which the Company offered to exchange all of
its $400 million aggregate principal amount of 11 1/8% senior notes due 2007
("old notes") for $400 million aggregate principal amount of 11 1/8% Senior
Notes due 2007 ("new notes"). The form and terms of the new notes are the same
as the form and terms of the old notes except that, because the new notes were
registered under the Securities Act, the new notes do not bear legends
restricting their transfer and are not entitled to certain registration rights
under the registration rights agreement. The new notes evidence the same debt as
the old notes and the new notes and the old notes are governed by the same
indenture. On October 31, 2001, Hercules filed Amendment No. 1 to the
Registration Statement on Form S-4 with the Securities and Exchange Commission
and the Registration Statement became effective. Hercules did not receive any
proceeds from the exchange offer. When the exchange offer expired on December 7,
2001, $375.3 million of the old notes had been tendered for a like amount of new
notes.

      At any time prior to November 15, 2003, Hercules may on any one or more
occasions, redeem up to 35% of the aggregate principal amount of the 11 1/8%
senior notes at a redemption price of 111.125% of the principal amount, plus
accrued and unpaid interest and liquidated damages, if any, to the redemption
date, with the net cash proceeds of one or more public equity offerings,
provided that (i) at least 65% of the aggregate principal amount of the 11 1/8%
senior notes issued under the indenture remains outstanding, immediately after
the occurrence of such redemption (excluding notes held by Hercules and its
Subsidiaries); and (ii) the redemption occurs within 45 days of the date of the
closing of such public equity offering. Except as described above, the 11 1/8%
senior notes will not be redeemable at Hercules' option prior to maturity.
Hercules is not required to make mandatory redemption or sinking fund payments
with respect to the senior notes.


                                       24
<PAGE>
      The proceeds of term loan tranche D and the 11 1/8% senior notes were used
to reduce borrowings under the revolving credit agreement, repay the Redeemable
Hybrid INcome Overnight Shares (RHINOS) and Floating Rate Preferred Securities
and reduce the current portion of term loan tranche A.

      As of December 31, 2001, the Company had $292 million available under the
revolving credit agreement and $42 million of short-term lines of credit.
However, the actual availability under the revolving credit agreement is
constrained by the Company's ability to meet covenants in its senior credit
facility. At December 31, 2001, the Company's incremental borrowing capacity was
$58 million.

      Both the senior credit facility and the ESOP credit facility (Note 6)
require quarterly compliance with certain financial covenants, including a
leverage ratio ("debt/EBITDA ratio"), an interest coverage ratio and minimum net
worth. In addition, the Company is required to deliver its annual audited
consolidated financial statements to the lenders within 90 days of the Company's
fiscal year end.

      Due to the delay in closing the Eastman transaction, which in turn delayed
the pay down of the debt, the Company's debt as of March 31, 2001 was
significantly higher than planned. As a result, the Company would have been out
of compliance with the debt/EBITDA ratio covenant of its senior credit facility
as of March 31, 2001. In addition, due to the fact that the Company extended the
filing date for the 2000 10-K, the Company's annual audited financial statements
were not provided to the lenders by March 31, 2001.

      On April 5, 2001, in consideration for the payment of a fee, the senior
credit facility bank syndicate and ESOP lender granted waivers with respect to:
(1) compliance with the debt/EBITDA ratio as of March 31, 2001 and (2) an
extension of time to deliver the December 31, 2000 audited financial statements
to April 17, 2001. These statements were delivered on April 17, 2001.

      With respect to the covenant regarding the debt/EBITDA ratio, the waiver
required that the Eastman transaction be consummated on or before May 31, 2001.
In addition, the Company had to demonstrate, as of the last day of the month in
which the Eastman transaction closed, that the leverage ratio did not exceed
4.75 to 1.00 after giving affect to the application of the net cash proceeds
from the Eastman transaction to prepay portions of the tranche A term loan and
the ESOP credit facility. The Company achieved this leverage ratio. The Eastman
and Peroxide transactions closed in May 2001.

     In order to facilitate the GE Transaction, the Company was required to
obtain amendments to its senior credit facility and ESOP credit facilities (the
"Facilities"). Effective March 6, 2002, the Facilities were amended to (i)
modify certain financial covenants; (ii) change the mandatory prepayment
provisions; (iii) permit the reorganization of the Company in order to effect
the separation of the Water Treatment Business; and (iv) permanently reduce the
revolving committed amount under the credit facility to $200 million. The
amendment to the credit facility also included provisions that will be effective
only upon the consummation of the sale of the Water Treatment Business and the
prepayment of the credit facility. These additional provisions include the
following: (i) the release of the subsidiary stock pledged to the collateral
agent; (ii) the elimination of the requirement that stock of any additional
subsidiaries be pledged in the future; and (iii) the revision of the permitted
amount of asset purchases and dispositions. If the GE Transaction does not close
by July 15, 2002, the financial covenants set forth in the Amendments will
revert back to the previously established levels.

      While the Company expects to remain in compliance with its debt covenants,
current and future compliance is dependent upon generating sufficient EBITDA and
cash flow which are, in turn, impacted by business performance, economic
climate, competitive uncertainties and possibly the resolution of contingencies,
including those set forth in Note 22 to the consolidated financial statements.

      In the event the Company is not in compliance with the debt covenants in
the future, it will pursue various alternatives, which may include, among other
things, refinancing of debt, debt covenant amendments or debt covenant waivers.
While the Company believes that it would be successful in pursuing these
alternatives, there can be no assurance that the Company would be successful.


                                       25
<PAGE>
      Capital Structure and Commitments: Total capitalization (stockholders'
equity, company obligated preferred securities of subsidiary trusts and debt)
decreased to $3.5 billion from $4.0 billion, and the ratio of debt-to-total
capitalization decreased to 62% from 64% at December 31, 2001 and December 31,
2000, respectively, as a result of the application of the proceeds from the sale
of businesses in 2001. The current ratio decreased to .92 at December 31, 2001,
compared to 1.1 at December 31, 2000. The quick ratio decreased to .66 at
December 31, 2001, compared to .78 at December 31, 2000.

      On October 4, 2000, Moody's Investors Service, Inc., downgraded the
Company's senior unsecured credit rating to Ba1 with a stable outlook. On
October 19, 2000, Standard & Poor's Ratings Services downgraded the corporate
credit rating to BB+ and placed Hercules on credit watch with "developing"
implications. On November 9, 2000, Moody's Investors Service, Inc., assigned a
Ba1 rating to term loan tranche D and a Ba2 rating to the 11 1/8% senior notes.
Also on November 9, 2000, Standard & Poor's Ratings Services assigned a BB+
rating to the term loan tranche D and a BB- rating to the 11 1/8% senior notes.
Both ratings were placed on credit watch with "developing" implications. On
January 23, 2001, Standard & Poor's Ratings Services downgraded the corporate
credit rating to BB, which initiated a 50 basis point increase in the interest
rates of term loan tranche A and term loan tranche D. On January 25, 2001,
Standard & Poor's Ratings Services assigned a B+ rating to the 11 1/8% senior
notes. These actions and future adverse actions, if any, by the rating agencies
are likely to result in the Company incurring higher interest costs in future
periods.

      Quarterly dividends of $0.27 per share were declared and paid in the first
and second quarters of 2000. In August 2000, the Board of Directors reduced the
quarterly dividend payment to $.08 per share, which was paid in September 2000
for the third quarter of 2000. On November 13, 2000, the Board of Directors
determined to suspend the payment of the quarterly dividend beginning with the
fourth quarter of this year, subject to reconsideration of the policy by the
Board, in its discretion, when warranted under appropriate circumstances. In
addition, payment of future dividends is significantly restricted by the
indenture governing the senior notes. The annual dividend was $.62 and $1.08 per
share during 2000 and 1999, respectively.

      Capital expenditures are expected to approximate $60 million during 2002.
This includes funds for continuing or completing existing projects and for
implementing new projects.

      The Company's contractual commitments are summarized as follows:

<TABLE>
<CAPTION>
                                                                         (Dollars in millions)
                                                                        Payments Due by Period
                                                  ------------------------------------------------------------------
                                                               Less than 1                                   After 5
                                                   Total          year       1 - 3 years    4 - 5 years      years
                                                  ------------------------------------------------------------------
<S>                                               <C>          <C>           <C>            <C>              <C>
      Long-term debt                              $2,201          $242          $1,008          $398          $553
      Non-cancelable operating leases                228            40              56            34            98
                                                  ------          ----          ------          ----          ----

      Total Contractual Cash Obligations          $2,429          $282          $1,064          $432          $651
                                                  ======          ====          ======          ====          ====
</TABLE>


                                       26
<PAGE>
      The Company had the following commercial commitments at December 31,
2001: lines of credit of $9 million and standby letters of credit of $100
million, both of which may require payments in the future.

RISK FACTORS

Indebtedness

      The Company has a significant amount of indebtedness. As of December 31,
2001, the Company's total debt was approximately $2,210 million. Total debt does
not include $624 million of company-obligated preferred securities of subsidiary
trusts. The Company's substantial indebtedness has significant consequences. For
example, it could: increase the Company's vulnerability to economic downturns
and competitive pressures; require the Company to dedicate a substantial portion
of its cash flow from operations to payments on its indebtedness, thereby
reducing the availability of its cash flow to fund working capital, capital
expenditures, research and development efforts and other general corporate
purposes; reduce the Company's cash flow due to increased interest expense in
times of rising interest rates; limit the Company's flexibility in planning for,
or reacting to, changes in its business and the industries in which it operates
or in pursuing attractive business opportunities requiring debt financing; place
the Company at a disadvantage to its competitors that have less debt; and limit
the Company's ability to borrow additional funds due to restrictive covenants.

      The senior credit facility, the ESOP credit facility and the indenture
governing the 11 1/8% senior notes due 2007, which together account for a large
portion of the Company's debt, contain numerous restrictive covenants,
including, among other things, covenants that limit the Company's ability to:
borrow money and incur contingent liabilities; make dividend or other restricted
payments; use assets as security in other transactions; enter into transactions
with affiliates; enter into new lines of business; issue and sell stock of
restricted subsidiaries; and sell assets or merge with or into other companies.
In addition, the senior credit facility and the ESOP credit facility require the
Company to meet financial ratios and tests, including maximum leverage, minimum
net worth and interest coverage levels. These restrictions could limit the
Company's ability to plan for or react to market conditions or meet
extraordinary capital needs and could otherwise restrict corporate activities.

      The Company's ability to comply with the covenants and other terms of the
senior credit facility, the ESOP credit facility and the indenture governing the
senior notes and to satisfy these and other debt obligations will depend upon
the Company's current and future performance and its ability to consummate the
sale of the Water Treatment Business or sell other assets. The Company's
performance is affected by general economic conditions and by financial,
competitive, political, business and other factors, many of which are beyond the
Company's control. The Company believes that the cash generated from its
business will be sufficient to enable the Company to comply with the covenants
and other terms of the senior credit facility, the ESOP credit facility and the
indenture governing the senior notes and to make debt payments as they become
due. If, however, the Company does not generate enough cash, the Company may be
required to refinance some or all of its indebtedness, sell equity or to obtain
waivers from its lenders. No assurance can be given that any refinancings,
additional borrowings or sales of equity will be available when needed or that
the Company will be able to negotiate acceptable terms. In addition, the
Company's access to capital is affected by prevailing conditions in the
financial and equity capital markets, as well as the Company's financial
condition (including leverage levels), financial performance and prospects.
While the Company has been successful in obtaining waivers from its lenders in
the past, it may be more difficult to do so in the future. Accordingly, there
can be no guarantee that the Company will be able to obtain future waivers. If
the Company fails to comply with the covenants and terms of the senior credit
facility, the ESOP credit facility and the indenture governing the senior notes
or to satisfy these and other debt obligations, the Company may be in default,
debt could be accelerated and any underlying security could be enforced.

      Despite current indebtedness levels, the Company and its subsidiaries may
incur additional indebtedness in the future. As of December 31, 2001, the
Company had a $1.8 billion senior credit facility with a syndicate of banks and
an $84 million


                                       27
<PAGE>
credit facility related to the BetzDearborn ESOP Trust. Under the senior credit
facility, the Company has a $900 million revolving credit agreement, which
permits certain additional borrowings. If new indebtedness is added to the
Company's current indebtedness levels, the risks described above could increase.

Market Risk

      Fluctuations in interest and foreign currency exchange rates affect the
Company's financial position and results of operations. The Company has used
several strategies to actively hedge interest rate and foreign currency exposure
and minimize the effect of such fluctuations on reported earnings and cash flow.
(See "Foreign Currency Translation" and "Derivative Financial Instruments and
Hedging" in the Summary of Significant Accounting Policies and Notes 18 and 21.)
Sensitivity of the Company's financial instruments to selected changes in market
rates and prices, which are reasonably possible over a one-year period, are
described below. Market values are the present value of projected future cash
flows based on the market rates and prices chosen. The market values for
interest rate risk are calculated by the Company utilizing a third-party
software model that employs standard pricing models to determine the present
value of the instruments based on the market conditions as of the valuation
date.

      During 2000, the interest rate swap portfolio was substantially terminated
due to the conversion of foreign denominated debt to U.S. dollar denominated
debt in the first half of 2000 and the November 2000 debt restructuring which
replaced variable rate debt with fixed rate debt.

      The Company's derivative and other financial instruments subject to
interest rate risk consists substantially of debt instruments and trust
preferred securities. At December 31, 2001 and 2000, net market value of these
combined instruments, substantially all of which were debt at December 31, 2001,
was a liability of $2.61 billion and $3.08 billion, respectively. The
sensitivity analysis assumes an instantaneous 100-basis point move in interest
rates from their levels, with all other variables held constant. A 100-basis
point increase in interest rates at December 31, 2001 and 2000 would result in a
$52 million and $70 million decrease, respectively, in the net market value of
the liability. A 100-basis point decrease in interest rates at December 31, 2001
and 2000 would result in a $57 million and $78 million increase, respectively,
in the net market value of the liability, respectively.

      Our financial instruments subject to foreign currency exchange risk
consist of foreign currency forwards and options and represent a net asset
position of $.2 million at December 31, 2001 and a net liability position of $1
million at December 31, 2000. The following sensitivity analysis assumes an
instantaneous 10% change in foreign currency exchange rates from year-end
levels, with all other variables held constant. A 10% strengthening of the U.S.
dollar versus other currencies at December 31, 2001 and 2000 would result in a
$2 million increase in the net asset position for 2001 and a $2 million decrease
in the net liability position for 2000, while a 10% weakening of the dollar
versus all currencies would result in a $2 million decrease in the net asset
position for 2001 and a $3 million increase in the net liability position for
2000.

      Foreign exchange forward and option contracts have been used to hedge the
Company's firm and anticipated foreign currency cash flows. Thus, there is
either an asset or cash flow exposure related to all the financial instruments
in the above sensitivity analysis for which the impact of a movement in exchange
rates would be in the opposite direction and substantially equal to the impact
on the instruments in the analysis. There are presently no significant
restrictions on the remittance of funds generated by the Company's operations
outside the United States. The free market exchange rate of the Argentinean peso
did not have a significant impact on the operations of the Company.

      The Company has not designated any derivative as a hedge instrument under
SFAS 133 and, accordingly, changes in the fair value of derivatives are recorded
each period in earnings.

Environmental

      In the ordinary course of its business, the Company is subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites, past
spills, disposals and other releases of hazardous substances. Changes in these
laws and regulations may have a material adverse effect on the Company's
financial position and results of operations. Any failure by the Company to
adequately comply with such laws and regulations could subject the Company to
significant future liabilities.

      Hercules has been identified by U.S. federal and state authorities as a
"potentially responsible party" for environmental cleanup at numerous sites. The
estimated range of reasonably possible costs for remediation is between $81
million and $256 million. These cost estimates are based upon the facts and
circumstances as they are presently known and are updated quarterly based upon
new information that the Company receives. While the Company believes that the
actual cost will more likely approximate $81 million based on its estimation
methods and prior experience, actual remediation-related liabilities may exceed
current estimates. While it is not


                                       28
<PAGE>
feasible to predict the outcome of all pending suits and claims, the ultimate
resolution of these environmental matters could have a material effect upon the
results of operations and financial position of Hercules (see Note 22).

      Environmental remediation expenses are funded from internal sources of
cash. Such expenses are not expected to have a significant effect on the
Company's ongoing liquidity. Environmental cleanup costs, including capital
expenditures for ongoing operations, are a normal, recurring part of operations
and are not significant in relation to total operating costs or cash flows.

Litigation

      Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. These suits concern issues such as
product liability, contract disputes, labor-related matters, patent
infringement, environmental proceedings, property damage and personal injury
matters. While it is not feasible to predict the outcome of all pending suits
and claims, the ultimate resolution of these matters could have a material
effect upon the financial position of Hercules, and the resolution of any of the
matters during a specific period could have a material effect on the quarterly
or annual operating results for that period (see Note 22)

      On February 5, 2002, the Appellate Division of the New York Supreme Court
affirmed a trial court judgment against Hercules currently totaling
approximately $10.9 million including interest, costs and expenses in the case,
Hexcel Corporation v Hercules Incorporated. Hercules continues to believe that
the decisions of the trial court and intermediate appellate courts are incorrect
and has filed a motion for Reargument or for Leave to Appeal to the Court of
Appeals. That motion was denied on March 19, 2002. Hercules will be filing a
motion for Leave to Appeal to the New York Court of Appeals directly with the
Court of Appeals. The granting of a motion for an appeal to the Court of Appeals
is discretionary and there can be no assurance that it will be granted.

Other

      The Company has undertaken a comprehensive cost reduction program to
improve its return on capital. While the cost reduction program may ultimately
benefit the Company and its stockholders, cost reduction programs also can have
an adverse effect on a company's operations and there can be no assurance that
the Company's cost reduction program will be successful.

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired) based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.

     The Company will adopt the provisions of SFAS 142 in its first quarter
ended March 31, 2002. The Company is in the process of preparing for its
adoption of SFAS 142 and is making the determinations as to what its reporting
units are and what amounts of goodwill, intangible assets, other assets and
liabilities should be allocated to those reporting units. As required by SFAS
142, the Company will reclassify $47 million of assembled workforce intangible
assets to goodwill. The Company will no longer record $49 million of annual
amortization relating to its existing goodwill and intangibles, as adjusted for
the reclassifications just mentioned.

      SFAS 142 requires that goodwill be tested upon transition and annually
thereafter for impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step must be measured
as of the beginning


                                       29
<PAGE>
of the fiscal year. However, the Company has six months from the date of
adoption to complete the first step. The second step of the goodwill impairment
test measures the amount of the impairment loss (measured as of the beginning of
the year of adoption), if any, and must be completed by the end of the Company's
fiscal year. The Company expects to complete both steps of its transitional
impairment analysis in time to fully recognize the provisions of SFAS 142 in the
first quarter 2002 results. Although the Company has not completed its
transitional impairment analysis required by SFAS 142, it anticipates that
initial adoption of this standard will result in recording a loss ranging from
$200 to $300 million related to impaired goodwill of the Water Treatment
Business. Also, it is likely that an additional transitional goodwill impairment
charge due to adopting SFAS 142 will be taken with respect to the FiberVisions
Business ranging from $70 to $125 million. These impairment charges are net of
tax since they are not tax deductible and will be reported as a cumulative
effect of a change in accounting principle.

      Goodwill related to both the Water Treatment and FiberVisions businesses
was evaluated for impairment at December 31, 2001 under Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Fixed Assets
and for Long-Lived Assets to Be Disposed of". Such evaluations indicated that
goodwill associated with these businesses was recoverable from anticipated
future undiscounted cash flows. Accordingly, no impairment loss was recorded in
the December 31, 2001 financial statements.

      In estimating future cash flows, the Company assumed that both of these
businesses would remain in its business portfolio for the foreseeable future,
which was the most likely case based on the facts that existed as of December
31, 2001.

      In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for the Company on
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is in the process
of evaluating the impact this standard will have on the Company's financial
statements.

      In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK:

      For discussion of quantitative and qualitative disclosures about market
risk, see the caption "Risk Factors" under Item 7, Management's Discussion and
Analysis of Financial Condition and Results of Operations.


                                       30
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA:

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND
                           REQUIRED SUPPLEMENTARY DATA
                              HERCULES INCORPORATED

<TABLE>
<CAPTION>
CONSOLIDATED FINANCIAL STATEMENTS                                                                                     Page
                                                                                                                      ----
<S>                                                                                                                   <C>
Report of Independent Accountants ..............................................................................       32

Consolidated Statement of Operations for the Years Ended December 31, 2001, 2000 and 1999 ......................       33

Consolidated Balance Sheet as of December 31, 2001 and 2000 ....................................................       34

Consolidated Statement of Cash Flows for the Years Ended December 31, 2001, 2000 and 1999 ......................       35

Consolidated Statement of Stockholders' Equity for the Years Ended December 31, 2001, 2000 and 1999 ............       36

Consolidated Statement of Comprehensive (Loss) Income for the Years Ended December 31, 2001, 2000 and 1999 .....       37

Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements ......................       38

SUPPLEMENTARY DATA

Summary of Quarterly Results (Unaudited) .......................................................................       78

Subsidiaries of Registrant .....................................................................................       79
</TABLE>


                                       31
<PAGE>
                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and the Board of Directors of
Hercules Incorporated
Wilmington, Delaware

      In our opinion, the consolidated financial statements listed in the
accompanying index present fairly, in all material respects, the financial
position of Hercules Incorporated and subsidiaries at December 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. In addition, in
our opinion, the financial statement schedule listed in the index appearing
under Item 14(a)(2) on page 82 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. These financial statements and the financial
statement schedule are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits. We conducted our audits of
these statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.


PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 28, 2002


                                       32
<PAGE>

HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>
                                                                  (Dollars in millions, except per share)
                                                                      2001          2000         1999
                                                                      ----          ----         ----
<S>                                                                 <C>           <C>           <C>
      Net sales                                                     $ 2,620       $ 3,152       $3,309
                                                                    -------       -------       ------
      Cost of sales                                                   1,464         1,784        1,831
      Selling, general, and administrative expenses                     743           810          787
      Research and development                                           67            80           85
      Goodwill and intangible asset amortization                         76            80           79
      Other operating (income) expenses, net (Note 16)                  (17)          (46)          47
                                                                    -------       -------       ------
      Profit from operations                                            287           444          480

      Interest and debt expense (Note 17)                               196           164          185
      Preferred security distributions of subsidiary trusts              58            96           51
      Other expense, net (Note 18)                                       10            18            2
                                                                    -------       -------       ------
      Income before income taxes and equity (loss) income                23           166          242
      Provision for income taxes (Note 19)                               72            66           75
                                                                    -------       -------       ------
      (Loss) income before equity (loss) income                         (49)          100          167
      Equity (loss) income of affiliated companies, net of tax           (9)           (2)           1
                                                                    -------       -------       ------
      Net (loss) income                                             $   (58)      $    98       $  168
                                                                    =======       =======       ======

      (Loss) earnings per share (Note 20)
          Basic:                                                    $ (0.54)      $  0.91       $ 1.63
          Diluted:                                                  $ (0.54)      $  0.91       $ 1.62
</TABLE>

   The accompanying accounting policies and notes are an integral part of the
                       consolidated financial statements.


                                       33
<PAGE>
HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET

<TABLE>
<CAPTION>
                                                                                    (Dollars in millions)
                                                                                        December 31,
                                                                                       2001          2000
                                                                                       ----          ----
<S>                                                                                 <C>           <C>
      ASSETS
      Current assets
        Cash and cash equivalents                                                   $    76       $    54
        Accounts and notes receivable, net (Note 2)                                     506           626
        Inventories (Note 3)                                                            233           305
        Deferred income taxes (Note 19)                                                  27            37
                                                                                    -------       -------
      Total current assets                                                              842         1,022
      Property, plant and equipment, net (Note 12)                                      903         1,104
      Investments (Note 4)                                                               43            53
      Goodwill and other intangible assets, net (Note 13)                             2,476         2,610
      Prepaid pension (Note 15)                                                         215           211
      Deferred charges and other assets                                                 570           528
                                                                                    -------       -------
        Total assets                                                                $ 5,049       $ 5,528
                                                                                    =======       =======
      LIABILITIES AND STOCKHOLDERS' EQUITY
      Current liabilities
        Accounts payable                                                            $   203       $   259
        Short-term debt (Note 5)                                                        251           261
        Accrued expenses (Note 12)                                                      463           402
                                                                                    -------       -------
      Total current liabilities                                                         917           922
      Long-term debt (Note 6)                                                         1,959         2,342
      Deferred income taxes (Note 19)                                                   334           406
      Other postretirement benefits (Note 15)                                           107           119
      Deferred credits and other liabilities                                            396           301
                                                                                    -------       -------
        Total liabilities                                                             3,713         4,090

      Commitments and contingencies (Note 22)                                            --            --

      Company-obligated preferred securities of subsidiary trusts (Note 7)              624           622

      Stockholders' equity
        Series preferred stock (Note 8)                                                  --            --
        Common stock, $25/48 par value (Note 9)                                          83            83
          (shares issued: 2001 - 159,984,444; 2000 - 159,984,444)
        Additional paid-in capital                                                      697           726
        Unearned compensation (Note 10)                                                (104)         (115)
        Accumulated other comprehensive losses                                         (218)         (143)
        Retained earnings                                                             2,099         2,157
                                                                                    -------       -------
                                                                                      2,557         2,708
      Reacquired stock, at cost (shares: 2001 - 51,196,972; 2000 - 52,442,393)        1,845         1,892
                                                                                    -------       -------
        Total stockholders' equity                                                      712           816
                                                                                    -------       -------
        Total liabilities and stockholders' equity                                  $ 5,049       $ 5,528
                                                                                    =======       =======
</TABLE>

   The accompanying accounting policies and notes are an integral part of the
                       consolidated financial statements.


                                       34
<PAGE>

HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW

<TABLE>
<CAPTION>
                                                                                           (Dollars in millions)
                                                                                      2001          2000          1999
                                                                                     -----       -------       -------
<S>                                                                                  <C>         <C>           <C>
      CASH FLOW FROM OPERATING ACTIVITIES:
      Net (loss) income                                                              $ (58)      $    98       $   168
      Adjustments to reconcile net income to net cash provided from operations:
        Depreciation                                                                   102           132           144
        Amortization                                                                   110           114           106
        Gain on disposals                                                              (77)         (142)          (23)
        Restructuring plans                                                             48            12            (4)
        Noncash charges (credits)                                                       21            93            (9)
        Accruals and deferrals of cash receipts and payments:
          Affiliates' earnings in excess of dividends received                           9             2            (1)
          Accounts receivable                                                          100            48           (69)
          Inventories                                                                   14            (3)           (7)
          Accounts payable and accrued expenses                                        (31)         (190)          (27)
          Deferred taxes                                                               (51)            2            34
          Noncurrent assets and liabilities                                            (78)          (96)          (32)
                                                                                     -----       -------       -------
            Net cash provided by operations                                            109            70           280
                                                                                     -----       -------       -------

      CASH FLOW FROM INVESTING ACTIVITIES:
      Capital expenditures                                                             (63)         (187)         (196)
      Proceeds of investment and fixed asset disposals                                 356           418            50
      Acquisitions, net of cash acquired                                                --            (6)          (10)
      Other, net                                                                        (9)          (12)          (37)
                                                                                     -----       -------       -------
            Net cash provided by (used in) investing activities                        284           213          (193)
                                                                                     -----       -------       -------

      CASH FLOW FROM FINANCING ACTIVITIES:
      Long-term debt proceeds                                                          349         1,889           279
      Long-term debt repayments                                                       (626)       (1,790)       (1,360)
      Change in short-term debt                                                       (107)           92            22
      Payment of debt issuance costs and underwriting fees                              --           (28)          (19)
      Proceeds from issuance of subsidiary trusts preferred securities                  --            --           792
      Repayment of subsidiary trust preferred securities                                --          (370)           --
      Proceeds from issuance of warrants                                                --            --            90
      Common stock issued                                                               17            13           182
      Common stock reacquired                                                           (1)           (2)           (3)
      Proceeds from issuance of subsidiary preferred stock                              --            --            12
      Dividends paid                                                                    --           (94)          (83)
                                                                                     -----       -------       -------
            Net cash used in financing activities                                     (368)         (290)          (88)
                                                                                     -----       -------       -------
      Effect of exchange rate changes on cash                                           (3)           (2)           (4)
                                                                                     -----       -------       -------
      Net increase (decrease) in cash and cash equivalents                              22            (9)           (5)
      Cash and cash equivalents at beginning of year                                    54            63            68
                                                                                     -----       -------       -------
      Cash and cash equivalents at end of year                                       $  76       $    54       $    63
                                                                                     =====       =======       =======

      SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
      Cash paid during the period for:
          Interest (net of amount capitalized)                                       $ 157       $   164       $   184
          Preferred security distributions of subsidiary trusts                         61            85            36
          Income taxes, net of refunds received                                         37            29            79
      Noncash investing and financing activities:
          Conversion of notes and debentures                                            --            --             2
          Acquisition of minority interest                                              --           (11)           --
          Incentive and other employee benefit stock plan issuances                     12             8             8
</TABLE>

   The accompanying accounting policies and notes are an integral part of the
                       consolidated financial statements.


                                       35
<PAGE>
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

<TABLE>
<CAPTION>
                                                                            (Dollars in millions)


                                                                                               Unearned
                                                                       Common     Paid-in       Compen-
                                                                       Stock      Capital       sation
-------------------------------------------------------------------------------------------------------
<S>                                                                   <C>         <C>          <C>
Balances at January 1, 1999                                           $    81     $   504      $  (130)
(Common shares: issued, 154,823,496; reacquired, 53,995,692)
Net income                                                                 --          --           --
Common dividends, $1.08 per common share                                   --          --           --
Foreign currency translation adjustment                                    --          --           --
Impact of allocation of shares held by ESOP                                --          --            7
Purchase of common stock, 126,893 shares                                   --          --           --
Warrants issued in connection with CRESTS
    Units offering (Note 7)                                                --          88           --
Issuance of common stock:
    Incentive plans, net, 535,220 shares from reacquired stock             --          --           --
    Conversion of notes and debentures, 153,234 shares                     --           2           --
    Public offering, 5,000,000 shares                                       2         163           --

-------------------------------------------------------------------------------------------------------
Balances at December 31, 1999                                         $    83     $   757      $  (123)
(Common shares: issued,159,976,730;  reacquired, 53,587,365)
Net income                                                                 --          --           --
Common dividends, $0.62 per common share                                   --          --           --
Foreign currency translation adjustment                                    --          --           --
Impact of allocation of shares held by ESOP                                --          --            8
Purchase of common stock, 174,547 shares                                   --          --           --
Issuance of common stock:
    Incentive plans, net, 1,319,519 shares, from reacquired stock          --         (31)          --
    Conversion of notes and debentures, 7,714 shares                       --          --           --

-------------------------------------------------------------------------------------------------------
Balances at December 31, 2000                                         $    83     $   726      $  (115)
(Common shares: issued,159,984,444;  reacquired, 52,442,393)
Net loss                                                                   --          --           --
Foreign currency translation adjustment                                    --          --           --
Impact of allocation of shares held by ESOP                                --          --           11
Additional minimum pension liability, net of tax                           --          --           --
Purchase of common stock, 66,470 shares                                    --          --           --
Issuances of common stock:
    Incentive plans, net, 1,311,891 shares, from reacquired stock          --         (29)          --

-------------------------------------------------------------------------------------------------------
Balances at December 31, 2001
(Common shares: issued,159,984,444;  reacquired, 51,196,972)          $    83     $   697      $  (104)
</TABLE>

<TABLE>
<CAPTION>
                                                                              (Dollars in millions)

                                                                      Accumulated
                                                                         Other
                                                                      Comprehen-     Retained   Reacquired
                                                                       sive Loss     Earnings      Stock
----------------------------------------------------------------------------------------------------------
<S>                                                                   <C>            <C>        <C>
Balances at January 1, 1999                                             $   (13)     $ 2,068      $ 1,951
(Common shares: issued, 154,823,496; reacquired, 53,995,692)
Net income                                                                   --          168           --
Common dividends, $1.08 per common share                                     --         (111)          --
Foreign currency translation adjustment                                     (31)          --           --
Impact of allocation of shares held by ESOP                                  --           --           --
Purchase of common stock, 126,893 shares                                     --           --            3
Warrants issued in connection with CRESTS
    Units offering (Note 7)                                                  --           --           --
Issuance of common stock:
    Incentive plans, net, 535,220 shares from reacquired stock               --           --          (19)
    Conversion of notes and debentures, 153,234 shares                       --           --           --
    Public offering, 5,000,000 shares                                        --           --           --

----------------------------------------------------------------------------------------------------------
Balances at December 31, 1999                                           $   (44)     $ 2,125      $ 1,935
(Common shares: issued,159,976,730;  reacquired, 53,587,365)
Net income                                                                   --           98           --
Common dividends, $0.62 per common share                                     --          (66)          --
Foreign currency translation adjustment                                     (99)          --           --
Impact of allocation of shares held by ESOP                                  --           --           --
Purchase of common stock, 174,547 shares                                     --           --            5
Issuance of common stock:
    Incentive plans, net, 1,319,519 shares, from reacquired stock            --           --          (48)
    Conversion of notes and debentures, 7,714 shares                         --           --           --

----------------------------------------------------------------------------------------------------------
Balances at December 31, 2000                                           $  (143)     $ 2,157      $ 1,892
(Common shares: issued,159,984,444;  reacquired, 52,442,393)
Net loss                                                                     --          (58)          --
Foreign currency translation adjustment                                     (69)          --           --
Impact of allocation of shares held by ESOP                                  --           --           --
Additional minimum pension liability, net of tax                             (6)          --           --
Purchase of common stock, 66,470 shares                                      --           --            1
Issuances of common stock:
    Incentive plans, net, 1,311,891 shares, from reacquired stock            --           --          (48)

----------------------------------------------------------------------------------------------------------
Balances at December 31, 2001
(Common shares: issued,159,984,444;  reacquired, 51,196,972)            $  (218)     $ 2,099      $ 1,845
</TABLE>

   The accompanying accounting policies and notes are an integral part of the
                       consolidated financial statements.


                                       36
<PAGE>
HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE (LOSS) INCOME

<TABLE>
<CAPTION>
                                                               (Dollars in millions)
                                                              Year Ended December 31,
                                                            2001       2000       1999
                                                            ----       ----       ----
<S>                                                        <C>        <C>        <C>
      Net (loss) income                                    $ (58)     $  98      $ 168
      Foreign currency translation                           (69)       (99)       (31)
      Additional minimum pension liability, net of tax        (6)        --         --
                                                           -----      -----      -----
      Comprehensive (loss) income                          $(133)     $  (1)     $ 137
                                                           =====      =====      =====
</TABLE>

   The accompanying accounting policies and notes are an integral part of the
                       consolidated financial statements.


                                       37
<PAGE>
HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

      The Consolidated Financial Statements include the accounts of Hercules and
all majority-owned subsidiaries where control exists. Following the acquisition
of BetzDearborn, the Company continued BetzDearborn's practice of using a
November 30 fiscal year-end for certain former BetzDearborn non-U.S.
subsidiaries to expedite the year-end closing process. All intercompany
transactions and profits have been eliminated. Investments in affiliated
companies with a 20% or greater ownership interest are accounted for using the
equity method of accounting and, accordingly, consolidated income includes
Hercules' share of their income.

USE OF ESTIMATES

      Preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and
accompanying notes. Actual results could differ from those estimates.

REVENUE RECOGNITION

      The Company recognizes revenue when the earnings process is complete. This
generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable and pricing is fixed and
determinable. Accruals are made for sales returns and other allowances based on
the Company's experience. The corresponding shipping and handling costs are
included in cost of sales.

RESEARCH AND DEVELOPMENT EXPENDITURES

      Research and development expenditures are expensed as incurred.

ENVIRONMENTAL EXPENDITURES

      Environmental expenditures that pertain to current operations or future
revenues are expensed or capitalized according to the Company's capitalization
policy. Expenditures for remediation of an existing condition caused by past
operations that do not contribute to current or future revenues are expensed.
Liabilities are recognized for remedial activities when the cleanup is probable
and the cost can be reasonably estimated.

CASH AND CASH EQUIVALENTS

      Cash in excess of operating requirements is invested in short-term,
income-producing instruments. Cash equivalents include commercial paper and
other securities with original maturities of 90 days or less. Book value
approximates fair value because of the short maturity of those instruments.

INVENTORIES

      Inventories are stated at the lower of cost or market. Domestic
inventories are valued predominantly on the last-in, first-out (LIFO) method.
Foreign and certain domestic inventories, which in the aggregate represented 66%
and 67%, respectively, of total inventories at December 31, 2001 and 2000, are
valued principally on the average-cost method. Elements of costs in inventories
include raw materials, direct labor and manufacturing overhead.

PROPERTY AND DEPRECIATION

      Property, plant and equipment are stated at cost. The Company changed to
the straight-line method of depreciation, effective January 1, 1991, for newly
acquired processing facilities and equipment. Assets acquired before then
continue to be depreciated by accelerated methods. The Company believes
straight-line depreciation provides a better matching of costs and revenues over
the lives of the assets. The estimated useful lives of depreciable assets are as
follows: buildings - 30 years; plant machinery and equipment - 15 years; other
machinery and equipment - 3 to 15 years.

      Maintenance, repairs and minor renewals are charged to income; major
renewals and betterments are capitalized. Upon normal retirement or replacement,
the net book value of property (less proceeds of sale or salvage) is charged to
income.

GOODWILL AND OTHER INTANGIBLE ASSETS

      Goodwill and other intangible assets have been amortized on a
straight-line basis over the estimated future periods to be benefited, generally
40 years for goodwill, customer relationships and trademarks and tradenames and
5 to 15 years for other intangible assets. Pursuant to Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS 142),
beginning January 1, 2002, goodwill will not be amortized but will be tested for
impairment annually and any necessary adjustment charged to expense. Intangible
assets with finite lives will be amortized over their useful lives.


                                       38
<PAGE>

HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

LONG-LIVED ASSETS

      The Company reviews its long-lived assets, including goodwill and other
intangibles, for impairment on an exception basis whenever events or changes in
circumstances indicate carrying amounts of the assets may not be recoverable
through undiscounted future cash flows. If an impairment loss has occurred based
on expected future cash flows (undiscounted), the loss is recognized in the
income statement. The amount of the impairment loss is the excess of the
carrying amount of the impaired asset over the fair value of the asset. The fair
value represents expected future cash flows from the use of the assets,
discounted at the rate used to evaluate potential investments.

INCOME TAXES

      The provision for income taxes has been determined using the asset and
liability approach for accounting for income taxes. Under this approach,
deferred taxes represent the future tax consequences expected to occur when the
reported amounts of assets and liabilities are recovered or paid. The provision
for income taxes represents income taxes paid or payable for the current year
plus the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax basis of the Company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.

FOREIGN CURRENCY TRANSLATION

      The financial statements of Hercules' non-U.S. entities are translated
into U.S. dollars using current rates of exchange, with gains or losses included
in accumulated other comprehensive losses.

DERIVATIVE INSTRUMENTS AND HEDGING

      On January 1, 2001, the Company adopted Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" ("SFAS 133"). SFAS 133, as amended by Statement No. 137, "Accounting
for Derivative Instruments and Hedging Activity - Deferral of the Effective Date
of FASB Statement No. 133," and Statement No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities," requires that all
derivative instruments be recorded on the balance sheet at their fair values.
The Company has not designated any derivative as a hedge instrument and
accordingly, changes in fair value of derivatives are recorded each period in
earnings. The adoption of SFAS 133 did not result in a pre-tax or post-tax
cumulative-effect-type adjustment to income and did not result in a change to
other comprehensive losses. Under procedures and controls established by the
Company's risk management policies, the Company strategically enters into
contractual arrangements (derivatives) in the ordinary course of business to
reduce the exposure to foreign currency rates and interest rates.

      The Company's risk management policies establish a variety of approved
derivative instruments to be utilized in each risk management program and the
level of exposure coverage based on the assessment of risk factors. Derivative
instruments utilized include forwards, swaps and options. The Company has not
designated any non-derivatives as hedging instruments. The Company uses forward
exchange contracts and options, generally no greater than three months in term,
to reduce its net currency exposure. The objective of this program is to
maintain an overall balanced position in foreign currencies so that exchange
gains and losses resulting from exchange rate changes are minimized. The Company
has used interest rate swap agreements to manage interest costs and risks
associated with changing rates.

      Counterparties to the forward exchange, currency swap, options and
interest swap contracts are major financial institutions. Credit loss from
counterparty nonperformance is not anticipated.

STOCK-BASED COMPENSATION

      Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
("APB 25"). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standard No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), requires companies electing to continue
to use the intrinsic-value method to make pro forma disclosures of net income
and earnings per share as if the fair-value-based method of accounting had been
applied.

COMPUTER SOFTWARE COSTS

      Effective January 1, 1999, the Company adopted the American Institute of
Certified Public Accountants Statement of Position 98-1, "Accounting for the
Cost of Computer Software Developed or Obtained for Internal Use" (SOP 98-1).
The Company's prior accounting was generally consistent with the requirements of
SOP 98-1 and, accordingly, adoption of SOP 98-1 had no material effect. Computer
software costs are being amortized over a period of 5 to 10 years.


                                       39
<PAGE>


HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141, "Business Combinations"
("SFAS 141"), and Statement of Financial Accounting Standards No. 142, "Goodwill
and Other Intangible Assets" ("SFAS 142"). SFAS 141 supersedes Accounting
Principles Board Opinion ("APB") No. 16, Business Combinations. The Provisions
of SFAS 141 (1) require that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001, (2) provide specific
criteria for the initial recognition and measurement of intangible assets apart
from goodwill and (3) require that unamortized negative goodwill be written off
immediately as extraordinary gain instead of being deferred and amortized. SFAS
141 also requires that upon adoption of SFAS 142 the Company reclassify the
carrying amounts of certain intangible assets into or out of goodwill, based on
certain criteria. SFAS 142 supersedes APB No. 17, Intangible Assets, and is
effective for fiscal years beginning after December 15, 2001. SFAS 142 primarily
addresses the accounting for goodwill and intangible assets subsequent to their
initial recognition. The provisions of SFAS 142 (1) prohibit the amortization of
goodwill and indefinite-lived intangible assets, (2) require that goodwill and
indefinite-lived intangible assets be tested annually for impairment (and in
interim periods if certain events occur indicating that the carrying value of
goodwill and/or indefinite-lived intangible assets may be impaired), based on
fair value (as opposed to cost recovery using future undiscounted cash flows),
(3) require that reporting units be identified for the purpose of assessing
potential future impairments of goodwill and (4) remove the forty-year
limitation on the amortization period of intangible assets that have finite
lives.

        The Company will adopt the provisions of SFAS 142 in its first quarter
ended March 31, 2002. The Company is in the process of preparing for its
adoption of SFAS 142 and is making the determinations as to what its reporting
units are and what amounts of goodwill, intangible assets, other assets and
liabilities should be allocated to those reporting units. In connection with
the adoption of SFAS 142, the Company will reclassify $47 million of assembled
workforce intangible assets to goodwill. The Company will no longer record $49
million of annual amortization relating to existing goodwill and intangibles,
as adjusted for the reclassifications just mentioned.

      SFAS 142 requires that goodwill be tested upon transition and annually
thereafter for impairment using a two-step process. The first step is to
identify a potential impairment and, in transition, this step must be measured
as of the beginning of the fiscal year. However, the Company has six months from
the date of adoption to complete the first step. The second step of the goodwill
impairment test measures the amount of the impairment loss (measured as of the
beginning of the year of adoption), if any, and must be completed by the end of
the Company's fiscal year. The Company expects to complete both steps of its
transitional impairment analysis in time to fully recognize the provisions of
SFAS 142 in first quarter 2002 results.

      Goodwill related to both our Water Treatment and FiberVisions businesses
was evaluated for impairment at December 31, 2001 under Statement of Financial
Accounting Standards No. 121 "Accounting for the Impairment of Long-Fixed Assets
and for Long-Lived Assets to Be Disposed of". Such evaluations indicated that
goodwill associated with these businesses was recoverable from anticipated
future undiscounted cash flows. Accordingly, no impairment loss was recorded in
our December 31, 2001 financial statements.

      In estimating future cash flows, we assumed that both of these businesses
would remain in our business portfolio for the foreseeable future, which was the
most likely case based on the facts that existed as of December 31, 2001.

      In addition, in June 2001, the FASB approved the issuance of Statement of
Financial Accounting Standards No. 143, "Accounting for Asset Retirement
Obligations" ("SFAS 143"). SFAS 143 establishes accounting standards for the
recognition and measurement of legal obligations associated with the retirement
of tangible long-lived assets. SFAS 143 will become effective for the Company on
January 1, 2003 and requires recognition of a liability for an asset retirement
obligation in the period in which it is incurred. Management is in the process
of evaluating the impact this standard will have on the Company's financial
statements.


                                       40
<PAGE>

HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

      In October 2001, the FASB issued Statement of Financial Accounting
Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets" ("SFAS 144"). SFAS 144 addresses financial accounting and reporting for
the impairment or disposal of long-lived assets. The provisions of this
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Management is in the process of evaluating
the impact this standard will have on the Company's financial statements.

RECLASSIFICATIONS

      Certain amounts in the 2000 and 1999 consolidated financial statements and
notes have been reclassified to conform to the 2001 presentation.


                                       41
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.    ACQUISITIONS AND DIVESTITURES

      All acquisitions have been accounted for under the purchase method. The
results of operations of the acquired businesses are included in the
consolidated financial statements from the dates of acquisition.

      The Company made one acquisition in 1999 and one in 2000 for an aggregate
purchase price of approximately $16 million in cash. These acquisitions included
the Scripset(R) water-soluble polymer resin business of Solutia Inc. in July
1999; and Quaker Chemical Corporation's paper chemicals business in May 2000.
Allocations of the purchase prices for these acquisitions resulted in
approximately $8 million of goodwill, which is being amortized over estimated
useful lives ranging from 30 to 40 years.

      In December 1999, the Company sold its 70% interest in Algas Marinas, its
Chilean Agar business, for approximately $27 million. The transaction resulted
in a pre-tax gain of approximately $16 million. This unit was included in the
Functional Products segment and contributed approximately $24 million of revenue
to this segment in 1999.

      On September 28, 2000, the Company sold its Food Gums business to CP
Kelco, a joint venture the Company entered into with Lehman Brothers Merchant
Banking Partners II, L.P., which contributed approximately $300 million in
equity. The Company received approximately $395 million in cash proceeds,
recorded certain selling and tax expenses of approximately $77 million and
retained a 28% equity position in CP Kelco. CP Kelco simultaneously acquired
Pharmacia's Kelco biogums business. The net proceeds from the sale of the Food
Gums business have been used to permanently reduce borrowings under Hercules'
senior credit facility. Food Gums had net sales of approximately $208 million in
1999.

      On May 1, 2001, the Company completed the sale of its hydrocarbon resins
business and select portions of its rosin resins business to a subsidiary of
Eastman Chemical Company, receiving proceeds of approximately $244 million. On
May 31, 2001, the Company completed the sale of its peroxy chemicals business to
GEO Specialty Chemicals, Inc., receiving proceeds of approximately $92 million.
Additionally, on May 25, 2001, the Company completed the sale of its interest in
Hercules - Sanyo, Inc., a toner resin joint venture, to Sanam Corporation, a
wholly owned subsidiary of Sanyo Chemicals Industries, Ltd., its joint venture
partner.

      The Company announced on February 12, 2002 that it has entered into an
agreement to sell the BetzDearborn Division businesses and certain Pulp and
Paper Division's treatment business (the "Water Treatment Business") to GE
Specialty Materials ("GESM"), a unit of General Electric Company. The Paper
Process Chemicals business, approximately one-third of the BetzDearborn company
purchased by Hercules in 1998, will remain with Hercules. In addition, Hercules
will have an agreement with GESM to distribute and service BetzDearborn's water
treatment products to the pulp and paper industry. This transaction is subject
to regulatory and other customary approvals, and is expected to close in the
second quarter of 2002. The purchase price is $1.8 billion in cash, with net
after tax proceeds available for debt reduction of approximately $1.665 billion.

2.    ACCOUNTS AND NOTES RECEIVABLE, NET

      Accounts and notes receivable, net, consists of:

<TABLE>
<CAPTION>
                                                 (Dollars in millions)
                                                     2001     2000
                                                     ----     ----
<S>                                                  <C>      <C>
      Trade                                          $463     $562
      Other                                            67       91
                                                     ----     ----
      Total                                           530      653
      Less allowance for doubtful accounts             24       27
                                                     ----     ----
                                                     $506     $626
                                                     ====     ====
</TABLE>


                                       42
<PAGE>


HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3.    INVENTORIES

      The components of inventories are:


<TABLE>
<CAPTION>
                                            (Dollars in millions)
                                               2001        2000
                                               ----        ----
<S>                                            <C>         <C>
      Finished products                        $127        $171
      Raw materials and work-in-process          85         108
      Supplies                                   21          26
                                               ----        ----
                                               $233        $305
                                               ====        ====
</TABLE>

      Inventories valued on the LIFO method were lower than if valued under the
average-cost method, which approximates current cost, by $20 and $31 million,
respectively, at December 31, 2001 and 2000. The average-cost basis of
inventories subject to LIFO was $100 million and $132 million at December 31,
2001 and 2000, respectively.

4.    INVESTMENTS

      Total equity investments in affiliated companies were $29 million at
December 31, 2001 and $40 million at December 31, 2000. As of December 31, 2000,
the Company retained a 28% equity position with a historical cost basis of $30
million in CP Kelco. The investment in CP Kelco at December 31, 2001 was $26
million.

      Other investments, at cost or less, were $14 million and $13 million at
December 31, 2001 and 2000, respectively. Included in these amounts are
non-current marketable securities aggregating $12 million for both years which
are classified as "available for sale." The value of these investments, based
upon market quotes, approximates book values.

5.    SHORT-TERM DEBT

      A summary of short-term debt follows:

<TABLE>
<CAPTION>
                                               (Dollars in millions)
                                                  2001        2000
                                                  ----        ----
<S>                                               <C>         <C>
      Banks                                       $  9        $118
      Current maturities of long-term debt         242         143
                                                  ----        ----
                                                  $251        $261
                                                  ====        ====
</TABLE>

      Bank borrowings represent primarily foreign overdraft facilities and
short-term lines of credit, which are generally payable on demand with interest
at various rates. Book values of bank borrowings approximate market value
because of their short maturity period.

      At December 31, 2001, Hercules had $42 million of unused short-term lines
of credit that may be drawn as needed, with interest at a negotiated spread over
lenders' cost of funds. However, actual availability for these lines of credit
is constrained by the Company's ability to meet covenants in its senior credit
facility. Weighted-average interest rates on short-term borrowings at December
31, 2001 and 2000 were 6.64% and 5.88%, respectively.

6.    LONG-TERM DEBT

      A summary of long-term debt follows:


                                       43
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                        (Dollars in millions)
                                                                            2001         2000
                                                                            ----         ----
<S>                                                                      <C>          <C>
      6.60% notes due 2027 (a)                                           $   100      $   100
      6.625% notes due 2003 (b)                                              125          125
      11.125% senior notes due 2007 (c)                                      400          400
      8% convertible subordinated debentures due 2010 (d)                      3            3
      Term loan tranche A due in varying amounts through 2003 (e)            543          875
      Term loan tranche D due 2005 (e)                                       372          375
      Revolving credit agreement due 2003 (e)                                516          437
      ESOP debt (f)                                                           84          101
      Term notes at various rates from 5.23% to 9.72% due in varying
            amounts through 2006 (g)                                          52           65
      Other                                                                    6            4
                                                                         -------      -------
                                                                         $ 2,201      $ 2,485
      Current maturities of long-term debt                                  (242)        (143)
                                                                         -------      -------
      Net long-term debt                                                 $ 1,959      $ 2,342
                                                                         =======      =======
</TABLE>

      (a)   30-year debentures with a 10-year put option, exercisable by
            bondholder at a redemption price equal to principal amount.

      (b)   Par value of $125 million issued June 1993.

      (c)   The senior notes accrue interest at 11 1/8% per annum, payable
            semi-annually. The senior notes are guaranteed by each of Hercules'
            current and future wholly owned domestic restricted subsidiaries. At
            any time prior to November 15, 2003, Hercules may on any one or more
            occasions, redeem up to 35% of the aggregate principal amount of the
            senior notes issued at a redemption price of 111.125% of the
            principal amount, plus accrued and unpaid interest and liquidated
            damages, if any, to the redemption date, with the net cash proceeds
            of one or more public equity offerings; provided that (i) at least
            65% of the aggregate principal amount of the senior notes issued
            under the indenture remains outstanding immediately after the
            occurrence of such redemption (excluding notes held by Hercules and
            its subsidiaries); and (ii) the redemption occurs within 45 days of
            the date of the closing of such public equity offering. Except as
            described above, the senior notes will not be redeemable at
            Hercules' option prior to maturity. Hercules is not required to make
            mandatory redemption or sinking fund payments with respect to senior
            notes. If a change of control occurs, each holder of the notes will
            have the right to require Hercules to repurchase all or any part of
            that Holder's notes pursuant to a change of control offer on the
            terms set forth in the indenture. In the change of control offer,
            Hercules will offer a change of control payment in cash equal to
            101% of the aggregate principal amount of the notes repurchased plus
            accrued and unpaid interest and liquidated damages, if any, on the
            notes repurchased, to the date of purchase. The notes were subject
            to a registration rights agreement that required Hercules to file an
            exchange offer registration statement with the Securities and
            Exchange Commission within 270 days (no later than August 11, 2001)
            and to use its best efforts to have the registration statement
            declared effective within 330 days. On August 9, 2001, Hercules
            filed a Registration Statement on Form S-4 with the Securities and
            Exchange Commission, pursuant to which the Company offered to
            exchange all of its $400 million aggregate principal amount of 11
            1/8% Senior Notes due 2007 ("old notes") for $400 million aggregate
            principal amount of 11 1/8% senior notes due 2007 ("new notes"). The
            form and terms of the new notes are the same as the form and terms
            of the old notes except that, because the issuance of the new notes
            is registered under the Securities Act, the new notes do not bear
            legends restricting their transfer and are not entitled to certain
            registration rights under the registration rights agreement. The new
            notes evidence the same debt as the old notes and the new notes and
            the old notes are governed by the same indenture. On October 31,
            2001, Hercules filed Amendment No. 1 to the Registration Statement
            on Form S-4 with the Securities and Exchange Commission and the
            Registration Statement became effective. Hercules did not receive
            any proceeds from the exchange offer. When the exchange offer
            expired on December 7, 2001, $375.3 million of the old notes had
            been tendered for a like amount of new notes.


                                       44
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      (d)   The convertible subordinated debentures are convertible into common
            stock at $14.90 per share and are redeemable at the option of the
            Company at varying rates. The annual sinking fund requirement of $5
            million, beginning in 1996, has been satisfied through conversions
            of debentures.

      (e)   The BetzDearborn acquisition was financed with borrowings under a
            $3,650 million credit facility with a syndicate of banks, and was
            consummated on October 15, 1998. The syndication included three
            tranches of varying maturity term loans totaling $2,750 million, of
            which $543 million was outstanding at year end 2001, and a $900
            million revolving credit agreement of which $516 million was
            outstanding at year end 2001. On April 19, 1999, the credit
            agreement was amended to allow borrowings in euros, as well as U.S.
            dollars. Approximately U.S. $950 million of term loan tranche A
            domestic borrowings were converted into indebtedness denominated in
            euros during the second quarter 1999. In addition, a Canadian
            subsidiary of the Company can borrow up to U.S. $100 million from
            select lenders in Canada in Canadian dollars that bears interest at
            Bankers' Acceptances Rate plus 2.75% at December 31, 2001. Interest
            rates are reset for one, three or six month periods at the Company's
            option. The Company's credit agreement contains various restrictive
            covenants that, among other things, require maintenance of certain
            financial covenants: leverage, net worth and interest coverage, and
            provides that the entry of judgment or judgments involving aggregate
            liabilities of $50 million or more be vacated, discharged, stayed or
            bonded pending appeal within 60 days of entry. Issuance costs
            related to the financing are included in deferred charges and other
            assets and are being amortized over the term of the loans, using the
            effective interest method. As of December 31, 2001, $292 million of
            the $900 million multi-currency revolver is available for use.
            However, actual availability under the revolving credit agreement is
            constrained by the Company's ability to meet covenants in its senior
            credit facility. At December 31, 2001, the Company's incremental
            borrowing capacity was $58 million. Effective November 14, 2000, the
            senior credit facility and the ESOP credit facility were amended to
            (i) modify certain financial covenants; (ii) change the mandatory
            prepayment provisions; and (iii) provide for security, among other
            things. The senior credit facility amendments were conditioned upon,
            among other things, the issuance by the Company of the 11 1/8%
            senior notes and term loan tranche D (described below). The
            amendment to the senior credit facility increased the interest rate
            on amounts outstanding under the revolving credit agreement and term
            loan tranche A to LIBOR + 2.25%. The senior credit facility and ESOP
            credit facility, as amended, are secured by liens on the Company's
            property and assets, a pledge of the stock of substantially all of
            Hercules' domestic subsidiaries and 65% of the stock of first tier
            foreign subsidiaries and a pledge of domestic intercompany
            indebtedness. In connection with the amendments to the senior credit
            facility and the ESOP credit facility, the 6.60% notes due 2027 and
            the 6.625% notes due 2003 were also secured as required by the
            indenture under which such notes were issued. On January 23, 2001,
            Hercules' corporate credit rating was downgraded by Standard &
            Poor's Rating Services to BB which resulted in an increase to the
            interest rates under the revolving credit agreement and term loan
            tranche A to LIBOR + 2.75% (5.03% at December 31, 2001). On November
            14, 2000, in conjunction with and conditioned upon the effectiveness
            of the amendment, the Company borrowed $375 million under the senior
            credit facility (term loan tranche D) and Hercules' issued $400
            million of 11 1/8% senior notes due 2007. Term loan tranche D
            initially bore interest at LIBOR + 2.75%, matures on November 15,
            2005, and will require only nominal principal payments prior to
            maturity. On January 23, 2001, the corporate credit rating downgrade
            by Standard & Poor's Rating Services resulted in an increase to the
            Company's interest rate on tranche D to LIBOR + 3.25% (5.87% at
            December 31, 2001). Due to the delay in closing the Eastman
            transaction, which in turn delayed the pay down of the debt, the
            Company's debt as of March 31, 2001 was significantly higher than
            planned. As a result, the Company would have been out of compliance
            with the debt/EBITDA ratio of its senior credit facility as of March
            31, 2001. In addition, due to the fact that the Company extended the
            filing date for the 2000 10-K, the Company's annual audited
            financial statements were not provided to the lenders by March 31,
            2001. On April 5, 2001, in consideration for the payment of a fee,
            the senior credit facility bank syndicate and ESOP lender granted
            waivers with respect to: (1) compliance with the debt/EBITDA ratio
            as of March 31, 2001 and (2) an extension of time to deliver the
            December 31, 2000 audited financial statements to April 17, 2001.
            These statements were delivered on April 17, 2001. With respect to
            the covenant regarding the debt/EBITDA ratio, the waiver required
            that the Eastman transaction be consummated on or before May 31,
            2001. In addition, the Company had to demonstrate, as of the last
            day of the month in which the Eastman transaction closed, that the
            leverage ratio did not exceed 4.75 to 1.00 after giving affect to
            the application of the net cash proceeds from the Eastman
            transaction to prepay portions of the tranche A term loan and the
            ESOP credit facility. The Company achieved this leverage ratio. The
            Eastman and Peroxide transactions closed in May 2001. In order to
            facilitate the


                                       45
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

            GE Transaction, the Company was required to obtain amendments to its
            senior credit facility and ESOP credit facilities (the
            "Facilities"). Effective March 6, 2002, Facilities were amended to
            (i) modify certain financial covenants (ii) change the mandatory
            prepayment provisions; (iii) permit the reorganization of the
            Company in order to effect the separation of the Water Treatment
            Business; and (iv) permanently reduce the revolving committed amount
            under the credit facility to $200 million. The amendment to the
            credit facility also included provisions that are effective only
            upon the consummation of the sale of the Water Treatment Business
            and the prepayment of the credit facility. These additional
            provisions include the following: (i) the release of the subsidiary
            stock pledged to the collateral agent; (ii) the elimination of the
            requirement that stock of any additional subsidiaries be pledged in
            the future; and (iii) the revision of the permitted amount of asset
            purchases and dispositions. If the GE Transaction does not close by
            July 15, 2002, the financial covenants set forth in the Fifth
            Amendment revert back to the previously established levels. While,
            as indicated above, the Company expects to remain in compliance with
            its debt covenants, current and future compliance is dependent upon
            generating sufficient EBITDA and cash flow which are, in turn,
            impacted by business performance, economic climate, competitive
            uncertainties and possibly the resolution of contingencies,
            including those set forth in Note 22 to the consolidated financial
            statements. In the event the Company is not in compliance with the
            debt covenants in the future it will pursue various alternatives,
            which may include, among other things, refinancing of debt, debt
            covenant amendments or debt covenant waivers. While the Company
            believes that it would be successful in pursuing these alternatives,
            there can be no assurance that the Company would be successful.

      (f)   The Company assumed a $94 million loan related to the BetzDearborn
            ESOP Trust. The proceeds of the loan were originally used by the
            ESOP Trust for the purchase of BetzDearborn preferred shares that,
            upon acquisition by Hercules, were converted into equivalent shares
            of Hercules common stock (see Note 10). The loan was recorded at a
            fair market value of $110 million at the date of acquisition, and
            the $16 million fair value step-up is being amortized over the term
            of the debt. The loan and guarantee mature in June 2009. Effective
            November 14, 2000, the senior credit facility and the ESOP credit
            facility were amended. The senior credit facility and ESOP credit
            facility, as amended, are secured by liens on the Company's property
            and assets, a pledge of the stock of substantially all of Hercules'
            domestic subsidiaries and 65% of the stock of first tier foreign
            subsidiaries and a pledge of domestic intercompany indebtedness.
            Effective with the third amendment, the interest rate was increased
            to 11.95%. Effective January 23, 2001, as a result of the lowered
            credit rating, the interest rate on the loan and guarantee increased
            to 12.95%. As a result of the Company's divestiture in May 2001 of
            its hydrocarbon resins business and select portions of its rosin
            resins business to a subsidiary of Eastman Chemical Company and its
            peroxy chemicals business to GEO Specialty Chemicals Inc., the
            Company was required to use a portion of the proceeds to prepay the
            ESOP credit facility. The Company paid $13 million against the loan
            principal, resulting in the incurrence of $5 million in pre-payment
            penalties which were expensed (see Note 16).

      (g)   Debt assumed in conjunction with the acquisition of FiberVisions
            L.L.C., net of repayments through December 31, 2001.

      Long-term debt maturities during the next five years are $242 million in
2002, $985 million in 2003, $23 million in 2004, $383 million in 2005 and $15
million in 2006.

7.    COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUSTS

Redeemable Hybrid INcome Overnight Shares

      In November 1998, Hercules Trust V, the Company's wholly owned
consolidated subsidiary, completed a private placement of $200 million
Redeemable Hybrid INcome Overnight Shares (RHINOS). The Company repaid the
RHINOS with a portion of the proceeds from the offering of 11 1/8% senior notes
on November 14, 2000.

Trust Originated Preferred Securities

      In March 1999, Hercules Trust I ("Trust I"), the Company's wholly owned
consolidated subsidiary trust, completed a $362 million underwritten public
offering of 14,500,000 shares of 9.42% Trust Originated Preferred Securities.
Trust I invested the proceeds from the sale of the preferred securities in an
equal principal amount of 9.42% Junior Subordinated Deferrable Interest
Debentures of Hercules due March 2029. The Company used these proceeds to repay
long-term debt.


                                       46
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Trust I distributes quarterly cash payments it receives from the Company
on the Debentures to preferred security holders at an annual rate of 9.42% on
the liquidation amount of $25 per preferred security. The Company may defer
interest payments on the debentures at any time, for up to 20 consecutive
quarters. If this occurs, Trust I will also defer distribution payments on the
preferred securities. The deferred distributions, however, will accumulate
distributions at a rate of 9.42% per annum.

      Trust I will redeem the preferred securities when the debentures are
repaid at maturity on March 31, 2029. The Company may redeem the Debentures, in
whole or, on or after March 17, 2004, in part, before their maturity at a price
equal to 100% of the principal amount of the debentures redeemed, plus accrued
interest. When the Company redeems any Debentures before their maturity, Trust I
will use the cash it receives to redeem preferred securities and common
securities as provided in the trust agreement. The Company guarantees the
obligations of Trust I on the preferred securities.

CRESTS Units

      In July 1999, the Company completed a public offering of 350,000 CRESTS
Units with Hercules Trust II, a wholly owned consolidated subsidiary trust
("Trust II"). This transaction provided net proceeds to the Company and Trust II
of $340.4 million. Each CRESTS Unit consists of one preferred security of Trust
II and one warrant to purchase 23.4192 shares of the Company's common stock at
an initial exercise price of $1,000 (equivalent to $42.70 per share). The
preferred security component of the CRESTS Units was initially valued at $741.46
per unit and the warrant component of the CRESTS Units was initially valued at
$258.54 per warrant. The preferred security and warrant components of each
CRESTS Unit may be separated and transferred independently. The warrants may be
exercised, subject to certain conditions, at any time before March 31, 2029,
unless there is a reset and remarketing event. No reset and remarketing event
will occur before July 27, 2004, unless all of its common stock is acquired in a
transaction that includes cash for a price above a predetermined level. Trust II
used the proceeds from the sale of its preferred securities to purchase junior
subordinated deferrable interest debentures of Hercules. As of December 31,
2001, no warrants had been exercised.

      The Company pays interest on the debentures, and Trust II pays
distributions on its preferred securities. Both are paid quarterly at an annual
rate of 6 1/2% of the scheduled liquidation amount of $1,000 per debenture
and/or preferred security until the scheduled maturity date and redemption date
of June 30, 2029, unless there is a reset and remarketing event. The Company
guarantees payments by Trust II on its preferred securities. Trust II must
redeem the preferred securities when the debentures are redeemed or repaid at
maturity.

      The Company used the proceeds from the CRESTS Units offering to repay
long-term debt. Issuance costs related to the preferred security component of
the CRESTS Units are being amortized over the life of the security and costs
related to the warrants were charged to additional paid-in capital.

Floating Rate Preferred Securities

      In December 1999, Hercules Trust VI, the Company's wholly owned
consolidated subsidiary trust ("Trust VI"), completed a $170 million private
offering of 170,000 shares of Floating Rate Preferred Securities. The Company
repaid the debentures with a portion of the proceeds from the offering of the 11
1/8% senior notes on December 29, 2000.

8.    SERIES PREFERRED STOCK

      There are 2,000,000 shares of series preferred stock without par value
authorized for issuance, none of which have been issued.

9.    COMMON STOCK

      Hercules common stock has a stated value of $25/48, and 300,000,000 shares
are authorized for issuance. At December 31, 2001, a total of 28,602,168 shares
were reserved for issuance for the following purposes: 71,190 shares for sales
to the Savings Plan Trustee; 18,892,273 shares for the exercise of awards under
the Stock Option Plan; 1,265,493 shares for awards under incentive compensation
plans; 176,492 shares for conversion of debentures and notes; and 8,196,720
shares for exercise of the warrant component of the CRESTS Units.

      For the Company's stock repurchase program, from its start in 1991 through
year-end 2001, the Board authorized the repurchase of up to 74,650,000 shares of
Company common stock. Of that total, 6,150,000 shares were intended to satisfy
requirements of various employee benefit programs. During this period, a total
of 66,858,726 shares of common stock were purchased in the open market at an
average price of $37.26 per share.


                                       47
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      In July 1999, Hercules completed a public offering of 5,000,000 shares of
its common stock, which provided the Company with proceeds of $171.5 million,
net of underwriting fees of $3.5 million. Hercules used the proceeds from the
common stock offering for the partial repayment of a term loan under its credit
facility. Issuance costs associated with the stock offering were charged to
additional paid-in capital.

10.   EMPLOYEE STOCK OWNERSHIP PLAN (ESOP)

      In connection with the acquisition of BetzDearborn in 1998, the Company
acquired BetzDearborn's ESOP and related trust as a long-term benefit for
substantially all of BetzDearborn's U.S. employees. The plan is a supplement to
BetzDearborn's 401(k) plan. The ESOP trust had long-term debt of $75 million and
$91 million at December 31, 2001 and 2000, respectively, which is guaranteed by
Hercules. Upon acquisition, the debt had a fair value in excess of its recorded
amount for which a $16 million step-up was recorded and is being amortized over
the remaining term of the debt. The fair value, included in long-term debt, was
$84 million and $101 million at December 31, 2001 and 2000, respectively. The
proceeds of the original loan were used to purchase BetzDearborn convertible
preferred stock, which, at the date of acquisition, was converted into Hercules
common stock.

      Under the provisions of the BetzDearborn 401(k) program, employees may
invest 2% to 15% of eligible compensation. The Company's matching contributions,
made in the form of Hercules common stock, are equal to 50% of the first 6% of
employee contributions, and fully vest to employees upon the completion of 5
years of service. The Company's matching contributions are included in ESOP
expense.

      The Company's contributions and dividends on the shares held by the trust
are used to repay the loan, and the shares are allocated to participants as the
principal and interest are paid. The Company's common stock dividends were
suspended during the fourth quarter of 2000. Long-term debt is reduced as
payments are made on the third party financing. In addition, unearned
compensation is also reduced as the shares are allocated to employees. The
unallocated shares held by the trust are reflected in unearned compensation as a
reduction in stockholders' equity on the balance sheet for $104 million and $115
million at December 31, 2001 and 2000, respectively.

<TABLE>
<CAPTION>
                                                   2001          2000
                                                   ----          ----
<S>                                             <C>           <C>
                  Allocated                     2,075,687     1,858,459
                  Unallocated                   3,228,690     3,582,334
                                                ---------     ---------
                  Total shares held by ESOP     5,304,377     5,440,793
                                                =========     =========
</TABLE>

      The ESOP expense is calculated using the shares-allocated method and
includes net interest incurred on the debt of $8 million and $6 million for 2001
and 2000, respectively. The Company is required to make quarterly contributions
to the plan, which enable the trust to service its indebtedness. Net ESOP
expense is comprised of the following elements:

<TABLE>
<CAPTION>
                                                                          (Dollars in millions)
                                                                           2001          2000          1999
                                                                           ----          ----          ----
<S>                                                                        <C>           <C>           <C>
            ESOP expense                                                   $ 19          $ 13          $ 13
            Common stock dividends (charged to retained earnings)            --            (3)           (6)
                                                                           ----          ----          ----
            Net ESOP expense                                               $ 19          $ 10          $  7
                                                                           ----          ----          ----
            ESOP Contributions                                             $ 15          $ 10          $  9
                                                                           ====          ====          ====
</TABLE>

11.   LONG-TERM INCENTIVE COMPENSATION PLANS

      The Company's long-term incentive compensation plans provide for the grant
of stock options and the award of common stock and other market-based units to
certain key employees and non-employee directors. Through 1994, shares of common
stock awarded under these plans normally were either restricted stock or
performance shares. During the restriction period, award holders have the rights
of stockholders, including the right to vote and receive cash dividends, but
they cannot transfer ownership.

      In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain


                                       48
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

programs. The number of awarded shares outstanding was
189,704 at December 31, 2001, and 491,488 and 926,689 at December 31, 2000 and
1999, respectively.

      At December 31, 2001, under the Company's incentive compensation plans,
1,265,493 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.

      Restricted shares, options and performance-accelerated stock options are
forfeited and revert to the Company in the event of employment termination,
except in the case of death, disability, retirement, or other specified events.

      The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. The cost of stock awards and other market-based units, which are charged
to income over the restriction or performance period, amounted to $2 million for
2001, $1 million for 2000 and $3 million for 1999.

      Below is a summary of outstanding stock option grants under the incentive
compensation plans during 1999, 2000 and 2001:

<TABLE>
<CAPTION>
                                      Regular                         Performance-Accelerated
                          --------------------------------        -------------------------------
                          Number of       Weighted-average        Number of      Weighted-average
                            Shares              Price               Shares             Price
                          --------------------------------        -------------------------------
<S>                       <C>             <C>                     <C>            <C>
December 31, 1998         6,351,278            $37.83             5,031,252           $46.12
Granted                   1,705,335            $37.49             1,079,455           $36.52
Exercised                   (94,275)           $22.07                    --               --
Forfeited                  (158,780)           $37.80               (99,866)          $44.41

December 31, 1999         7,803,558            $37.94             6,010,841           $44.42
Granted                   3,418,275            $16.75               187,500           $14.06
Exercised                   (28,500)           $11.83                    --               --
Forfeited                  (217,405)           $34.30               (38,916)          $42.31

December 31, 2000        10,975,928            $31.49             6,159,425           $43.51
Granted                   2,781,675            $11.60                    --               --
Exercised                   (44,400)           $15.01              (187,500)          $14.06
Forfeited                  (663,255)           $25.89              (129,600)          $43.61

December 31, 2001        13,049,948            $27.42             5,842,325           $44.45
</TABLE>

      The weighted-average fair value of regular stock options granted during
1999, 2000 and 2001 was $8.18, $7.19 and $5.91 respectively. The
weighted-average fair value of performance-accelerated stock options granted
during 1999 and 2000 was $7.82 and $5.86, respectively. There were no
performance-accelerated stock options granted during 2001.

      Following is a summary of regular stock options exercisable at December
31, 1999, 2000 and 2001, and their respective weighted-average share prices:

<TABLE>
<CAPTION>
                                          Number of       Weighted-average
                  Options Exercisable       Shares         Exercise Price
                  --------------------------------------------------------
<S>                                       <C>             <C>
                  December 31, 1999       4,651,273            $39.95
                  December 31, 2000       6,237,147            $38.43
                  December 31, 2001       9,297,983            $32.97
</TABLE>

      At December 31, 2000 and 2001, respectively, there were 50,000 and 75,000
performance-accelerated stock options exercisable at a weighted average exercise
price of $47.00 per share. There were no performance-accelerated stock options
exercisable at December 31, 1999.


                                       49
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Following is a summary of stock options outstanding at December 31, 2001:

<TABLE>
<CAPTION>
                                                            Outstanding Options                        Exercisable Options
                                          -----------------------------------------------------    --------------------------------
                                              Number        Weighted-average       Weighted-           Number          Weighted-
                                          Outstanding at       Remaining            average        Exercisable at       average
          Exercise Price Range               12/31/01       Contractual Life     Exercise Price       12/31/01       Exercise Price
-------------------------------------     -----------------------------------------------------    --------------------------------
<S>                                       <C>               <C>                  <C>               <C>               <C>
Regular Stock Options
$11.00 - $15.00                              3,310,800            9.40               $12.06             570,365          $14.13
$15.01 - $22.50                              2,708,313            7.97               $17.23           1,786,598          $17.23
$22.51 - $33.75                              1,762,400            6.27               $25.69           1,759,750          $25.68
$33.76 - $40.00                              3,196,910            6.09               $38.28           3,122,245          $38.30
$40.01 - $60.00                              2,071,525            4.77               $50.00           2,059,025          $50.00
                                            ----------                                                ---------
                                            13,049,948                                                9,297,983
                                            ==========                                                =========

Performance-Accelerated Stock Options
$24.00 - $36.00                                639,225            6.99               $31.73                  --              --
$36.01 - $45.01                              1,401,705            6.54               $38.37              75,000          $47.00
$45.01 - $50.00                              3,027,495            4.83               $47.10                  --              --
$50.01 - $61.00                                773,900            4.08               $55.64
                                            ----------                                                ---------
                                             5,842,325                                                   75,000
                                            ==========                                                =========
</TABLE>

      The Company currently expects that 100% of performance-accelerated stock
options will eventually vest.

      The Company's Employee Stock Purchase Plan was a qualified
non-compensatory plan, which allows eligible employees to acquire shares of
common stock through systematic payroll deductions. The plan consists of
three-month subscription periods, beginning July 1 of each year. The purchase
price is 85% of the fair market value of the common stock on either the first
or last day of that subscription period, whichever is lower. Purchases may
range from 2% to 15% of an employee's base salary each pay period, subject to
certain limitations. Shares issued at December 31, 2001 and 2000 under the
qualified plan were 1,758,081 and 1,597,861 respectively. Currently, there are
no shares of Hercules common stock registered for offer and sale under the
plan. The plan was converted to a non-qualified employee stock purchase plan in
2001 and the shares are funded from treasury stock. The shares issued under the
non-qualified plan totaled 385,255 at December 31, 2001. The Company applies
APB Opinion 25 and related interpretations in accounting for its Employee Stock
Purchase Plan. Accordingly, no compensation cost has been recognized for the
qualified Employee Stock Purchase Plan. The 15% discount on the purchase price
of the common stock has  been recognized as compensation expense for the
non-qualified Employee Stock  Purchase Plan.

      Had compensation cost for the Company's Stock-Based Incentive Plans and
Employee Stock Purchase Plan been determined on the basis of fair value
according to SFAS No. 123, the fair value of each option granted or share
purchased would be estimated on the grant date using the Black-Scholes option
pricing model.

      The following weighted-average assumptions would be used in estimating
fair value for 2001, 2000 and 1999:

<TABLE>
<CAPTION>
                                                              Performance        Employee Stock
            Assumption                 Regular Plan        Accelerated Plan      Purchase Plan
            ----------                 ------------        ----------------      -------------
<S>                                    <C>                 <C>                   <C>
            Dividend yield                  0.96%                3.83%                 0.0%
            Risk-free interest rate         5.80%                5.57%                4.86%
            Expected life                7.1 yrs.               5 yrs.               3 mos.
            Expected volatility            33.36%               29.78%               49.11%
</TABLE>


                                       50
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The Company's net (loss) income and (loss) earnings per share for 2001,
2000 and 1999 would approximate the pro forma amounts below:

<TABLE>
<CAPTION>
                                                      (Dollars in millions, except per share)
                                                         2001             2000            1999
                                                         ----             ----            ----
<S>                                                  <C>              <C>             <C>
            Net (loss) income
              As reported                            $    (58)        $     98        $    168
              Pro forma                              $    (78)        $     74        $    149
            Basic (loss) earnings per share
              As reported                            $  (0.54)        $   0.91        $   1.63
              Pro forma                              $  (0.73)        $   0.69        $   1.45
            Diluted (loss) earnings per share
              As reported                            $  (0.54)        $   0.91        $   1.62
              Pro forma                              $  (0.73)        $   0.69        $   1.44
</TABLE>

12.   ADDITIONAL BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
                                                             (Dollars in millions)
                                                                2001          2000
                                                                ----          ----
<S>                                                          <C>           <C>
            Property, plant and equipment
              Land                                           $    34       $    44
              Buildings and equipment                          2,133         2,394
              Construction in progress                            67           126
                                                             -------       -------
              Total                                            2,234         2,564
              Accumulated depreciation and amortization       (1,331)       (1,460)
                                                             -------       -------
              Property, plant and equipment, net             $   903       $ 1,104
                                                             =======       =======
</TABLE>

<TABLE>
<CAPTION>
                                                         (Dollars in millions)
                                                            2001      2000
                                                            ----      ----
<S>                                                         <C>       <C>
            Accrued expenses
              Payroll and employee benefits                 $ 60      $ 78
              Income taxes payable                           105        17
              Restructuring liability                         43        34
              Interest payable                                15        30
              Current portion of postretirement benefits      23        20
              Current portion of legal accrual                50        25
              Current portion of environmental accrual         9        24
              Other                                          158       174
                                                            ----      ----
                                                            $463      $402
                                                            ====      ====
</TABLE>


                                       51
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13.   GOODWILL AND OTHER INTANGIBLE ASSETS

      At December 31, 2001 and 2000, the goodwill and other intangible assets
were:

<TABLE>
<CAPTION>
                                                           (Dollars in millions)
                                                              2001          2000
                                                              ----          ----
<S>                                                        <C>           <C>
            Goodwill                                       $ 1,985       $ 2,022
            Customer relationships                             335           342
            Trademarks and tradenames                          255           260
            Other intangibles                                  205           209
                                                           -------       -------
            Total                                            2,780         2,833
            Less accumulated amortization                     (304)         (223)
                                                           -------       -------
              Goodwill and other intangible assets, net    $ 2,476       $ 2,610
                                                           =======       =======
</TABLE>

14.   RESTRUCTURING

      The consolidated balance sheet reflects liabilities for employee severance
benefits and other exit costs of $43 million and $34 million, respectively, at
December 31, 2001 and 2000. During the third quarter of 2001, management
authorized and committed to a plan to reduce the workforce as part of the
comprehensive cost reduction and work process redesign program. The Company
incurred restructuring charges of $45 million, which includes charges of $41
million for employee termination benefits and $4 million for exit costs related
to facility closures. During the fourth quarter of 2001, the estimate for
severance benefits and for exit costs related to facility closures increased $5
million and $1 million, respectively. Under this plan, approximately 975
employees have left or will leave the Company. The plan includes reductions
throughout the Company with the majority of them from support functions as well
as the Process Chemicals and Services segment.

      The restructuring liabilities also include amounts relating to the 1998
plan initiated upon the acquisition of BetzDearborn and additional plans that
the Company committed to in 2000 relating to the restructuring of the Process
Chemicals and Services segment and corporate realignment due to the divestiture
of non-core businesses. The total number of employee terminations relating to
the 1998 plan is 889. The total number of employee terminations relating to the
2000 plan is 212. Actions under the 1998 and 2000 plans were substantially
complete as of December 31, 2000 and December 31, 2001, respectively.

      Pursuant to the above plans, approximately 808 employees were terminated
during the year ended December 31, 2001. Cash payments during 2001 and 2000
included $25 million and $45 million, respectively, for severance benefits and
other exit costs. Severance benefits paid during the current year represent the
continuing benefit streams of previously terminated employees as well as those
terminated in the current year. During the second and third quarters of 2001,
the Company completed assessments of the remaining expenditures for the 1998
BetzDearborn plan and the 2000 plans, respectively. As a result of these
assessments, the estimates for severance benefits and other exit costs were
lowered by $17 million, with corresponding reductions to goodwill and expense of
$10 million and $7 million, respectively. The lower than planned severance
benefits are the result of higher than anticipated attrition, with voluntary
resignations not requiring the payment of termination benefits. A reconciliation
of activity with respect to the liabilities established for these plans is as
follows:

<TABLE>
<CAPTION>
                                                                              (Dollars in millions)
                                                                                 2001       2000
                                                                                 ----       ----
<S>                                                                              <C>        <C>
            Balance at beginning of year                                         $ 34       $ 77
                 Additional termination benefits and other exit costs              51         18
                 Cash payments                                                    (25)       (45)
                 Reversals against goodwill                                       (10)       (12)
                 Reversals against earnings                                        (7)        (4)
                                                                                 ----       ----
            Balance at end of year                                               $ 43       $ 34
                                                                                 ====       ====
</TABLE>


                                       52
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      The balance at the end of the period represents severance benefits and
other exit costs of which $35 million pertains to the 2001 restructuring plan,
$5 million pertains to the 1998 BetzDearborn plan which is being paid out over
multiple years and $3 million relates to other restructuring plans initiated in
2000.

15.   PENSION AND OTHER POSTRETIREMENT BENEFITS

The Company provides a defined benefit pension and postretirement benefit plans
to employees. Assets of the defined benefit plan are invested in domestic and
international corporate equity securities (including $6 million of Company
stock), domestic and international fixed income securities (including
governments, agencies, mortgages, asset backed, corporates) and various
derivative and money market securities. The following chart lists benefit
obligations, plan assets and funded status of the plans.


                                       53
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                             (Dollars in millions)

                                                                              Pension Benefits         Other Postretirement Benefits
                                                                           -----------------------     -----------------------------
                                                                             2001           2000             2001         2000
                                                                             ----           ----             ----         ----
<S>                                                                        <C>            <C>               <C>          <C>
CHANGE IN BENEFIT OBLIGATION
  Benefit obligation at January 1                                          $ 1,462        $ 1,381           $ 188        $ 181
  Service cost                                                                  25             26               1            1
  Interest cost                                                                104            105              14           14
  Amendments                                                                     6             --              --           (7)
  Assumption change                                                             --             71              --            8
  Settlements                                                                   --             (6)             --           --
  Divestiture                                                                  (45)            --              (2)          --
  Translation difference                                                       (10)           (16)             --           --
  Actuarial loss                                                                64             12              50           15
  Benefits paid from plan assets                                              (134)          (111)             --           (4)
  Benefits paid by company                                                      --             --             (25)         (20)
                                                                           -------        -------           -----        -----
Benefit obligation at December 31                                          $ 1,472        $ 1,462           $ 226        $ 188
                                                                           =======        =======           =====        =====

CHANGE IN PLAN ASSETS
  Fair value of plan assets at January 1                                   $ 1,571        $ 1,736               3        $   7
  Actual return on plan assets                                                 (95)           (44)             --           --
  Actuarial loss                                                               (27)            --              --           --
  Divestiture                                                                  (26)            --              --           --
  Company contributions                                                          4              9              --           --
  Settlements                                                                   --             (1)             --           --
  Translation difference                                                       (10)           (19)             --           --
  Plan participant contributions                                                 1             --              --           --
  Benefits paid from plan assets                                              (134)          (110)             (2)          (4)
                                                                           -------        -------           -----        -----
Fair value of plan assets at December 31                                   $ 1,284        $ 1,571           $   1        $   3
                                                                           =======        =======           =====        =====

Funded status of the plans                                                 $  (188)       $   109            (225)       $(185)
Unrecognized actuarial loss                                                    380             69             112           67
Unrecognized prior service cost (benefit)                                       32             32             (17)         (21)
Unrecognized net transition obligation                                           1              1              --           --
Amount included in accrued expenses- other                                      --             --              23           20
                                                                           -------        -------           -----        -----
Net amount recognized                                                      $   225        $   211           $(107)       $(119)
                                                                           =======        =======           =====        =====

AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION CONSIST OF:
Prepaid benefit cost                                                       $   268        $   245              --        $  --
Accrued benefit liability                                                      (53)           (34)           (107)        (119)
Deferred tax asset                                                               4
Accumulated other comprehensive income                                           6             --              --           --
                                                                           -------        -------           -----        -----
Net amount recognized                                                      $   225        $   211           $(107)       $(119)
                                                                           =======        =======           =====        =====
ASSUMPTIONS AS OF DECEMBER 31
Weighted-average discount rate                                                7.25%          7.50%           7.25%        7.50%
Expected return on plan assets                                                9.25%          9.25%           9.25%        9.25%
Rate of compensation increase                                                 4.50%          4.50%           4.50%        4.50%
</TABLE>


                                       54
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Net Periodic Benefit (Credit) Cost

<TABLE>
<CAPTION>
                                                   Pension Benefits           Other Postretirement Benefits
                                            ------------------------------    ------------------------------
                                             2001        2000        1999       2001       2000       1999
                                             ----        ----        ----       ----       ----       ----
<S>                                         <C>         <C>         <C>         <C>        <C>        <C>
      Service cost                          $  25       $  26       $  30       $  1       $  1       $  2
      Interest cost                           104         105          97         14         14         13
      Return on plan assets (expected)       (141)       (142)       (134)                   (1)        (1)
      Special termination benefits              2           4          --         --         --         --
      Amortization and deferrals                5           3           3         (1)        (2)        (2)
      Amortization of transition asset          2         (11)        (14)        --         --         --
                                            -----       -----       -----       ----       ----       ----
      Benefit (credit) cost                 $  (3)      $ (15)      $ (18)      $ 14       $ 12       $ 12
                                            =====       =====       =====       ====       ====       ====
</TABLE>

      At December 31, 2001, the funded benefits in the U.S. defined benefit
pension plan marginally exceeded the accumulated benefit obligation ("ABO") for
this plan. Based on current economic conditions and anticipated benefit
payments, it is reasonably possible the ABO will exceed the funded benefits at
December 31, 2002. If this occurs at December 31, 2002 (or at an earlier date if
an interim valuation is required), the Company will be required to recognize an
additional liability equal to the sum of such excess  plus the prepaid pension
asset balance, with a corresponding net-of-tax charge to other comprehensive
income in stockholders' equity. The prepaid pension asset balance for the U.S.
plan is approximately $250 million at December 31, 2001.

Other Postretirement Benefits

      The non-pension postretirement benefit plans are contributory health care
and life insurance plans. The assumed participation rate in these plans for
future eligible retirees was 60% for health care and 100% for life insurance. In
August 1993, a Voluntary Employees' Beneficiary Association Trust was
established and funded with $10 million of Company funds. The Company
periodically obtains reimbursement for union retiree claims, while other claims
are paid from Company assets. The participant contributions are immediately used
to cover claim payments, and for this reason do not appear as contributions to
plan assets.

      The assumed health care cost trend rate was 7.0% for the year ended
December 31, 2001. The assumed health care cost trend rate was 8.0% for the year
ended December 31, 2000 and 4.5% for the year ended December 31, 1999. The
assumed health care cost trend rate will be 10% in 2002, decreasing to 4.5% by
2006 and for all subsequent years.

      A one-percentage point increase or decrease in the assumed health care
cost trend rate would increase or decrease the postretirement benefit obligation
by $6 million either way, and would not have a material effect on aggregate
service and interest cost components.

      As of December 31, 2001, Hercules recognized an additional minimum
liability of $6 million, net of tax, attributable to the nonqualified pension
plan.

16. OTHER OPERATING (INCOME) EXPENSES, NET

      Other operating (income) expense, net, in 2001 includes $74 million in net
gains from the sale of the Company's hydrocarbon resins business, select
portions of its rosin resins business, its peroxy chemicals business and its 50%
interest in Hercules-Sanyo, Inc. In addition, a pension curtailment gain of $5
million was recognized related to the divestiture of the Company's hydrocarbon
resins business and select portions of its rosins resins business. As a result
of resolving issues relating to a prior year business divestiture, an additional
gain of $5 million was recognized. The Company incurred $51 million in
restructuring charges associated with the comprehensive cost reduction and work
process redesign program (see Note 14). Partially offsetting these restructuring
charges was $5 million of reversals pertaining to prior year plans.

      In addition, the Company recognized $10 million in net environmental
expense, $5 million of executive severance charges, $5 million in pre-payment
penalties relating to the ESOP credit facility, $3 million in non-recurring fees
related to the 2001 proxy contest and other matters and $4 million for other
items.

      Other operating (income) expenses, net, in 2000 includes a gain of $168
million from the sale of the Food Gums business. On September 28, 2000, the
Company sold its Food Gums business to CP Kelco, a joint venture with Lehman
Brothers Merchant Banking Partners II, L.P., which contributed approximately
$300 million in equity. The Company received approximately $395 million in cash
proceeds, recorded certain selling and tax expenses of approximately $77


                                       55
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

million and retained a 28% equity position in CP Kelco. CP Kelco simultaneously
acquired Kelco biogums business of Pharmacia Corporation (formerly Monsanto
Corporation).

      Partially offsetting the gain from the sale of the Food Gums business is
$66 million of charges for asset impairments and write-offs, primarily in the
FiberVisions business. Restructuring charges of $18 million, including $4
million (below) related to the nitrocellulose divestiture, were incurred for
2000 plans, primarily relating to severance and termination benefits for
approximately 212 employee terminations in its Process Chemicals and Services
segment and corporate realignment due to the divestitures of its non-core
businesses (Food Gums, Resins and nitrocellulose). Offsetting these
restructuring charges was $4 million of reversals relating to prior year plans.
Environmental charges of $8 million were incurred, offset by $11 million in
recoveries of insurance for environmental claims. Additionally, the Company
incurred a loss of $25 million, including $4 million for severance and
termination benefits (see Note 14), associated with the sale of the
nitrocellulose business, and $5 million associated with the integration of the
BetzDearborn acquisition. Also reflected in 2000 are $16 million of severance
benefits and compensation expense not associated with restructuring plans and $1
million for other items. The asset impairments were triggered by significantly
higher raw material costs and the loss of a facility's major customer.

      Other operating expenses (income), net, in 1999 included integration
charges of $36 million, primarily for employee incentive and retention,
consulting, legal and other costs associated with the BetzDearborn acquisition.
During 1999, the Company recognized charges of approximately $36 million related
to a legal settlement and asset write-downs and disposal costs including
impairment losses of approximately $16 million in the Chemical Specialties
segment. Additionally, the Company recognized an additional $3 million of
severance benefits under a plan to terminate approximately 20 employees,
primarily manufacturing personnel (see Note 14). The asset write-down and
severance charges were incurred primarily as a result of the decisions to exit
the nitrocellulose business and rationalize assets in the resins business, which
will no longer be utilized. Also during 1999, the Company realized a $16 million
gain on the sale of its Agar business, a $6 million net environmental insurance
recovery, $4 million reversal of restructuring charges and $2 million for other
items.

17.   INTEREST AND DEBT EXPENSE

      Interest and debt costs are summarized as follows:

<TABLE>
<CAPTION>
                                      (Dollars in millions)
                                    2001      2000      1999
                                    ----      ----      ----
<S>                                 <C>       <C>       <C>
            Costs incurred          $199      $175      $197
            Amount capitalized         3        11        12
                                    ----      ----      ----
            Amount expensed         $196      $164      $185
                                    ====      ====      ====
</TABLE>

18.   OTHER EXPENSE, NET

      Other expense, net, consists of the following:

<TABLE>
<CAPTION>
                                                  (Dollars in millions)
                                               2001       2000       1999
                                               ----       ----       ----
<S>                                            <C>        <C>        <C>
      Net (gains) losses on dispositions       $ (3)      $  1       $(10)
      Legal settlements and accruals, net        16         10          7
      Minority interests                         (1)        --          2
      Exchange and translation                   (6)        (1)         1
      Other, net                                  4          8          2
                                               ----       ----       ----
                                               $ 10       $ 18       $  2
                                               ====       ====       ====
</TABLE>

      Net gains (losses) on dispositions include a $3 million gain from the sale
of the country club in 2001, a loss of $1 million from the sale of non-operating
real estate and other investments in 2000 and gains of $10 million in 1999.
Legal settlements and accruals in all years primarily represent certain other
legal expenses and settlements associated with former operations of the Company.


                                       56
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

19.   INCOME TAXES

      The domestic and foreign components of income before taxes and equity
(loss) income are presented below:

<TABLE>
<CAPTION>
                              (Dollars in millions)
                           2001        2000       1999
                           ----        ----       ----
<S>                       <C>         <C>         <C>
            Domestic      $ (99)      $ (15)      $  3
            Foreign         122         181        239
                          -----       -----       ----
                          $  23       $ 166       $242
                          =====       =====       ====
</TABLE>

      A summary of the components of the tax provision follows:

<TABLE>
<CAPTION>
                                               (Dollars in millions)
                                            2001       2000       1999
                                            ----       ----       ----
<S>                                         <C>        <C>        <C>
            Currently payable
              U.S. federal                  $ 69       $ 14       $(25)
              Foreign                         58         70         82
              State                           13          4         (4)
            Deferred
              Domestic                       (60)       (21)        15
              Foreign                         (8)        (1)         7
                                            ----       ----       ----
            Provision for income taxes      $ 72       $ 66       $ 75
                                            ====       ====       ====
</TABLE>

      Deferred tax liabilities (assets) at December 31 consisted of:

<TABLE>
<CAPTION>
                                                           (Dollars in millions)
                                                              2001        2000
                                                              ----        ----
<S>                                                          <C>         <C>
            Depreciation                                     $ 230       $ 232
            Prepaid pension                                     80          68
            Inventory                                            7          11
            Investments                                         48          88
            Goodwill                                           214         219
            Other                                               90          79
                                                             -----       -----
            Gross deferred tax liabilities                   $ 669       $ 697
                                                             -----       -----

            Postretirement benefits other than pensions      $ (68)      $ (70)
            Accrued expenses                                  (204)       (172)
            Loss carryforwards                                 (34)        (10)
            Other                                              (93)       (104)
                                                             -----       -----
            Gross deferred tax assets                         (399)       (356)
                                                             -----       -----
            Valuation allowance                                 37          28
                                                             -----       -----
                                                             $ 307       $ 369
                                                             =====       =====
</TABLE>


                                       57
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      A reconciliation of the U.S. statutory income tax rate to the effective
rate follows:

<TABLE>
<CAPTION>
                                                                          2001       2000       1999
                                                                          ----       ----       ----
<S>                                                                       <C>        <C>        <C>
      U.S.  statutory income tax rate                                       35%        35%        35%
      Goodwill amortization                                                103         14          9
      Valuation allowances                                                  49          3         (7)
      Research and development credits                                      --         (6)        --
      Tax rate differences on subsidiary earnings                          (42)        (5)        --
      Incremental tax on cash repatriations from non-US subsidiaries        24          2          3
      State taxes                                                           11          2         (2)
      Reserves                                                             129         (6)        (6)
      Other                                                                  1          1         (1)
                                                                          -----       ---        ---
      Effective tax rate                                                   310%        40%        31%
                                                                          =====       ===        ===
</TABLE>

      The net operating losses have indefinite carryforward periods, but may be
limited in their use in any given year.

      The Company provides taxes on undistributed earnings of subsidiaries and
affiliates to the extent such earnings are planned to be remitted and not
reinvested permanently. The undistributed earnings of subsidiaries and
affiliates on which no provision for foreign withholding or U.S. income taxes
has been made amounted to approximately $227 million and $246 million at
December 31, 2001 and 2000, respectively. U.S. and foreign income taxes that
would be payable if such earnings were distributed may be lower than the amount
computed at the U.S. statutory rate because of the availability of tax credits.

20.   EARNINGS PER SHARE

The following table shows the amounts used in computing earnings per share and
the effect on income and the weighted-average number of shares of dilutive
common stock:

<TABLE>
<CAPTION>
                                              (Dollars in millions, except per share)
                                                   2001           2000          1999
                                                   ----           ----          ----
<S>                                            <C>            <C>           <C>
      BASIC EPS COMPUTATION:
      Net (loss) income                        $    (58)      $     98      $    168
                                               ========       ========      ========

      Weighted-average shares outstanding         108.2          107.2         103.2
                                               --------       --------      --------

      (Loss) earnings per share                $  (0.54)      $   0.91      $   1.63
                                               ========       ========      ========

      DILUTED EPS COMPUTATION:
      Net (loss) income                        $    (58)      $     98      $    168
                                               ========       ========      ========

      Weighted-average shares outstanding         108.2          107.2         103.2
      Options                                       0.0            0.0           0.4
      Convertible debentures                        0.0            0.2           0.3
                                               --------       --------      --------
      Adjusted weighted-average shares            108.2          107.4         103.9
                                               ========       ========      ========

      (Loss) earnings per share                $  (0.54)      $   0.91      $   1.62
                                               ========       ========      ========
</TABLE>


                                       58
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

21.   DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

      The Company enters into forward-exchange contracts and currency swaps to
reduce currency exposure. The Company used interest rate swap agreements to
manage interest costs and risks associated with changing rates.

Notional Amounts and Credit Exposure of Derivatives

      The notional amounts of the derivative contracts summarized below do not
represent the amounts exchanged by the parties involved, and, thus, are not a
measure of the Company's exposure to various risks through its use of
derivatives. The amounts exchanged by the parties are calculated on the basis of
the notional amounts, underlyings such as interest rates and exchange rates, and
other terms of the derivative contracts.

Interest Rate Risk Management

      The aggregate notional principal amount for interest rate swaps at the end
of 2001 and 2000 was $20 million for both years. These swaps act as a hedge
against the Company's interest rate exposure on its outstanding variable rate
debt.

      During 2000, the interest rate swap portfolio, which replaced variable
rate debt with fixed rate debt, was substantially terminated due to the
conversion of foreign denominated debt to U.S. dollar denominated debt in the
first half of 2000 and the November 2000 debt restructuring.

      The following table indicates the types of swaps used and their
weighted-average interest rates:

<TABLE>
<CAPTION>
                  (Dollars in millions)                                    2001          2000
                  ------------------------------------------------         ----          ----
<S>                                                                     <C>           <C>
                  Pay fixed on swaps notional amount (at year-end)      $    20       $    20
                  Average pay rate                                          6.2%          6.2%
                  Average receive rate                                      4.4%          4.3%
</TABLE>

Foreign Exchange Risk Management

      The Company has selectively used foreign currency forward contracts and
currency swaps to offset the effects of exchange rate changes on reported
earnings, cash flow, and net asset positions. The primary exposures are
denominated in the Euro, Swedish kroner and British pound sterling. Some of the
contracts involve the exchange of two foreign currencies, according to local
needs in foreign subsidiaries. The term of the currency derivatives is rarely
more than three months. At December 31, 2001 and 2000, the Company had
outstanding forward-exchange contracts to purchase foreign currencies
aggregating $8 million and $19 million and to sell foreign currencies
aggregating $24 million and $39 million, respectively. Non-U.S. dollar
cross-currency trades aggregated $222 million and $188 million at December 31,
2001 and 2000, respectively. The foreign exchange contracts outstanding at
December 31, 2001 will mature by March 31, 2002.


                                       59
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Fair Values

      The following table presents the carrying amounts and fair values of the
Company's financial instruments at December 31, 2001 and 2000:

<TABLE>
<CAPTION>
                                                                               (Dollars in millions)
                                                                 ---------------------------------------------------
                                                                          2001                        2000
                                                                 ---------------------------------------------------
                                                                 Carrying                    Carrying
                                                                  Amount      Fair Value      Amount      Fair Value
                                                                 ---------------------------------------------------
<S>                                                              <C>          <C>            <C>          <C>
Investment securities (available for sale)                       $    11       $    12       $    11       $    11
Long-term debt                                                    (1,959)       (1,948)       (2,342)       (2,325)
Company-obligated preferred securities of subsidiary trusts         (624)         (408)         (622)         (492)
Foreign exchange contracts                                            --            --            (1)           (1)
Interest rate swap contracts                                          --            (1)           --            --
</TABLE>

      Fair values of derivative contracts are indicative of cash that would have
been required had settlement been made at December 31, 2001 and 2000.

Basis of Valuation

-     Investment securities: Quoted market prices.
-     Long-term debt: Present value of expected cash flows related to existing
      borrowings discounted at rates currently available to the Company for
      long-term borrowings with similar terms and remaining maturities.
-     Company obligated preferred securities of subsidiary trusts: Year-end
      interest rates and Company common stock price.
-     Foreign exchange contracts: Year-end exchange rates.
-     Currency swaps: Year-end interest and exchange rates.
-     Interest rate swap contracts: Bank or market quotes or discounted cash
      flows using year-end interest rates.


                                       60
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

22.   COMMITMENTS AND CONTINGENCIES

Leases

      Hercules has operating leases (including office space, transportation and
data processing equipment) expiring at various dates. Rental expense was $56
million in 2001, $57 million in 2000 and $55 million in 1999.

      At December 31, 2001, minimum rental payments under noncancelable leases
aggregated $251 million with subleases of $23 million. A significant portion of
these payments relates to a long-term operating lease for corporate office
facilities. The net minimum payments over the next five years are $40 million in
2002, $31 million in 2003, $25 million in 2004, $18 million in 2005 and $16
million in 2006.

Environmental

      In the ordinary course of its business, the Company is subject to numerous
environmental laws and regulations covering compliance matters or imposing
liability for the costs of, and damages resulting from, cleaning up sites, past
spills, disposals and other releases of hazardous substances. Changes in these
laws and regulations may have a material adverse effect on the Company's
financial position and results of operations. Any failure by the Company to
adequately comply with such laws and regulations could subject the Company to
significant future liabilities.

      Hercules has been identified as a potentially responsible party (PRP) by
U.S. federal and state authorities, or by private parties seeking contribution,
for the cost of environmental investigation and/or cleanup at numerous sites.
The estimated range of the reasonably possible share of costs for the
investigation and cleanup is between $81 million and $256 million. The Company
believes that the actual cost will more likely approximate $81 million based on
its estimation methods and prior experience. The actual costs will depend
upon numerous factors, including the number of parties found responsible at each
environmental site and their ability to pay; the actual methods of remediation
required or agreed to; outcomes of negotiations with regulatory authorities;
outcomes of litigation; changes in environmental laws and regulations;
technological developments; and the years of remedial activity required, which
could range from 0 to 30 years.

      Hercules becomes aware of sites in which it may be named a PRP in
investigatory and/or remedial activities through correspondence from the U.S.
Environmental Protection Agency or other government agencies or from previously
named PRPs, who either request information or notify the Company of its
potential liability. The Company has established procedures for identifying
environmental issues at its plant sites. In addition to environmental audit
programs, the Company has environmental coordinators who are familiar with
environmental laws and regulations and act as a resource for identifying
environmental issues.

      United States, et al. v. Vertac Corporation, et al., USDC No. LR-C-80-109
and LR-C-80-110 (E.D. Ark.)

      This case, a cost-recovery action based upon the Comprehensive
Environmental Response, Compensation and Liability Act (CERCLA, or the Superfund
statute), as well as other statutes, has been pending since 1980, and involves
liability for costs expended and to be expended in connection with the
investigation and remediation of the Vertac Chemical Company (Vertac) site in
Jacksonville, Arkansas. Hercules owned and operated the site from December 1961
until 1971. The site was used for the manufacture of certain herbicides and, at
the order of the United States, Agent Orange. In 1971, the site was leased to
Vertac's predecessor. In 1976, Hercules sold the site to Vertac. The site was
abandoned by Vertac in 1987, and Vertac was subsequently placed into
receivership by the Court. Both prior to and following the abandonment of the
site, the U.S. Environmental Protection Agency (EPA) and the Arkansas Department
of Pollution Control and Ecology (ADPC&E) were involved in the investigation and
remediation of contamination at and around the site. Pursuant to several orders
issued pursuant to CERCLA, Hercules actively participated in many of these
activities. The cleanup is essentially complete, except for certain on-going
maintenance and monitoring activities. This litigation primarily concerns the
responsibility for and the allocation of liability for the costs incurred in
connection with these activities.

      Although the case initially involved many parties, as a result of various
United States District Court rulings and decisions, as well as a trial, Hercules
and Uniroyal were held jointly and severally liable for the approximately $100
million


                                       61
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

in costs allegedly incurred by the EPA, as well as costs to be incurred in the
future. That decision was made final by the District Court on September 13,
1999. Both Hercules and Uniroyal timely appealed that judgment to the United
States Court of Appeals for the Eighth Circuit.

      On February 8, 2000, the District Court issued a final judgment on the
allocation between Hercules and Uniroyal finding Uniroyal liable for 2.6 percent
and Hercules liable for 97.4 percent of the costs at issue. Hercules timely
appealed that judgment. Oral argument in both appeals was held before the Eighth
Circuit on June 12, 2000.

      On April 10, 2001, the United States Court of Appeals for the Eighth
Circuit issued an opinion in the consolidated appeals described above. In that
opinion, the Appeals Court reversed the District Court's decision which had held
Hercules jointly and severally liable for costs incurred and to be incurred at
the Jacksonville site, and remanded the case back to the District Court for a
determination of whether the harms at the site giving rise to the government's
claims were divisible, as well as other findings of the District Court. The
Appeals Court also vacated the District Court's allocation decision holding
Hercules liable for 97.4 percent of the costs at issue, ordering that these
issues be revisited following further proceedings with respect to divisibility.
Finally, the Appeals Court affirmed the judgment of liability against Uniroyal.

      The trial on remand commenced on October 8, 2001 and continued through
October 19, 2001, and resumed on December 11, 2001, concluding on December 14,
2001. At the trial, the Company presented both facts and law to the District
Court in support of its belief that the Company should not be liable under
CERCLA for some or all of the costs incurred by the government in connection
with the site because those harms are divisible. Should the Company prevail on
remand, any liability to the government will be either eliminated or reduced.

      Hercules Incorporated v. Aetna Casualty & Surety Company, et al., Del.
      Super., C.A. No. 92C-10-105 and 90C-FE-195-1-CV (consolidated)

      In 1992, Hercules brought suit against its insurance carriers for past and
future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas, site (see
discussion above) was completed. The jury returned a "Special Verdict Form" with
findings that, in conjunction with the Court's other opinions, were used by the
Court to enter a judgment in August 1999. The judgment determined the amount of
Hercules' recovery for past cleanup expenditures and stated that Hercules is
entitled to similar coverage for costs incurred since September 30, 1997 and in
the future. Hercules has not included any insurance recovery in the estimated
range of costs above. Since entry of the Court's August 1999 order, Hercules has
entered into settlement agreements with several of its insurance carriers and
has recovered certain settlement monies. The terms of those settlements and
amounts recovered are confidential. On August 15, 2001, the Delaware Supreme
Court issued a decision in Hercules Incorporated v. Aetna Casualty & Surety
Company, et al., Del. Super., C.A. No. 92C-10-105 and 90C-FE-195-1-CV
(consolidated). In its decision, the Delaware Supreme Court affirmed the trial
court in part, reversed the trial court in part and remanded the case for
further proceedings. The specific basis upon which the Delaware Supreme Court
reversed the trial court was the trial court's application of pro rata
allocation to determine the extent of the insurers' liability. At this time,
proceedings at the trial court have not yet commenced. The Allegany Ballistics
Laboratory ("ABL") is a government owned facility which was operated by Hercules
from 1945 to 1995. The United States Department of the Navy has notified
Hercules that the Navy would like to negotiate with Hercules with respect to
certain environmental liabilities which, the Navy alleges, are attributable to
Hercules' past operations at ABL. The Navy alleges that, pursuant to CERCLA, it
has spent a total of $24.8 million and that it expects to spend an additional
$60 million over the next 10 years. The Company is currently investigating the
Navy's allegations, including the basis of the Navy's claims, and whether the
Company's contracts with the government pursuant to which the Company operated
ABL may insulate the Company from some or all of the amounts sought. At this
time, however, the Company cannot reasonably estimate its liability, if any,
with respect to ABL and, accordingly, has not included this site in the range of
its environmental liabilities reported above.

      At December 31, 2001, the accrued liability of $81 million for
environmental remediation represents management's best estimate of the probable
and reasonably estimable costs related to environmental remediation. The extent
of liability is evaluated quarterly. The measurement of the liability is
evaluated based on currently available information, including the progress of
remedial investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules, and the resolution of any of these matters during a specific period
could have a material effect on the quarterly or annual operating results of
that period.


                                       62
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Litigation

      The Company is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to asbestos
fibers from resin-encapsulated pipe and tank products which were sold by one of
the Company's former subsidiaries to a limited industrial market ("products
claims"). The Company is also a defendant in lawsuits alleging exposure to
asbestos at facilities formerly or presently owned or operated by the Company
("premises claims"). Claims are received and settled or otherwise resolved on a
regular basis. In late December 1999, the Company entered into a settlement
agreement to resolve the majority of the claims then pending. In connection with
that settlement, the Company also entered into an agreement with several of the
insurance carriers which sold that former subsidiary primary and first level
excess insurance policies. Under the terms of that agreement, the majority of
the amounts paid to resolve those products claims will be insured, subject to
the limits of the insurance coverage provided by those policies. The terms of
both settlement agreements are confidential.

      Since entering into those agreements, the Company has continued to receive
and settle or otherwise resolve claims on a regular basis, with the number of
new claims averaging approximately 2,200 per year during the past two years. As
of February 2002, the Company had pending approximately 5,170 unresolved claims,
of which approximately 625 are premises claims. In addition, as of February
2002, there were pending approximately 5,830 unpaid claims which have been
settled or are subject to the terms of a settlement agreement. In accordance
with the terms of the previously mentioned agreement with several insurance
carriers, as well as agreements with two other excess insurance carriers, the
majority of the amounts paid and to be paid to resolve those claims will be
insured.

      The Company anticipates that the primary and first level excess insurance
policies referenced above will exhaust over the next 12 to 24 months, assuming
that the rate of settlements and payments remains relatively consistent with the
Company's past experience. Nonetheless, based on the current number of claims
pending, the amounts the Company presently pays to resolve those claims, and
anticipated future claims (the Company's assumption being that the number of
future claims filed per year and claim resolution payments remain relatively
consistent with the Company's past experience, and that these matters cease to
be an ongoing liability after ten years), the Company believes that it and its
former subsidiary together have sufficient additional insurance to cover the
majority of its current and future asbestos-related liabilities. The Company is
seeking defense and indemnity payments or an agreement to pay from those
carriers responsible for excess coverage whose levels of coverage have been or
will soon be reached. Although those excess carriers have not yet agreed to
defend or indemnify it, the Company believes that it is likely that they will
ultimately agree to do so, and that the majority of future asbestos related
costs will ultimately be paid or reimbursed by those carriers. However, if the
Company is not able to reach satisfactory agreements with those carriers prior
to exhaustion of the primary and first level excess insurance policies now
covering the majority of its current asbestos related claims, then beginning as
early as sometime in 2003, the Company might be required to completely fund
these matters while it seeks reimbursement from its carriers.

      Based on the assumptions set forth in the preceding paragraph, the
reasonably possible future financial exposure for these matters is estimated to
be less than $200 million. As stated above, the Company presently believes that
the majority of this financial exposure will be funded by insurance proceeds.
Cash payments related to this exposure are expected to be made over an extended
number of years.

      Due to the dynamic nature of asbestos litigation and the present
uncertainty concerning the participation of its excess insurance carriers,
however, the Company's estimates are inherently uncertain, and these matters may
present significantly greater and longer lasting financial exposures than
presently anticipated. As a result, the Company's liability with respect to
asbestos-related matters could exceed the amount noted above. If the Company's
liability does exceed that amount, the Company presently believes that the
majority of any additional liability it may reasonably anticipate will be paid
or reimbursed by its insurance carriers.

      The Company has estimated and therefore recorded a gross liability for
asbestos-related matters in its December 31, 2001 balance sheet of $80 million.
The Company believes that it is probable that $66 million of that amount will be
funded by or recovered from insurance carriers. Accordingly, the Company has
recorded an asset in this amount in its December 31, 2001 balance sheet.

      In June 1998, Hercules and David T. Smith Jr., a former Hercules employee
and a former plant manager at the Brunswick plant, along with Georgia-Pacific
Corporation and AlliedSignal Inc., were sued in Georgia State Court by 423
plaintiffs for alleged personal injuries and property damage. This litigation is
captioned Coley, et al. v. Hercules Incorporated, et al., No. 98 VSO 140933 B
(Fulton County, Georgia). Plaintiffs allege they were damaged by the discharge
of hazardous waste from the companies' plants. On February 11, 2000, the Georgia
State Court dismissed Georgia-Pacific Corporation and AlliedSignal Inc., without
prejudice. In September 2000, David T. Smith Jr., was dismissed by the Georgia


                                       63
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

State Court with prejudice. On July 18, 2000, the Company was served with a
complaint in a case captioned Erica Nicole Sullivan, et al. v. Hercules
Incorporated and David T. Smith, Jr., Civil Action File No. 00-1-05463-99 (Cobb
County, Georgia). Based on the allegations contained in the complaint, this
matter is very similar to the Coley litigation, and is brought on behalf of
approximately 700 plaintiffs for alleged personal injury and property damage
arising from the discharge of hazardous waste from Hercules' plant. Although
venue had been removed to the United States District Court for the Northern
District of Georgia, the case was ultimately remanded back to state court. Both
the Coley and Erica Nicole Sullivan cases are in the early stages of motion
practice and discovery. The Company denies any liability to plaintiffs, and it
will vigorously defend both of these cases.

      In August 1999, the Company was sued in an action styled as Cape
Composites, Inc. v. Mitsubishi Rayon Co., Ltd., Case No. 99-08260 (U.S. District
Court, Central District of California), one of a series of similar purported
class action lawsuits brought on behalf of purchasers (excluding government
purchasers) of carbon fiber and carbon prepreg in the United States from the
named defendants from January 1, 1993 through January 31, 1999. The lawsuits
were brought following published reports of a Los Angeles federal grand jury
investigation of the carbon fiber and carbon prepreg industries. In these
lawsuits, plaintiffs allege violations of Section 1 of the Sherman Antitrust Act
for alleged price fixing. In September 1999, these lawsuits were consolidated by
the Court into a case captioned Thomas & Thomas Rodmakers v. Newport Adhesives
and Composites, Case No. CV-99-07796-GHK (CTx) (U.S. District Court, Central
District of California), with all related cases ordered dismissed. This lawsuit
is in the early stages of motion practice and discovery. On March 11, 2002, the
Court tentatively granted plaintiffs' motion to Certify Class. The Company is
named in connection with its former Composites Products Division, which was sold
to Hexcel Corporation in 1996, has denied liability and will vigorously defend
this action.

      Beginning in September 2001, Hercules, along with the other defendants in
the Thomas & Thomas Rodmakers action referred to above, has been sued in nine
California state court purported class actions brought on behalf of indirect
purchasers of carbon fiber. In January 2002, these were consolidated into a case
captioned Carbon Fiber Cases I, II, and III, Judicial Council Coordination
Proceedings Nos. 4212, 4216 and 4222, Superior Court of California, County of
San Francisco. These actions all allege violations of the California Business
and Professions Code relating to alleged price fixing of carbon fiber and unfair
competition. The Company denies liability and will vigorously defend each of
these actions.

      In connection with the grand jury investigation noted above, in January
2000, the United States Department of Justice (DOJ), Antitrust Division, served
a grand jury subpoena duces tecum upon Hercules. The Company has been advised
that it is one of several manufacturers of carbon fiber and carbon prepreg that
have been served with such a subpoena.

      In December 1999, an action was filed in the U.S. District Court for the
Eastern District of Pennsylvania on behalf of two classes of individuals: (1)
veterans of the South Korean military who claim they were exposed to Agent
Orange and other chemical defoliants used in the demilitarized zone between
North and South Korea between 1967 and 1970 and (2) veterans of the United
States military who claim to have been similarly exposed. This case is captioned
Chang Ok-Lee, Individually and as Representative of a Class, and Thomas Wolfe,
Individually and as Representative of a Class v. Dow Chemical Co., et al., Civil
Action No. 99-6127 (U.S. District Court, Eastern District of Pennsylvania).
During 2000, this case was transferred by the Multi-District Litigation (MDL)
Panel to the United States District Court for the Eastern District of New York,
where Agent Orange cases have previously been consolidated. In late 2001, this
case was dismissed voluntarily by the plaintiffs, with plaintiffs retaining the
right to re-file in the future.

      In 1999, the Company was sued by Hexcel Corporation (Hexcel) in a case
captioned Hexcel Corporation v. Hercules Incorporated, Index No. 602293/99,
Supreme Court of New York, County of New York. In that case, Hexcel sought
recovery of a total of approximately $8,422,000 (plus interest) in alleged
"post-closing" adjustments to the purchase price paid by Hexcel for Hercules'
former Composite Products Division. The basis for these alleged "adjustments"
derive from the Sale and Purchase Agreement between Hercules and Hexcel dated as
of April 15, 1996. In June 2000, the Court granted Hexcel's motion for summary
judgment as to liability, finding the Company liable to Hexcel on technical
grounds, but reserved ruling on the amount of damages. The Court then referred
the damages determination to a Special Referee. In January 2001, the Special
Referee issued a report, recommending that the Company be found liable to Hexcel
for a total of approximately $7,300,000 plus interest, costs and expenses. In
February 2001, Hexcel moved to confirm the Special Referee's Report and the
Company moved to confirm in part and reject in part the Special Referee's
Report. The Company specifically challenged the majority of the Special
Referee's findings, and argued that a $2,000,000 indemnity "basket" established
by the terms of the April 1996 Sale and Purchase Agreement should apply,
reducing any award to Hexcel by $2,000,000. In May 2001, the Court accepted the
Special Referee's Report and rejected the Company's position. As a result,
judgment was entered against the Company in the amount of $10,219,685, which
included pre-judgment interest, costs and expenses. The Company appealed to the
Supreme Court, Appellate Division, First Department. On February 5, 2002, the
Supreme Court of New York, Appellate Division, First Department, affirmed the
decision of the trial court, entering


                                       64
<PAGE>
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

judgment in favor of Hexcel in the full amount. Interest continues to accrue.
The Company continues to believe that the decision of the trial and intermediate
appellate courts is incorrect, and the Company filed a Motion for Reargument or
for Leave to Appeal to the Court of Appeals. That motion was denied on March 19,
2002. Hercules will be filing a motion for Leave to Appeal to the New York Court
of Appeals directly with the Court of Appeals. The granting of a motion for an
appeal to the Court of Appeals is discretionary and there can be no assurance
that it will be granted. In addition to the foregoing, in October 2000, Hexcel
brought an action against Hercules to compel arbitration to determine the proper
"Working Capital Adjustment" under the terms of the Sale and Purchase Agreement.
Hexcel claimed it was owed approximately $1,500,000, while the Company claimed
that the Company was owed approximately $129,000. In late 2001, this matter was
submitted to binding arbitration. In December 2001, the arbitrator found in the
Company's favor and awarded damages to the Company of $129,000.

      In December 1999, BetzDearborn and Bill Blythe, its employee, were sued by
M.C. Dixon Lumber Company, Inc. (M.C. Dixon Lumber Company, Inc. v. BetzDearborn
and Bill Blythe, Circuit Court of Barbour County, Alabama, Case No. 99-0177). In
this lawsuit, M.C. Dixon sought recovery for alleged damage to wood drying kilns
and other equipment, as well as lost production and other consequential damages.
M.C. Dixon alleged that these damages were caused by BetzDearborn's negligence
and breach of contract in the administration of the water treatment program at
M.C. Dixon's plant. On September 4, 2001, this case went to trial. During the
course of the trial, the Company agreed to settle this case for an amount which
is confidential. In connection with that settlement, the Company reached an
agreement with one of BetzDearborn's insurance carriers whereby the total amount
paid by BetzDearborn towards the settlement was $1.75 million.

      On September 28, 2000, the Company sold its Food Gums Division to CP Kelco
ApS, a joint venture that the Company entered into with Lehman Brothers Merchant
Banking Partners II, L.P. CP Kelco also acquired the biogums business of
Pharmacia Corporation (formerly Monsanto Company). In April 2001, CP Kelco U.S.,
Inc., a wholly-owned subsidiary of CP Kelco ApS, sued Pharmacia (CP Kelco U.S.,
Inc. v. Pharmacia Corporation, U.S. District Court for the District of Delaware,
Case No. 01-240-RRM) alleging federal securities fraud, common law fraud, breach
of warranties and representations, and equitable fraud. In essence, the lawsuit
alleges that Pharmacia misrepresented the value of the biogums business,
resulting in damages to CP Kelco U.S., including the devaluation of CP Kelco
U.S.'s senior debt by the securities markets. The complaint seeks over $430
million in direct damages, as well as punitive damages. In June 2001, Pharmacia
filed a third-party complaint against the Company and Lehman. That complaint
seeks contribution and indemnification from the Company and Lehman, jointly and
severally, for any damages that may be awarded to CP Kelco U.S. in its action
against Pharmacia. This lawsuit is in early discovery. The Company believes that
the third-party lawsuit against it and Lehman is without merit. The Company has
denied any liability to Pharmacia and is vigorously defending this action.

      At December 31, 2001, the consolidated balance sheet reflects a current
liability of approximately $50 million and a long-term liability of
approximately $51 million for litigation and claims. These amounts represent
management's best estimate of the probable and reasonably estimable losses
related to litigation or claims. The extent of the liability and recovery is
evaluated quarterly. While it is not feasible to predict the outcome of all
pending suits and claims, the ultimate resolution of these matters could have a
material effect upon the financial position of Hercules, and the resolution of
any of the matters during a specific period could have a material effect on the
quarterly or annual operating results for that period.

Other

      At December 31, 2001, Hercules had $100 million in letters of credit
outstanding with lenders, $92 million of which were issued under the senior
credit facility (see Note 6).

23.   OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA

      In 1998, Hercules adopted Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS
131). The statement established new standards for reporting information about
operating segments in annual financial statements and required selected
information about operating segments in interim financial reports. It also
established standards for related disclosure about products and services,
geographic area and major customers. In compliance with SFAS 131, the Company
has identified three reportable segments.

      Process Chemicals and Services: (Pulp and Paper and BetzDearborn.)
Products and services in this segment are designed to enhance customers'
processes and products, improve their manufacturing costs or environmental
impact. Principal products and markets include performance additives and water
and process treatment chemicals and related on-site services for a wide variety
of industrial and commercial applications including pulp and paper mills,
refineries, chemical plants, metals manufacturers, automobile assembly plants
and makers of food and beverages.


                                       65
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

      Functional Products: (Aqualon.) Products from this segment are principally
derived from natural resources and are sold as key raw materials to other
manufacturers. Principal products and markets include water-soluble polymers and
solvent-soluble polymers, used as thickeners, emulsifiers and stabilizers for
water-based paints, oil and gas exploration, building materials, and personal
care products and producers of inks and aviation fluids. Prior to September 28,
2000, this segment also included the Food Gums Division, which was sold to CP
Kelco, a joint venture the Company entered into with Lehman Brothers Merchant
Banking Partners II, L.P.

      Chemical Specialties: (FiberVisions and Resins.) Products in this segment
provide low-cost, technology driven solutions to meet customer needs and market
demands. Principal products and markets include rosin and hydrocarbon resins for
adhesives, food and beverage, flavor and fragrance and construction specialties
markets; thermal-bond polypropylene staple fiber for disposable diapers and
other hygienic products, and industrial fiber products.

      The Company evaluates performance and makes decisions based primarily on
"Profit from Operations" and "Capital Employed." Consolidated capital employed
represents the total resources employed in the Company and is the sum of total
debt, Company-obligated preferred securities of subsidiary trusts and
stockholders' equity. Capital employed in each reportable segment represents the
net operating assets employed to conduct business in that segment and generally
includes working capital (excluding cash) and property, plant and equipment.
Other assets and liabilities, primarily goodwill and other intangibles, not
specifically allocated to business segments, are reflected in "Reconciling
Items" in the table below.

      Hercules has no single customer representing greater than 10% of its
revenues.

GEOGRAPHIC REPORTING

      For geographic reporting, no single country, outside the United States, is
material for separate disclosure. However, because the Company has significant
foreign operations, revenues and long-lived assets are disclosed by geographic
region.

      Revenues are reported on a "customer basis," meaning that net sales are
included in the geographic area where the customer is located. Long-lived assets
are included in the geographic areas in which the producing entities are
located.

      Intersegment sales are eliminated in consolidation.


                                       66
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                    (Dollars in millions)
------------------------------------------------------------------------------------------------------------------------------------
                                                             PROCESS
                                                            CHEMICALS      FUNCTIONAL      CHEMICAL      RECONCILING
                 INDUSTRY SEGMENTS                        AND SERVICES      PRODUCTS     SPECIALTIES        ITEMS       CONSOLIDATED
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                       <C>              <C>           <C>             <C>            <C>
                       2001
Net sales                                                    $1,654           $541           $425                          $2,620
Profit (loss) from operations                                   295            123             38           (169)(c)          287
Interest and debt expense                                                                                                     196
Preferred security distributions of subsidiary trusts                                                                          58
Other expense, net                                                                                                             10
                                                                                                                           ------
Income before income taxes and equity income (loss)                                                                            23
                                                                                                                           ------
Capital employed (a)                                            530            221            116          2,697(b)         3,564
Capital expenditures                                             24             22             10              7               63
Depreciation and amortization                                    50             19             21            122              212

------------------------------------------------------------------------------------------------------------------------------------
                       2000
Net sales                                                    $1,717           $742           $695        $    (2)          $3,152
Profit (loss) from operations                                   297            176             59            (88)(d)          444
Interest and debt expense                                                                                                     164
Preferred security distributions of subsidiary trusts                                                                          96
Other expense, net                                                                                                             18
                                                                                                                           ------
Income before income taxes and equity income (loss)                                                                           166
                                                                                                                           ------
Capital employed (a)                                            632            219            308          2,882(b)         4,041
Capital expenditures                                             39             76             36             28              179
Depreciation and amortization                                    51             26             25            144              246

------------------------------------------------------------------------------------------------------------------------------------
                       1999
Net sales                                                    $1,725           $875           $711        $    (2)          $3,309
Profit (loss) from operations                                   338            218             89           (165)(e)          480
Interest and debt expense                                                                                                     185
Preferred security distributions of subsidiary trusts                                                                          51
Other expense, net                                                                                                              2
                                                                                                                           ------
Income before income taxes and equity income (loss)                                                                           242
                                                                                                                           ------
Capital employed (a)                                            735            372            379          2,824(b)         4,310
Capital expenditures                                             51             74             39             40              204
Depreciation and amortization                                    66             33             30            121              250

------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       67
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                     (Dollars in millions)
-----------------------------------------------------------------------------------------------
                             UNITED
GEOGRAPHIC AREAS             STATES        EUROPE       AMERICAS(f)      ASIA PACIFIC     TOTAL
-----------------------------------------------------------------------------------------------
<S>                          <C>           <C>          <C>              <C>             <C>
2001
Net sales                    $1,454        $  765          $184              $217        $2,620
Long-lived assets (g)         2,253           684           347                95         3,379

2000
Net sales                    $1,702        $  964          $215              $271        $3,152
Long-lived assets (g)         2,410           797           382               125         3,714

1999
Net sales                    $1,742        $1,074          $220              $273        $3,309
Long-lived assets (g)         2,264           948           529               150         3,891
</TABLE>

      (a)   Represents total segment assets net of operating liabilities

      (b)   Assets and liabilities not specifically allocated to business
            segments, primarily goodwill, intangibles and other long-term
            assets, net of liabilities.

      (c)   Includes environmental charges, legal and insurance expenses,
            pre-payment penalties relating to the ESOP credit facility (see Note
            10) and restructuring charges relating to the 2001 cost reduction
            program (see Note 14). Also included are amortization of goodwill
            and intangibles and other corporate items not specifically allocated
            to the business segments. Partially offsetting these charges were
            net gains from the sale of the hydrocarbon resins business, select
            portions of the rosins resins business and the peroxy chemicals
            business, restructuring reversals pertaining to prior year plans, a
            pension curtailment gain and an additional gain recognition relating
            to a prior year business divestiture.

      (d)   Includes integration expenses, restructuring charges, asset
            impairment charges, environmental charges, a loss on the sale of the
            nitrocellulose business offset by a gain on the sale of Food Gums
            business, insurance recoveries and restructuring reversals (see Note
            14). Also included are amortization of goodwill and intangibles and
            other corporate items not specifically allocated to the business
            segments.

      (e)   Includes integration expenses, severance costs, asset write-downs
            and other charges net of litigation and insurance settlements,
            partially offset by a gain on the sale of a subsidiary and the
            reversal of restructuring charges (see Notes 14 and 16). Also
            included are amortization of goodwill and intangibles, corporate
            research and development and other corporate items not specifically
            allocated to business segments.

      (f)   Ex-U.S.A.

      (g)   Long-lived assets include property, plant and equipment, goodwill
            and other intangible assets.

24.   CONSOLIDATING CONDENSED FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES

      One of the amendments to the senior credit facility effective November 14,
2000 (see Note 6) included a guarantee by each of the Company's current and
future wholly owned domestic restricted subsidiaries (each, a "Guarantor
Subsidiary"). The guarantee of each Guarantor Subsidiary is full and
unconditional and joint and several. The indenture under which the Company's
registered 6.6% notes due 2027 and 6.625% notes due 2003 were issued requires
the holders of such notes to be on the same basis as the holders of any other
subsequently issued debt that provides either guarantees or pledges of
collateral. As a result, the following wholly-owned domestic restricted
subsidiaries jointly and severally, and full and unconditionally guarantee the
senior credit facility, the registered 6.6% notes due 2027, the 6.625% notes
due 2003 and the 11.125% notes due 2007.

<TABLE>
<S>                                               <C>
            Aqualon Company                       FiberVisions, L.L.C.
            Athens Holding Inc.                   FiberVisions L.P.
            BetzDearborn China, Inc.              Hercules Chemical Corporation
            BetzDearborn Europe, Inc.             Hercules Country Club, Inc.
            BetzDearborn International, Inc.      Hercules Credit, Inc.
            BetzDearborn Inc.                     Hercules Euro Holdings, L.L.C.
</TABLE>


                                       68
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<S>                                                <C>
            BL Chemicals Inc.                      Hercules Finance Company
            BL Technologies, Inc.                  Hercules Flavor, Inc.
            BLI Holdings, Inc.                     Hercules International Limited
            Chemical Technologies India, Ltd.      Hercules International Limited, L.L.C.
            Covington Holdings, Inc.               Hercules Investments L.L.C.
            DRC, Ltd.                              Hercules Shared Services Corp.
            East Bay Realty Services, Inc.         HISPAN Corporation
            FiberVisions Incorporated              WSP, Inc.
            FiberVisions Products, Inc.
</TABLE>

      The non-guarantor subsidiaries (the "Non-Guarantor Subsidiaries") include
all of the Company's foreign subsidiaries and certain domestic subsidiaries. The
Company conducts much of its business through and derives much of its income
from its subsidiaries. Therefore, the Company's ability to make required
payments with respect to its indebtedness and other obligations depends on the
financial results and condition of its subsidiaries and its ability to receive
funds from its subsidiaries. There are no restrictions on the ability of any of
the Guarantor Subsidiaries to transfer funds to the Company, however there may
be restrictions for certain foreign Non-Guarantor Subsidiaries.

      The following condensed consolidating financial information for the
Company presents the financial information of Hercules, the Guarantor
Subsidiaries and the Non-Guarantor Subsidiaries based on the Company's
understanding of Securities and Exchange Commission's interpretation and
application of Rule 3-10 under the Securities and Exchange Commission's
Regulation S-X. The financial information may not necessarily be indicative of
results of operations or financial position had the Guarantor Subsidiaries or
Non-Guarantor Subsidiaries operated as independent entities.

      In this presentation, Hercules consists of parent company operations.
Guarantor Subsidiaries and Non-Guarantor Subsidiaries of Hercules are reported
on an equity basis. For companies acquired during 1998, the goodwill and fair
values of the assets and liabilities acquired have been presented on a
"push-down" accounting basis.


                                       69
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidating Condensed Statement of Operations
December 31, 2001

<TABLE>
<CAPTION>
                                                                                     (Millions of Dollars)
                                                          -------------------------------------------------------------------------
                                                                     Unconsolidated
                                                          -----------------------------------------
                                                                        Guarantor     Non-Guarantor   Eliminations &
                                                           Parent      Subsidiaries    Subsidiaries     Adjustments    Consolidated
                                                          -------------------------------------------------------------------------
<S>                                                       <C>          <C>            <C>             <C>              <C>
Net sales                                                  $ 417         $ 1,207         $ 1,260           $(264)          2,620
Cost of sales                                                288             713             727            (264)          1,464
Selling, general, and administrative expenses                 57             331             355              --             743
Research and development                                      29              30               8              --              67
Goodwill and intangible asset amortization                     3              51              22              --              76
Other operating (income) expense, net                        (60)             34               9              --             (17)
                                                           -----         -------         -------           -----         -------
Profit from operations                                       100              48             139              --             287
Interest and debt expense (income)                           334            (108)            (30)             --             196
Preferred security distributions of subsidiary
  trusts                                                      --              --              58              --              58
Other (expense) income, net                                  (13)              9              (6)             --             (10)
                                                           -----         -------         -------           -----         -------
(Loss) income before income taxes and equity
  income (loss)                                             (247)            165             105              --              23

(Benefit) provision for income taxes                         (40)             78              34              --              72
                                                           -----         -------         -------           -----         -------
(Loss) income before equity income (loss)                   (207)             87              71              --             (49)
Equity income (loss) of affiliated companies                  --               1             (10)             --              (9)
Equity income (loss) from consolidated subsidiaries          149             (10)              1            (140)             --
                                                           -----         -------         -------           -----         -------
Net (loss) income                                          $ (58)        $    78         $    62           $(140)        $   (58)
                                                           =====         =======         =======           =====         =======
</TABLE>


                                       70
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidating Condensed Statement of Operations
December 31, 2000

<TABLE>
<CAPTION>
                                                                                     (Millions of Dollars)
                                                          -------------------------------------------------------------------------
                                                                     Unconsolidated
                                                          -----------------------------------------
                                                                        Guarantor     Non-Guarantor   Eliminations &
                                                           Parent      Subsidiaries    Subsidiaries     Adjustments    Consolidated
                                                          -------------------------------------------------------------------------
<S>                                                       <C>          <C>            <C>             <C>              <C>
Net sales                                                  $ 606         $ 1,532         $ 1,701           $(687)        $ 3,152
Cost of sales                                                432             995           1,050            (693)          1,784
Selling, general, and administrative expenses                 84             338             388              --             810
Research and development                                      33              35              12              --              80
Goodwill and intangible asset amortization                     7              48              25              --              80
Other operating expenses (income), net                        38              92            (176)             --             (46)
                                                           -----         -------         -------           -----         -------
Profit from operations                                        12              24             402               6             444

Interest and debt expense (income)                           283            (129)             10              --             164
Preferred security distributions of subsidiary
  trusts                                                      --              --              96              --              96
Other (expense) income, net                                  (21)            (15)             18              --             (18)
                                                           -----         -------         -------           -----         -------
(Loss) income before income taxes and equity
  income (loss)                                             (292)            138             314               6             166

(Benefit) provision for income taxes                         (58)             68              54               2              66
                                                           -----         -------         -------           -----         -------
(Loss) income before equity income (loss)                   (234)             70             260               4             100
Equity loss of affiliated companies                           --              --              (2)                             (2)
Equity income (loss) from consolidated subsidiaries          332              65               3            (400)             --
                                                           -----         -------         -------           -----         -------
Net income (loss)                                          $  98         $   135         $   261           $(396)             98
                                                           =====         =======         =======           =====         =======
</TABLE>


                                       71
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidating Condensed Statement of Operations
December 31, 1999

<TABLE>
<CAPTION>
                                                                                     (Millions of Dollars)
                                                          -------------------------------------------------------------------------
                                                                     Unconsolidated
                                                          -----------------------------------------
                                                                        Guarantor     Non-Guarantor   Eliminations &
                                                           Parent      Subsidiaries    Subsidiaries     Adjustments    Consolidated
                                                          -------------------------------------------------------------------------
<S>                                                       <C>          <C>            <C>             <C>              <C>
Net sales                                                  $ 584         $ 1,570         $ 1,827           $(672)        $ 3,309
Cost of sales                                                424             974           1,100            (667)          1,831
Selling, general, and administrative expenses                118             365             304              --             787
Research and development                                      28              13              44              --              85
Goodwill and intangible asset amortization                     9              53              17              --              79
Other operating expenses, net                                 23              23               1              --              47
                                                           -----         -------         -------           -----         -------
(Loss) profit from operations                                (18)            142             361              (5)            480

Interest and debt expense (income)                           261             (51)            (25)             --             185
Preferred security distributions of subsidiary
  trusts                                                      --              --              51              --              51
Other (expense) income net                                    (3)             (1)              4              (2)             (2)
                                                           -----         -------         -------           -----         -------
(Loss) income before income taxes and equity
  income (loss)                                             (282)            192             339              (7)            242

(Benefit) provision for income taxes                        (121)             89             110              (3)             75
                                                           -----         -------         -------           -----         -------
(Loss) income before equity income (loss)                   (161)            103             229              (4)            167
Equity income (loss) from affiliated companies                 2              --              (1)                              1
Equity income (loss) from consolidated subsidiaries          327             143               6            (476)             --
                                                           -----         -------         -------           -----         -------
Net income (loss)                                          $ 168         $   246         $   234           $(480)        $   168
                                                           =====         =======         =======           =====         =======
</TABLE>


                                       72
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidating Condensed Balance Sheet
December 31, 2001

<TABLE>
<CAPTION>
                                                                                     (Millions of Dollars)
                                                          -------------------------------------------------------------------------
                                                                       Unconsolidated
                                                          -------------------------------------------
                                                                          Guarantor     Non-Guarantor
                                                            Parent       Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                                          -------------------------------------------------------------------------
<S>                                                       <C>            <C>            <C>              <C>            <C>
ASSETS
Current assets
  Cash and cash equivalents                                $     8         $    12         $    56         $    --         $   76
  Accounts and notes receivable, net                           103             134             269              --            506
  Intercompany receivable                                       87              60              66            (213)            --
  Inventories                                                   45              89             109             (10)           233
  Deferred income taxes                                          7              16               4              --             27
                                                           -------         -------         -------         -------         ------
  Total current assets                                         250             311             504            (223)           842

Property, plant and equipment, net                             186             327             390              --            903

Investments in subsidiaries and advances, net                4,546           1,485              51          (6,082)            --
Goodwill and other intangible assets, net                       33           1,631             812              --          2,476
Deferred charges and other assets                              690              36             102              --            828
                                                           -------         -------         -------         -------         ------
  Total assets                                             $ 5,705         $ 3,790         $ 1,859         $(6,305)        $5,049
                                                           =======         =======         =======         =======         ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable                                              50              44             109              --            203
  Accrued expenses                                             154             207             102              --            463
  Intercompany payable                                         104              21              88            (213)            --
  Short-term debt                                              230               5              16              --            251
                                                           -------         -------         -------         -------         ------
  Total current liabilities                                    538             277             315            (213)           917
Long-term debt                                               1,832              79              48              --          1,959
Deferred income taxes                                          (73)            351              56              --            334
Other postretirement benefits and other liabilities            324             140              39              --            503
Company-obligated preferred securities of
  subsidiary trusts                                             --              --             624              --            624
Intercompany notes payable (receivable)                      2,372          (1,209)         (1,154)             (9)            --
Stockholders' equity                                           712           4,152           1,931          (6,083)           712
                                                           -------         -------         -------         -------         ------
  Total liabilities and stockholders' equity               $ 5,705         $ 3,790         $ 1,859         $(6,305)        $5,049
                                                           =======         =======         =======         =======         ======
</TABLE>


                                       73
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidating Condensed Balance Sheet
December 31, 2000

<TABLE>
<CAPTION>
                                                                                     (Millions of Dollars)
                                                          -------------------------------------------------------------------------
                                                                       Unconsolidated
                                                          -------------------------------------------
                                                                          Guarantor     Non-Guarantor   Eliminations &
                                                            Parent       Subsidiaries    Subsidiaries     Adjustments   Consolidated
                                                          -------------------------------------------------------------------------
<S>                                                       <C>            <C>            <C>              <C>            <C>
ASSETS
Current assets
  Cash and cash equivalents                                $     1         $     7         $    46         $    --         $   54
  Accounts and notes receivable, net                           110             183             333              --            626
  Intercompany receivables                                      19              84              98            (201)            --
  Inventories                                                   63             124             128             (10)           305
  Deferred income taxes                                         28               2               7              --             37
                                                           -------         -------         -------         -------         ------
  Total current assets                                         221             400             612            (211)         1,022

Property, plant, and equipment, net                            281             352             471              --          1,104

Investments in subsidiaries and advances, net                4,350           1,595              61          (6,006)            --
Goodwill and other intangible assets, net                       35           1,690             885              --          2,610
Deferred charges and other assets                              648              37             107              --            792
                                                           -------         -------         -------         -------         ------
  Total assets                                             $ 5,535         $ 4,074         $ 2,136         $(6,217)        $5,528
                                                           =======         =======         =======         =======         ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
  Accounts payable                                              72              62             123               2            259
  Accrued expenses                                             135             131             136              --            402
  Intercompany payables                                         73              20             108            (201)            --
  Short-term debt                                              127               5             129              --            261
                                                           -------         -------         -------         -------         ------
  Total current liabilities                                    407             218             496            (199)           922
Long-term debt                                               2,233              97              12              --          2,342
Deferred income taxes                                           92             264              50              --            406
Other postretirement benefits and other liabilities            210             169              41              --            420
Company-obligated preferred securities of
  subsidiary trusts                                             --              --             622              --            622
Intercompany notes payable/(receivable)                      1,777            (746)         (1,021)            (10)            --
Stockholders' equity                                           816           4,072           1,936          (6,008)           816
                                                           -------         -------         -------         -------         ------
  Total liabilities and stockholders' equity               $ 5,535         $ 4,074         $ 2,136         $(6,217)        $5,528
                                                           =======         =======         =======         =======         ======
</TABLE>


                                       74
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidating Condensed Statement of Cash Flows
December 31, 2001

<TABLE>
<CAPTION>
                                                                                     (Millions of Dollars)
                                                          --------------------------------------------------------------------------
                                                                       Unconsolidated
                                                          -------------------------------------------
                                                                          Guarantor     Non-Guarantor
                                                            Parent       Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                                          --------------------------------------------------------------------------
<S>                                                       <C>            <C>            <C>              <C>            <C>
NET CASH (USED IN) PROVIDED BY OPERATIONS                  $  (407)        $   404         $   130         $   (18)        $  109

CASH FLOW FROM INVESTING ACTIVITIES:
  Capital expenditures                                         (11)            (19)            (33)             --            (63)
  Proceeds of investment and fixed asset disposals             229               5             122              --            356
  Other, net                                                    --              --              (9)             --             (9)
                                                           -------         -------         -------         -------         ------
  Net cash provided by (used in) investing activities          218             (14)             80              --            284
                                                           -------         -------         -------         -------         ------
CASH FLOW FROM FINANCING ACTIVITIES:
  Long-term debt proceeds                                      347              --               2              --            349
  Long-term debt repayments                                   (585)            (16)            (25)             --           (626)
  Change in short-term debt                                     --              --            (107)             --           (107)
  Change in intercompany, noncurrent                           418            (369)            (49)             --             --
  Common stock issued                                           17              --              --              --             17
  Common stock reacquired                                       (1)             --              --              --             (1)
  Dividends paid                                                --              --             (18)             18             --
                                                           -------         -------         -------         -------         ------
  Net cash provided by (used in) financing activities          196            (385)           (197)             18           (368)
                                                           -------         -------         -------         -------         ------
Effect of exchange rate changes on cash                         --              --              (3)             --             (3)
                                                           -------         -------         -------         -------         ------
Net increase in cash and cash  equivalents                       7               5              10              --             22
Cash and cash equivalents at beginning of  year                  1               7              46              --             54
                                                           -------         -------         -------         -------         ------
Cash and cash equivalents at end of year                   $     8         $    12         $    56         $    --         $   76
                                                           =======         =======         =======         =======         ======
</TABLE>


                                       75
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidating Condensed Statement of Cash Flows
December 31, 2000

<TABLE>
<CAPTION>
                                                                                     (Millions of Dollars)
                                                          --------------------------------------------------------------------------
                                                                       Unconsolidated
                                                          -------------------------------------------
                                                                          Guarantor     Non-Guarantor
                                                            Parent       Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                                          --------------------------------------------------------------------------
<S>                                                       <C>            <C>            <C>              <C>            <C>
NET CASH (USED IN) PROVIDED BY OPERATIONS                  $   (85)        $   (34)        $   238         $   (49)       $    70

CASH FLOW FROM INVESTING ACTIVITIES:
  Capital expenditures                                         (37)            (38)           (112)             --           (187)
  Proceeds of investment and fixed asset disposals              --              14             404              --            418
  Acquisitions, net of cash acquired                            (6)             --              --              --             (6)
  Other, net                                                   (19)             (1)              8              --            (12)
                                                           -------         -------         -------         -------        -------
  Net cash (used in) provided by investing activities          (62)            (25)            300              --            213
                                                           -------         -------         -------         -------        -------
CASH FLOW FROM FINANCING ACTIVITIES:
  Long-term debt proceeds                                    1,858              27               4              --          1,889
  Long-term debt repayments                                 (1,756)            (27)             (7)             --         (1,790)
  Change in short-term debt                                     --              --              92              --             92
  Payment of debt issuance costs and underwriting fees         (28)             --              --              --            (28)
  Repayment of subsidiary trust preferred securities            --              --            (370)             --           (370)
  Change in intercompany, noncurrent                           155              43            (198)             --             --
  Common stock issued                                           13              --              --              --             13
  Common stock reacquired                                       (2)             --              --              --             (2)
  Dividends paid                                               (94)             --             (49)             49            (94)
                                                           -------         -------         -------         -------        -------
  Net cash provided by (used in) financing activities          146              43            (528)             49           (290)
                                                           -------         -------         -------         -------        -------
Effect of exchange rate changes on cash                         --              --              (2)             --             (2)
                                                           -------         -------         -------         -------        -------
Net (decrease) increase in cash and cash  equivalents           (1)            (16)              8              --             (9)
Cash and cash equivalents at beginning of  year                  2              23              38              --             63
                                                           -------         -------         -------         -------        -------
Cash and cash equivalents at end of year                   $     1         $     7         $    46         $    --        $    54
                                                           =======         =======         =======         =======        =======
</TABLE>


                                       76
<PAGE>

HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Consolidating Condensed Statement of Cash Flows
December 31, 1999

<TABLE>
<CAPTION>
                                                                                     (Millions of Dollars)
                                                          --------------------------------------------------------------------------
                                                                       Unconsolidated
                                                          -------------------------------------------
                                                                          Guarantor     Non-Guarantor
                                                            Parent       Subsidiaries    Subsidiaries    Eliminations   Consolidated
                                                          --------------------------------------------------------------------------
<S>                                                       <C>            <C>            <C>              <C>            <C>
NET CASH (USED IN) PROVIDED BY OPERATIONS                  $   (59)        $   198         $   243         $  (102)       $   280

CASH FLOW FROM INVESTING ACTIVITIES:
  Capital expenditures                                         (42)            (66)            (88)             --           (196)
  Proceeds of investment and fixed asset disposals               2              28              20              --             50
  Acquisitions, net of cash acquired                           (10)             --              --              --            (10)
  Other, net                                                   (24)            (15)              2                            (37)
                                                           -------         -------         -------         -------        -------
  Net cash (used in) provided by investing activities          (74)            (53)            (66)             --           (193)
                                                           -------         -------         -------         -------        -------

CASH FLOW FROM FINANCING ACTIVITIES:
  Long-term debt proceeds                                      274               5              --              --            279
  Long-term debt repayments                                 (1,344)            (16)             --              --         (1,360)
  Change in short-term debt                                     99             (17)            (60)             --             22
  Payment of debt issuance costs and underwriting fees          --              --             (19)             --            (19)
  Proceeds from issuance of subsidiary trusts'
    preferred                                                   --              --             792              --            792
  Change in intercompany, noncurrent                           915            (112)           (804)              1             --
  Proceeds from issuance of warrants                            90              --              --              --             90
  Common stock issued                                          182              --              --              --            182
  Common stock reacquired                                       (3)             --              --              --             (3)
  Proceeds from issuance of subsidiary preferred stock          --              12              --              --             12
  Dividends paid                                               (83)             --            (101)            101            (83)
                                                           -------         -------         -------         -------        -------
  Net cash provided by (used in) financing activities          130            (128)           (192)            102            (88)
                                                           -------         -------         -------         -------        -------
Effect of exchange rate changes on cash                         --              --              (4)             --             (4)
                                                           -------         -------         -------         -------        -------
Net (decrease) increase  in cash and cash equivalents           (3)             17             (19)             --             (5)
Cash and cash equivalents at beginning of year                   5               6              57              --             68
                                                           -------         -------         -------         -------        -------
Cash and cash equivalents at end of year                   $     2         $    23         $    38         $    --        $    63
                                                           =======         =======         =======         =======        =======
</TABLE>


                                       77
<PAGE>

HERCULES INCORPORATED
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)

<TABLE>
<CAPTION>
                                                                      (Dollars in millions, except per share)
                                                                1st Quarter        2nd Quarter        3rd Quarter
                                                               2001     2000     2001      2000      2001      2000
                                                               ----     ----     ----      ----      ----      ----
<S>                                                           <C>       <C>     <C>       <C>      <C>        <C>
Net Sales                                                     $ 702     $798    $ 670     $ 822    $  637     $ 815
Cost of sales                                                   409      450      375       462       349       463
Selling, general, and administrative expenses                   190      197      195       206       179       210
Research and development                                         19       21       17        20        16        20
Goodwill and intangible asset amortization                       19       20       19        20        19        20
Other operating expenses (income), net                            3        4      (65)       18        43      (105)
                                                              -----     ----    -----     -----    ------     -----

Profit from operations                                        $  62     $106    $ 129     $  96    $   31     $ 207
Interest and debt expense                                        55       32       53        42        46        42
Preferred security distributions of subsidiary trusts            15       23       14        23        15        23
Other (expense) income, net                                      (3)       5        4        (6)       (6)      (13)
                                                              -----     ----    -----     -----    ------     -----

(Loss) income before income taxes and equity income (loss)    $ (11)    $ 56    $  66     $  25    $  (36)    $ 129
(Benefit) provision for income taxes                             (4)      20       42         9        29        54
                                                              -----     ----    -----     -----    ------     -----

(Loss) income before equity income (loss)                        (7)      36       24        16       (65)       75
Equity (loss) income of affiliated companies, net of tax         (3)      --       (1)       --        (6)       --
                                                              -----     ----    -----     -----    ------     -----
Net (loss) income                                             $ (10)    $ 36    $  23     $  16    $  (71)    $  75
                                                              =====     ====    =====     =====    ======     =====

(Loss) earnings per share Basic:
     (Loss) earnings per share                                $(0.09)   $0.34   $0.21     $0.15    $(0.66)    $0.70
Diluted:
     (Loss) earnings per share                                $(0.09)   $0.34   $0.21     $0.15    $(0.66)    $0.70
</TABLE>

<TABLE>
<CAPTION>
                                                              (Dollars in millions, except per share)
                                                                4th Quarter               Year
                                                               2001      2000       2001       2000
                                                               ----      ----       ----       ----
<S>                                                           <C>      <C>        <C>         <C>
Net Sales                                                     $ 611    $  717     $ 2,620     $ 3,152
Cost of sales                                                   331       409       1,464       1,784
Selling, general, and administrative expenses                   179       197         743         810
Research and development                                         15        19          67          80
Goodwill and intangible asset amortization                       19        20          76          80
Other operating expenses (income), net                            2        37         (17)        (46)
                                                              -----    ------     -------     -------

Profit from operations                                        $  65    $   35     $   287     $   444
Interest and debt expense                                        42        48         196         164
Preferred security distributions of subsidiary trusts            14        27          58          96
Other (expense) income, net                                      (5)       (4)        (10)        (18)
                                                              -----    ------     -------     -------

(Loss) income before income taxes and equity income (loss)    $   4    $  (44)    $    23     $   166
(Benefit) provision for income taxes                              5       (17)         72          66
                                                              -----    ------     -------     -------

(Loss) income before equity income (loss)                        (1)      (27)        (49)        100
Equity (loss) income of affiliated companies, net of tax          1        (2)         (9)         (2)
                                                              -----    ------     -------     -------
Net (loss) income                                                --    $  (29)    $   (58)    $    98
                                                              =====    ======     =======     =======

(Loss) earnings per share Basic:
     (Loss) earnings per share                                   --    $(0.28)    $ (0.54)    $  0.91
Diluted:
     (Loss) earnings per share                                   --    $(0.28)    $ (0.54)    $  0.91
</TABLE>


                                       78
<PAGE>

HERCULES INCORPORATED

PRINCIPAL CONSOLIDATED SUBSIDIARIES AS OF DECEMBER 31, 2001

      ARGENTINA
        Hercules Argentina S.A.

      AUSTRALIA
        BetzDearborn Australia Pty, Ltd.
        Little H Pty Ltd.

      AUSTRIA
        Hercules Austria GmbH.

      BAHAMAS
        Hercules International Trade Corporation Limited

      BELGIUM
        BetzDearborn N.V.
        Hercules Beringen B.V.B.A.
        Hercules Doel B.V.B.A.
        Hercules Europe B.V.B.A.
        Hercules Holding B.V./B.V.B.A.

      BERMUDA
        Curtis Bay Insurance Co. Ltd.

      BRAZIL
        Hercules BetzDearborn Ltda.
        Hercules do Brasil Produtos Quimicos Ltda.

      CANADA
        BetzDearborn Canada, Inc.
        Hercules Canada Inc.
        Hercules Canada (partnership)

      CHILE
        Hercules Quimica Chile Ltda

      CHINA
        Beijing Hercules Chemical Co. Ltd.*
        FiberVisions (Suzhou) Nonwovens Products Co. Ltd.
        FiberVisions (China) Textile Products Ltd.
        Shanghai Hercules Chemicals Co., Ltd.*

      COLOMBIA
        Hercules de Colombia S.A.

      CROATIA
        BetzDearborn d.o.o.

      CURACAO
        BetzDearborn Caribbean N.V.

      CZECH (REPUBLIC)
        Hercules CZ s.r.o.

      DENMARK
        Hercules Denmark A/S
        FiberVisions, A/S
        Hercules Investments ApS

      ECUADOR
        BetzDearborn de Ecuador S.A.

      FINLAND
        Hercules Finland OY

      FRANCE
        Aqualon France B.V.
        BetzDearborn SA
        Hercules SA

      GERMANY
        Abieta Chemie, GmbH*
        BetzDearborn Gmbh
        Hercules Deutschland GmbH
        Hercules GmbH

      HONG KONG
        Hercules China Limited

      HUNGARY
        BetzDearborn Hungary Kft

      INDIA
        Hercules Specialty Chemicals (India) Private Limited

      INDONESIA
        P.T. BetzDearborn Persada
        P.T. Hercules Chemicals Indonesia

      IRELAND
        BetzDearborn Ireland Limited

      ITALY
        Hercules Italia SpA

      JAPAN
        Hercules Japan Ltd.
        Nippon BetzDearborn K.K.*

      KOREA
        BetzDearborn Korea, Ltd.
        Hercules Korea Chemical Co. Ltd.

      LIECHTENSTEIN
        Organa Trust

      LUXEMBOURG
        Hercules Investments S.a.r.l.
        Hercules Luxembourg S.a.r.l.
        Hercules European Participations S.a.r.l.

      MALAYSIA
        Hercules Chemicals (Malaysia) Sdn. Bhd

      MEXICO
        BetzDearborn de Mexico S.A. de C.V.
        Hercules Inc. Mexico, S.A. de C.V.
        Hercules Mexico, S.A. de C.V.

      *     This entity is owned in part by Hercules with the remaining interest
            held by a third party.


                                       79
<PAGE>

HERCULES INCORPORATED

      NETHERLANDS
        Aqualon France B.V.
        Betz Chemical Technologies B.V.
        BetzDearborn B.V.
        Hechem B.V.
        Hercules B.V.

      NORWAY
        Hercules Norway A/S

      PERU
        Hercules del Peru S.A.

      POLAND
        Hercules Polska Sp. z.o.o.

      PORTUGAL
        Misan Portuguesa, Lda.

      SINGAPORE
        Hercules Chemicals Singapore Pte Ltd.

      SOUTH AFRICA
        Hercules Chemicals South Africa (Pty) Ltd.

      SPAIN
        Hercules Quimica, S.A.

      SWEDEN
        Betz KEMI AB
        BetzDearborn AB
        Hercules AB

      SWITZERLAND
        Fibervisions A.G./Fibervisions Ltd.

      TAIWAN
        Hercules Chemicals (Taiwan) Co., Ltd.

      THAILAND
        Hercules Chemicals (Thailand) Co., Ltd.

      UNITED KINGDOM
        BetzDearborn Limited
        Hercules Investments Global Ltd.
        Hercules Limited
        Hercules GB Holdings Limited

      URUGUAY
        BetzDearborn de Uruguay S.A.

      UNITED STATES
        Aqualon Company, Delaware
        Athens Holding Inc., Delaware
        BetzDearborn Europe, Inc., Delaware
        BetzDearborn Inc., Pennsylvania
        BetzDearborn International, Inc., Pennsylvania
        BL Chemicals Inc., Delaware
        BL Technologies, Inc., Delaware
        BLI Holding Inc., Delaware
        Chemical Technologies India, Ltd., Delaware
        Covington Holdings Inc., Delaware
        DRC., Ltd. Delaware
        East Bay Realty Services, Inc., Delaware
        FiberVisions Incorporated, Delaware
        FiberVisions, L.L.C., Delaware
        FiberVisions L.P., Delaware
        FiberVisions Products, Inc., Georgia
        Hercules Chemical Corporation, Delaware
        Hercules Chemicals International, Inc., Delaware
        Hercules Credit Inc., Delaware
        Hercules Euro Holdings, L.L.C., Delaware
        Hercules Finance Company, Delaware
        Hercules Flavor, Inc., Delaware
        Hercules International Limited, Delaware
        Hercules International Limited, L.L.C., Delaware
        Hercules Trust I
        Hercules Trust II
        Hercules Shared Services Corporation, Delaware*
        WSP, Inc., Delaware

      VENEZUELA
        Hercules BetzDearborn C.A.

      VIRGIN ISLANDS
        Hercules Islands Corporation *
        Hercules Overseas Corp.

      *     This entity is owned in part by Hercules with the remaining interest
            held by a third party

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE:

      None.


                                       80
<PAGE>

HERCULES INCORPORATED

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:

      Information regarding directors and nominees for directors of Hercules and
executive officers will be included in the Proxy Statement and is incorporated
herein by reference.

EXECUTIVE OFFICERS OF THE REGISTRANT:

      The name, age and current position of each executive officer of Hercules
as of March 15, 2002 are listed below. There are no family relationships among
executive officers.

<TABLE>
<CAPTION>
   NAME                     AGE     CURRENT POSITION
<S>                         <C>     <C>

   William H. Joyce         66      Chairman and Chief Executive Officer

   Fred G. Aanonsen         54      Vice President and Controller

   Edward V. Carrington     59      Vice President, Human Resources and Corporate Resources

   Richard G. Dahlen        62      Chief Legal Counsel

   Robert C. Flexon         43      Vice President, Corporate Affairs, Strategic Planning and Work Processes

   Israel J. Floyd          55      Corporate Secretary and General Counsel

   Bruce W. Jester          50      Vice President, Taxes

   Stuart C. Shears         51      Vice President and Treasurer
</TABLE>

ITEM 11. EXECUTIVE COMPENSATION:

      Information regarding executive compensation of Hercules' directors and
executive officers will be in the Proxy Statement, and is incorporated herein by
reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:

      Information regarding beneficial ownership of Hercules common stock by
certain beneficial owners and by management of Hercules will be included in the
Proxy Statement and is incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:

      In 2001, no director or officer had an involvement in such transactions of
a nature or magnitude to require disclosure under the applicable SEC thresholds.


                                       81
<PAGE>

HERCULES INCORPORATED

                                     PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K:

<TABLE>
<S>                                                                                                                 <C>
            (a)   Documents filed as part of this Report:

                  1.    Financial Statements

                        See Item 8 for an Index to the Consolidated Financial Statements of Hercules Incorporated.

                  2.    Financial Statement Schedules:

                        Schedule II - Valuation and Qualifying Accounts..........................................   Below

      All other schedules are omitted because they are not applicable, not
required or the information required is either presented in the Notes to
Financial Statements or has not changed materially from that previously
reported.

                  3.    Exhibits:

                        A complete listing of exhibits required is included in the Exhibit Index that precedes the exhibits
                        filed with this Report.

            (b)   Reports on Form 8-K.

                        None.
</TABLE>

      HERCULES INCORPORATED
      SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS      (Dollars in millions)

<TABLE>
<CAPTION>
     ---------------------------------------------------------------------------------------------------------------
                   Col. A.                  Col. B                   Col. C                 Col. D          Col. E
     ---------------------------------------------------------------------------------------------------------------
                                                                   Additions
     ---------------------------------------------------------------------------------------------------------------
                 Description              Balance at      Charged to      Charged to      Deductions      Balance at
                                         beginning of      costs and    other accounts                      end of
                                            period         expenses                                         period
     ---------------------------------------------------------------------------------------------------------------
<S>                                      <C>              <C>           <C>               <C>             <C>
      YEAR 2001
      Allowance for doubtful accounts        $27              11              --             (14)             $24
      Tax valuation allowance                 28               9              --              --              $37

      YEAR 2000
      Allowance for doubtful accounts        $16              21              --             (10)             $27
      Tax valuation allowance                 16              12              --              --               28

      YEAR 1999
      Allowance for doubtful accounts        $13              --               3              --              $16
      Tax valuation allowance                 12              --               4              --               16
</TABLE>


                                       82
<PAGE>

HERCULES INCORPORATED

                                   SIGNATURES

      Pursuant to the requirements of Section 13 or 15(d) 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 on March 29, 2002.

                                        HERCULES INCORPORATED


                                        By:  /s/ William H. Joyce
                                             -----------------------------------
                                             Chairman and Chief Executive
                                             Officer

      Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 29, 2002.

PRINCIPAL EXECUTIVE OFFICERS AND DIRECTORS:

            Chairman and Chief Executive Officer        /s/ William H. Joyce
                                                        ------------------------
                                                         William H. Joyce


PRINCIPAL FINANCIAL OFFICER:

            Vice President and Treasurer                /s/ Stuart C. Shears
                                                        ------------------------
                                                        Stuart C. Shears


PRINCIPAL ACCOUNTING OFFICER:

            Vice President and Controller               /s/ Fred G. Aanonsen
                                                        ------------------------
                                                         Fred G. Aanonsen

DIRECTORS:

<TABLE>
<S>                                                     <C>
      /s/ William H. Joyce                              /s/ Sunil Kumar
------------------------------------------              ------------------------
      William H. Joyce                                   Sunil Kumar


      /s/ John G. Drosdick                              /s/ Jeffrey M. Lipton
------------------------------------------              ------------------------
      John G. Drosdick                                   Jeffrey M. Lipton


      /s/ Richard M. Fairbanks, III                     /s/ Peter McCausland
------------------------------------------              ------------------------
      Richard M. Fairbanks, III                          Peter McCausland


      /s/ Samuel J. Heyman                              /s/ Gloria Schaffer
------------------------------------------              ------------------------
      Samuel J. Heyman                                   Gloria Schaffer


      /s/ Alan R. Hirsig                                /s/ Paula A. Sneed
------------------------------------------              ------------------------
      Alan R. Hirsig                                     Paula A. Sneed


      /s/ Edith E. Holiday                              /s/ Raymond S. Troubh
------------------------------------------              ------------------------
      Edith E. Holiday                                   Raymond S. Troubh


      /s/ Robert D. Kennedy                             /s/ Joe B. Wyatt
------------------------------------------              ------------------------
      Robert D. Kennedy                                  Joe B. Wyatt
</TABLE>


                                       83
<PAGE>

HERCULES INCORPORATED

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
NUMBER                                DESCRIPTION                                     INCORPORATED BY REFERENCE TO
<S>             <C>                                                                  <C>

2-A             Agreement and Plan of Merger among Hercules, Water                   Exhibit 2.1, BetzDearborn Inc.
                Acquisition Company and BetzDearborn Inc., dated July                Current Report on Form 8-K,
                30, 1998                                                             filed July 30, 1998

3-A.1           Restated Certificate of Incorporation of Hercules, as                Exhibit 3-A, Annual Report on
                revised and amended July 6, 1988                                     Form 10-K filed March 26, 1993

3-A.2           Certificate of Amendment dated October 24, 1995, to Hercules'        Exhibit 4.1a, Registration
                Restated Certificate of Incorporation as revised and amended         Statement on Form S-3, filed
                July 5, 1998                                                         September 15, 1998

3-B             By-Laws of Hercules, as revised and amended October                  Exhibit 3-B, Annual Report on
                30, 1991                                                             Form 10-K filed March 26, 1993

4-A             Officers' Certificate, dated as of March 17, 1999, pursuant to       Exhibit 4.1, Current Report on
                the Junior Subordinated Debentures Indenture between Hercules        Form 8-K dated March 17, 1999
                and Chase

4-B             Form of Preferred Securities Guarantee by Hercules and               Exhibit 4.28, Amendment No. 1
                Chase, with respect to Hercules Trust I                              to Registration Statement on
                                                                                     Form S-3, filed October 29,
                                                                                     1998

4-C             Form of Amended and Restated Trust Agreement of                      Exhibit 4.13, Amendment No. 1
                Hercules Trust I                                                     to Registration Statement on
                                                                                     Form S-3, filed October 29,
                                                                                     1998

4-D             Form of 9.42% Trust Originated Preferred Securities of               Exhibit 4.2, Current Report on
                Hercules Trust I                                                     Form 8-K, dated March 17, 1999

4-E             Form of 9.42% Junior Subordinated Deferrable Interest                Exhibit 4.3, Current Report on
                Debentures due 2029                                                  Form 8-K, dated March 17, 1999

4-F             Officer's Certificate, dated as of July 27, 1999, pursuant to        Exhibit 4.1, Current Report on
                the Junior Subordinated Debentures Indenture between Hercules        Form 8-K, dated July 27, 1999
                and Chase, dated as of November 12, 1998

4-G             Amended and Restated Trust Agreement of Hercules Trust II, dated     Exhibit 4.2, Current Report on
                as of July 27, 1999, together with Annex I thereto                   Form 8-K, dated July 27, 1999

4-H             Unit Agreement, dated July 27, 1999, among Hercules, Hercules        Exhibit 4.3, Current Report on
                Trust II and The Chase Manhattan Bank, as unit agent                 Form 8-K, dated July 27, 1999

4-I             Warrant Agreement, dated July 27, 1999, between Hercules and The     Exhibit 4.4, Current Report on
                Chase Manhattan Bank, as warrant agent                               Form 8-K, dated July 27, 1999

4-J             Form of Series A Junior Subordinated Deferrable                      Exhibit 4.5, Current Report on
                Interest Debentures                                                  Form 8-K, dated July 27, 1999

4-K             Form of Trust II Preferred Securities                                Exhibit 4.6, Current Report on
                                                                                     Form 8-K, dated July 27, 1999

4-L             Form of CRESTS Unit                                                  Exhibit 4.7, Current Report on
                                                                                     Form 8-K, dated July 27, 1999

4-M             Form of Warrant                                                      Exhibit 4.8, Current Report on
                                                                                     Form 8-K, dated July 27, 1999
</TABLE>


                                       84
<PAGE>

HERCULES INCORPORATED

<TABLE>
<CAPTION>
NUMBER                                DESCRIPTION                                     INCORPORATED BY REFERENCE TO
<S>             <C>                                                                  <C>
4-N             Rights Agreement, dated as of August 24, 2000, between Hercules      Exhibit 4.1 to Hercules
                Incorporated and Chase Mellon Shareholder Services, L.L.C.           Registration of Certain
                                                                                     Classes of Securities on Form
                                                                                     8-A filed August 10, 2000

4-O             Indenture, dated as of November 14, 2000, between                    Exhibit 4-A, Quarterly Report
                Hercules Incorporated, as issuer and Wells Fargo Bank                on Form 10-Q, filed November
                Minnesota, N.A., as trustee (including the form of                   14, 2000
                11 1/8% senior notes due 2007 included as Exhibit A
                thereto).

4-P             Registration Rights Agreement, dated as of November 14, 2000,        Exhibit 4-B Quarterly Report
                among Hercules Incorporated and all of its domestic subsidiaries     on Form 10-Q, filed November
                and Donaldson, Lufkin & Jenrette Securities Corporation and          14, 2000
                Credit Suisse First Boston Corporation, as the initial
                purchasers.
</TABLE>

Hercules is party to several long-term debt instruments under which in each case
the total amount of securities Authorized does not exceed 10% of the total
assets of Hercules. Hercules agrees to furnish a copy of such instruments to the
Securities and Exchange Commission upon request.

<TABLE>
<S>             <C>                                                                  <C>
10-A            Hercules Executive Survivor Benefit Plan                             Exhibit 10-D, Annual Report on
                                                                                     Form 10-K, filed March 27,
                                                                                     1981

10-B            Hercules Phantom Stock Plan                                          Exhibit E, Notice Annual
                                                                                     Meeting and Proxy Statement,
                                                                                     dated February 14, 1986

10-C            Hercules Deferred Compensation Plan                                  Exhibit 10-I, Annual Report on
                                                                                     Form 10-K, filed March 29,
                                                                                     1988

10-D            Hercules Annual Management Incentive Compensation                    Exhibit 10-H, Annual Report on
                Plan                                                                 Form 10-K, filed March 26,
                                                                                     1993

10-E            Hercules 1993 Nonemployee Director Stock                             Exhibit 4.1, Registration
                Accumulation Plan                                                    Statement on Form S-8, filed
                                                                                     July 16, 1993

10-F            Hercules Deferred Compensation Plan for Nonemployee                  Exhibit 10-J, Annual Report
                Directors                                                            Form 10-K, filed March 26,
                                                                                     1993

10-G            Hercules Employee Pension Restoration Plan                           Exhibit 10-L, Annual Report on
                                                                                     Form 10-K, filed March 26,
                                                                                     1993

10-H            Form of Employment Contract between Hercules and                     Exhibit 10-J, Annual Report on
                certain of its officers                                              Form 10-K, filed March 29,
                                                                                     1988

10-I            Form of Indemnification Agreement between Hercules                   Annex II, Notice of Annual
                and certain officers and directors of Hercules                       Meeting and Proxy Statement,
                                                                                     dated February 19, 1987

10-J            Employment Agreement effective August 1, 1998,                       Exhibit 10-T, Annual Report on
                between Hercules and Vincent J. Corbo                                Form 10-K, filed March 30,
                                                                                     1999

10-K            Hercules Amended and Restated Long Term Incentive                    Exhibit 10-K, Annual Report on
                Compensation Plan                                                    Form 10-K, filed March 29,
                                                                                     2000

10-L            BetzDearborn Inc. Employee Stock Ownership and                       Exhibit 10-L, Annual Report on
                401(k) Plan                                                          Form 10-K, filed March 29,
                                                                                     2000

10-M            Amended and Restated Credit Agreement, dated April                   Exhibit 10.2, Current Report
                19, 1999, among Hercules, NationsBank, N.A., as                      on Form 8-K, dated April 19,
                Administrative Agent, and the lenders party thereto                  1999
</TABLE>


                                       85
<PAGE>

HERCULES INCORPORATED

<TABLE>
<CAPTION>
NUMBER                                DESCRIPTION                                     INCORPORATED BY REFERENCE TO
<S>             <C>                                                                  <C>
10-N            Underwriting Agreement, dated March 12, 1999, among Hercules,        Exhibit 1.1, Current Report on
                Hercules Trust I and the Underwriters named therein                  Form 8-K, dated March 17, 1999

10-O            CRESTS Units Underwriting Agreement, dated July 21, 1999, among      Exhibit 1.1, Current Report on
                Hercules, Hercules Trust II and the Underwriters named therein       Form 8-K, dated July 27, 1999

10-P            Common Stock Underwriting Agreement, dated July 21,                  Exhibit 1.2, Current Report on
                1999, among Hercules and the Underwriters named                      Form 8-K, dated July 27, 1999
                therein

10-Q            First Amendment to Amended and Restated Credit                       Exhibit 10-A, Quarterly Report
                Agreement, dated March 31, 2000, among Hercules                      on Form 10-Q, filed August
                Incorporated, BetzDearborn Canada, certain                           15, 2000
                subsidiaries of Hercules, the several banks and other
                financial institutions identified in the agreement and
                Bank of America, N.A., as administrative agent, and
                Bank of America Canada, as Canadian administrative
                agent.

10-R            Second Amendment to Amended and Restated Credit                      Exhibit 10-B, Quarterly Report
                Agreement, dated July 26, 2000, among Hercules                       on Form 10-Q, filed August 15,
                Incorporated, BetzDearborn Canada, certain subsidiaries              2000
                of Hercules, the several banks and other financial
                institutions identified in the agreement and Bank of
                America, N.A., as administrative agent, and Bank of
                America Canada, as Canadian administrative agent.

10-S            Share Purchase Agreement, dated as of August 10, 2000, among CP      Exhibit 2-1, Current Report on
                Kelco ApS (formerly known as Hercules Copenhagen ApS), Hercules      Form 8-K, dated September 28,
                Investment ApS, Hercules Incorporated, Lehman FG Newco, Inc.,        2000
                WSP, Inc. and Hercules Holding BV/BVBA.

10-T            Third Amendment to Amended and Restated Credit                       Exhibit 10-T, Annual Report on
                Agreement, dated November 14, 2000, among Hercules                   Form 10-K, filed April 17,
                Incorporated, BetzDearborn Canada, certain subsidiaries              2001.
                of Hercules, the several banks and other financial
                institutions identified in the agreement, and Bank of
                America, N.A., as administrative agent, and Bank of
                America Canada, as Canadian administrative agent.

10-U            Form of Change-of-Control Employment Agreements                      Exhibit 10-19, Registration Statement
                between Hercules Incorporated and each of Dominick                   on Form S-4, filed August 9, 2001
                W. DiDonna and Israel J. Floyd.

10-V            Resignation Agreement, dated as of October 17, 2000,                 Exhibit 10-20, Registration Statement
                between Hercules Incorporated and Vincent J. Corbo.                  on Form S-4, filed August 9, 2001

10-W            Letter Agreement, dated November 1, 2000, between                    Exhibit 10-21, Registration Statement
                Hercules Incorporated and Harry J. Tucci.                            on Form S-4, filed August 9, 2001

10-X            Letter Agreement, dated November 1, 2000, between                    Exhibit 10-B, Quarterly Report
                Hercules Incorporated and Thomas L. Gossage.                         on Form 10-Q, filed May 16,
                                                                                     2001.

10-Y            Employment Agreement, effective as of May 8, 2001,                   Exhibit 10-A, Quarterly Report on
                between Hercules Incorporated and William H. Joyce.                  Form 10-Q, filed May 16, 2001.

10-Z            Change-of-Control Employment Agreement, dated as of                  Exhibit 10-24, Registration Statement
                May 8, 2001, by and between Hercules Incorporated and                on Form S-4, filed August 9, 2001
                William H. Joyce
</TABLE>


                                       86
<PAGE>

HERCULES INCORPORATED

<TABLE>
<CAPTION>
NUMBER                                DESCRIPTION                                     INCORPORATED BY REFERENCE TO
<S>             <C>                                                                  <C>
10-Aa           Form of Change-of-Control Employment Agreements,                      Exhibit 10-25, Registration Statement
                dated as of June 15, 2001, by and between Hercules                    on Form S-4, filed August 9, 2001
                Incorporated and each of Edward V. Carrington and
                Richard G. Dahlen.

10-Bb           Separation Agreement and General Release of Claims,                   Exhibit 10-26, Registration Statement
                dated June 22, 2001, between Hercules Incorporated and                on Form S-4, filed August 9, 2001
                June B. Barry.

10-Cc           Separation Agreement and General Release of Claims, dated June        Exhibit 10-27, Registration Statement
                21, 2001, between Hercules Incorporated and George MacKenzie.         on Form S-4, filed August 9, 2001

10-Dd           Change-of-Control Employment Agreement, dated as of                   Exhibit 10-28, Registration Statement
                July 2, 2001, by and between Hercules Incorporated and                on Form S-4, filed August 9, 2001
                Fred G. Aanonsen.

10-Ee           Fourth Amendment to Amended and Restated Credit                       Exhibit 10-29, Registration Statement
                Agreement, dated July 17, 2001, among Hercules                        on Form S-4, filed August 9, 2001
                Incorporated, BetzDearborn Canada, certain subsidiaries
                of Hercules, the several banks and other financial
                institutions identified in the agreement and Bank of
                America, N.A., as administrative agent, and Bank of
                America Canada, as Canadian administrative agent.

10-Ff           Note Purchase Agreement, dated as of June 19, 1989,                   Exhibit 10-18, Registration Statement
                between the Betz Laboratories, Inc. Employee Stock                    on Form S-4, filed October 31, 2001.
                Ownership Plan and the Betz Laboratories, Inc.

10-Gg           First Amendment to Note Purchase Agreement, dated as of               Exhibit 10-30, Registration Statement
                June 25, 1996, among BetzDearborn Laboratories, Inc.,                 on Form S-4, filed October 31, 2001.
                Putnam Fiduciary Trust Company and The Prudential Insurance
                Company of America.

10-Hh           Second Amendment to Note Purchase Agreement, dated as of              Exhibit 10-31, Registration Statement
                June 25, 1998, among BetzDearborn, Inc., Putnam Fiduciary             on Form S-4, filed October 31, 2001.
                Trust Company and The Prudential Insurance Company of America.


10-Ii           Third Amendment and Assumption Agreement with respect to Note         Exhibit 10-32, Registration Statement
                Purchase Agreement, dated as of December 31, 1998, among              on Form S-4, filed October 31, 2001.
                BetzDearborn, Inc., Putnam Fiduciary Trust Company, Hercules
                Incorporated and The Prudential Insurance Company of America.

10-Jj           Fourth Amendment with respect to Note Purchase Agreement, dated       Exhibit 10-33, Registration Statement
                as of April 19, 1999, among Hercules Incorporated, Putnam             on Form S-4, filed October 31, 2001.
                Fiduciary Trust Company and The Prudential Insurance Company of
                America.


10-Kk           Fifth Amendment with respect to Note Purchase Agreement, dated        Exhibit 10-34, Registration Statement
                as of July 26, 2000, among Hercules Incorporated, Putnam              on Form S-4, filed October 31, 2001.
                Fiduciary Trust Company and The Prudential Insurance Company of
                America.


10-Ll           Sixth Amendment with respect to Note Purchase Agreement, dated       Exhibit 10-35, Registration Statement
                as of November 14, 2000, among Hercules Incorporated, Putnam         on Form S-4, filed October 31, 2001.
                Fiduciary Trust Company and The Prudential Insurance Company of
                America.


10-Mm           Seventh Amendment with respect to Note Purchase Agreement, dated     Exhibit 10-36, Registration Statement
                as of July 17, 2001 among Hercules Incorporated, Putnam              on Form S-4, filed October 31, 2001.
                Fiduciary Trust Company and The Prudential Insurance Company of
                America.

10-Nn*          Fifth Amendment to Amended and Restated Credit
                Agreement, dated March 6, 2002, among Hercules
                Incorporated, BetzDearborn Canada, certain subsidiaries
                of Hercules, the several banks and other financial
                institutions identified in the agreement and Bank of
                America, N.A., as administrative agent, and Bank of
                America Canada, as Canadian administrative agent.

21.1            Subsidiaries of Registrant                                           See Part II, Item 8 on page 66
                                                                                     of Annual Report on Form 10-K,
                                                                                     filed April 17, 2001.

</TABLE>

* Filed herewith.

                                       87