<PAGE>   1


                       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, 1995    Commission file number 1-496
                       ------------------------------

                             HERCULES INCORPORATED

                             A DELAWARE CORPORATION
                 L.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)
         6 1/2 % Convertible Subordinated Debentures due June 30, 1999
           8% Convertible Subordinated Debentures due August 15, 2010


         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.  / /

         As of February 26, 1996, registrant had outstanding 108,501,417 shares
of common stock, $25/48 stated value ("Common Stock"), 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 February 26, 1996 was
approximately $6.4 billion.


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

         Portions of the registrant's definitive Proxy Statement dated March
14, 1996 (the "Proxy Statement") are incorporated by reference in Part lll of
this Report.  Other documents incorporated by reference in this report are
listed in the Exhibit Index.
<PAGE>   2
                                     PART I

ITEM 1. BUSINESS:
         Hercules Incorporated ("Hercules" or the "Company") is a diversified,
worldwide producer of chemicals and related products.  The Company was
incorporated in Delaware in 1912.  During 1995, Hercules divested its Aerospace
segment (which produced solid fuel systems) and the Electronics & Printing
Division of its Food & Functional Products segment (which produced photopolymer
resins for printing and publishing applications).  In December 1995, the
company signed a letter of intent to sell the Composite Products Division
(which produces graphite fiber) of its Corporate and other segment.
Accordingly, information related to the Aerospace segment, Electronics &
Printing Division, and Composite Products Division has been omitted in this
Form 10-K, except where relevant.


INDUSTRY SEGMENTS
         Hercules operates, both domestically and throughout the world, in two
industry segments: Chemical Specialties and Food & Functional Products. The
financial information regarding Hercules' industry segments, which includes net
sales and profit from operations for each of the three years in the period
ended December 31, 1995 and identifiable assets as of December 31, 1995, 1994,
and 1993, is provided in Note 23 to the Consolidated Financial Statements.

         Information regarding principal products produced and sold by each
industry segment and principal markets served by each segment is presented in
the columns so designated in the segment table presented below.  These products
are sold directly to customers from plants and warehouses, as well as being
sold in some cases (particularly in markets outside the United States) to and
through distributors.

<TABLE>
<CAPTION>
                 BUSINESS UNITS                                PRINCIPAL PRODUCTS                       PRIMARY MARKETS
                 --------------                                ------------------                       ---------------
                 Chemical Specialties
                 --------------------
                 <S>                                   <C>                                 <C>
                 Paper Technology                      Reactive sizes, rosin size,         Writing and printing paper, tissues and
                                                       dispersed rosin sizes, wet-         toweling, liquid packaging, kraft paper,
                                                       strength resins, wax emulsions,     corrugated and linerboard packaging, and
                                                       defoamers, and retention aids.      kraft specialties.

                 Fibers                                Polypropylene nonwoven fiber and    Disposable hygiene products, home
                                                       polypropylene textile yarns.        furnishings, and automotive.

                 Resins                                Rosin resins, hydrocarbon resins,   Adhesives for tapes, labels, carpet
                                                       peroxides.                          backing, packaging, and sealants;
                                                                                           graphic arts, particularly inks and
                                                                                           toners; rubber, including plastic
                                                                                           compounds for wire and cable insulation;
                                                                                           the construction industry; and household
                                                                                           products.

                 Food & Functional Products
                 --------------------------

                 Aqualon                               Carboxymethylcellulose,             Paints and lacquers, adhesives, paper,
                                                       hydroxypropylcellulose, ethyl-      personal care products and cosmetics,
                                                       cellulose, nitrocellulose,          pharmaceuticals, food and beverages,
                                                       hydroxyethylcellulose,              inks, oil well drilling, rubber, and
                                                       methylcellulose, and                smokeless powder.
                                                       pentaerythritol.

                 Food Gums                             Food gums and aroma chemicals.      Processed meats, jellies and jams, baked
                                                                                           goods, convenience foods, and beverages.
</TABLE>

    In general, Hercules does not produce against a backlog of firm orders;
production is geared primarily to the level of incoming orders and the
projections of future demand.  Inventories of finished products, work in
process and raw materials are maintained to meet delivery requirements of
customers and Hercules' production schedules.





                                       1
<PAGE>   3
    The businesses of each of the segments are not seasonal to any significant
extent.

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

    The important raw materials for the Chemical Specialties segment are
d-limonene, turpentine, crude tall oil, rosin, pine wood stumps, aromatic and
aliphatic resin formers, ketones, cumene, catalysts, alcohols, pure monomers,
toluene, clay, phenol, adipic acid, epichlorohydrin, fumaric acid, process
oils, stearic acid, diethylenetriamine, phosphorus trichloride, wax, casein,
starch, polypropylene resin, pigments, and antioxidants.

    Raw materials important to the Food & Functional Products segment are
acetaldehyde, fatty acids, chemical cotton, woodpulp, ethyl chloride, alcohols,
chlorine, ethylene oxide, propylene oxide, monochloroacetic acid, methyl
chloride, caustic, inorganic acids, fruit and floral extracts, guar splits,
seaweed, terpenes, and citrus peel.

    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 United
States Government regulations. The impact of any future raw material and energy
shortages on Hercules' business as a whole or in specific world areas cannot be
accurately predicted. Operations and products may, at times, be adversely
affected by legislation, shortages or international or domestic events.

COMPETITION
    Hercules encounters substantial competition in each of its two industry
segments. This competition, from other manufacturers of the same products and
from manufacturers of different products designed for the same uses, is
expected to continue in both the United States and markets outside the United
States. Some of Hercules' competitors, such as companies engaged in petroleum
operations, have more direct access to raw materials, and some have greater
financial resources than Hercules.

    The number of Hercules' principal competitors varies from product to
product. It is not practicable to estimate the number of all competitors
because of the large variety of Hercules' products, the markets served and the
world-wide business interests of Hercules.

PATENTS AND TRADEMARKS
    Patents covering a variety of products and processes have been issued to
Hercules and its assignees. In addition, Hercules is licensed under certain
other patents covering the products and processes. Taken as a whole, the rights
of Hercules under these patents and licenses, which expire from time to time,
are considered by Hercules to constitute a valuable asset. However, Hercules
does not consider any single patent or license, or any group thereof related to
a specific product or process, to be of material importance to its business as
a whole.

    Hercules also has registered trademarks for a number of its products. Some
of the more significant trademarks include: AQUAPEL(R) sizing agent, HERCON(R)
sizing emulsions, KYMENE(R) resin, REGALREZ(R) resin, HERCULON(R) olefin fiber,
SLENDID(R) fat replacer, NATROSOL(R) hydroxyethylcellulose, CULMINAL(R)
methylcellulose, KLUCEL(R) hydroxypropylcellulose, NATROSOL FPS(R)
water-soluble polymer suspension, and PRECIS (TM) sizing agent.





                                       2
<PAGE>   4
RESEARCH AND DEVELOPMENT
    Research and development, which is directed toward the discovery and
development of new products and processes, the improvement and refinement of
existing products and processes and development of new applications for
existing products, is primarily company-sponsored. Hercules spent $58,547,000
on research activities during 1995, as compared to $64,780,000 in 1994 and
$76,121,000 in 1993. During the three-year period, research and development
expenditures for the Chemical Specialties and Food & Functional Products
segments were between 1.8% and 2.6% of sales.

ENVIRONMENTAL MATTERS
    Hercules believes that 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 and are not
expected to materially affect capital expenditures or competitive position.
Additional information regarding environmental matters is provided in Note 22
to the Consolidated Financial Statements.

EMPLOYEES
    As of December 31, 1995, Hercules had 7,892 employees worldwide.
Approximately 3,805 were located in the United States, and of these employees
about 39% were represented by various local or national unions.

INTERNATIONAL OPERATIONS
    Information on net sales, profit from operations, identifiable assets by
geographic areas, and the amount of export sales, for each of the last three
years appear in Note 23 to the Consolidated Financial Statements. Hercules'
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.  Information as to Hercules' principal manufacturing
facilities and the industry segment served by each is presented below.

    All principal properties are owned by Hercules except for the Company's
corporate headquarters, which is leased to the Company.

    The following are Hercules' major worldwide plants:
    Chemical Specialties - Aberdeen, Scotland; Beringen, Belgium; Brunswick,
    Georgia; Burlington, Ontario, Canada; Busnago, Italy; Chicopee,
    Massachusetts; Franklin, Virginia; Gibbstown, New Jersey; Hattiesburg,
    Mississippi; Iberville, Quebec, Canada; Jefferson, Pennsylvania; Kalamazoo,
    Michigan; Kim Cheon, Korea; Lilla Edet, Sweden; Mexico City, Mexico;
    Middelburg, the Netherlands; Milwaukee, Wisconsin; Nant'ou, Taiwan; Oxford,
    Georgia; Pandaan, Indonesia; Paulinia, Brazil; Pendlebury, England;
    Portland, Oregon; St.-Jean, Quebec, Canada; Sandarne, Sweden; Savannah,
    Georgia; Sobernheim, Germany; Tampere, Finland; Tarragona, Spain; Traun,
    Austria; Uruapan, Mexico; Voreppe, France; Zwijndrecht, the Netherlands.
    Food & Functional Products - Alizay, France;  Barneveld, the Netherlands;
    Doel, Belgium; Grossenbrode, Germany; Hopewell, Virginia;  Kenedy, Texas;
    Lille Skensved, Denmark; Louisiana, Missouri; Parlin, New Jersey; Sao
    Paulo, Brazil; Zwijndrecht, the Netherlands.

    Hercules plants and facilities, which are continually added to and
modernized, are generally considered to be in good condition and adequate for
business operations. From time to time Hercules discontinues operations at, or
disposes of, facilities that have for one reason or another become unsuitable.





                                       3
<PAGE>   5
ITEM 3. LEGAL PROCEEDINGS:
    For discussion of legal proceedings see Note 22 to the Hercules Financial
Statements.

    In September 1993, Hercules and the U.S. Environmental Protection Agency
(EPA) Region 1 reached an agreement in principle in settlement of EPA's claims
that Hercules violated its wastewater permit with the City of Chicopee and the
federal pretreatment standard for industrial users of publicly owned treatment
works at its Chicopee, Massachusetts, facility.  Hercules signed a consent
Decree (the "Decree"), which was entered by the court on December 15, 1994,
based on this agreement, requiring supplemental environmental projects (at a
cost of approximately $375,000), compliance with permit limits in the future,
and $250,000 in fines.  Hercules has paid the $250,000 fine and is currently in
the process of performing the supplemental environmental projects, which are
expected to be completed in 1996.

    Hercules received a letter from the New Jersey Department of Environmental
Protection (the "Department") dated March 9, 1995, which stated that the
Department was considering an enforcement action against Hercules for alleged
noncompliance with the terms of a 1993 Administrative Consent Order ("ACO") at
its Kenvil, New Jersey, facility.  The ACO covered alleged violations of the
Air Pollution Control Act.  The letter also identified potential violations
under the Spill Compensation and Control Act, the New Jersey Water Pollution
Control Act, and the New Jersey Safe Drinking Water Act.  Hercules has met with
the Department and has submitted a schedule addressing all matters identified
in the Department's letter. Although no formal legal proceeding has been
commenced, a civil enforcement action, including a penalty assessment in excess
of $100,000 is expected.

    Hercules received a letter from the U.S. Department of Justice ("DoJ")
dated May 3, 1995 in which it was notified of the U.S.  Environmental
Protection Agency's request that a complaint be filed against Hercules for
violations of the Clean Air Act and the National Emission Standard for
Hazardous Air Pollutants for Asbestos that allegedly occurred during demolition
activities at its former Covington, Virginia, facility.  On September 7, 1995,
Hercules signed a Consent Decree in settlement of the matter.  The Consent
Decree obligates Hercules to pay a civil penalty of $1.2 million, to provide
asbestos training to select personnel, and to appoint an official responsible
for asbestos compliance company-wide.  DoJ signed the Consent Decree and lodged
it with the Federal District Court in Virginia on October 12, 1995. A 30-day
public comment period commencing on that date has now run and entry of the
Consent Decree by the Court has occurred.  Hercules paid the fine of $1.2
million in February 1996.

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 1995, through the solicitations of proxies or otherwise.





                                       4
<PAGE>   6
EXECUTIVE OFFICERS OF THE REGISTRANT:

    The name, age and current position of each executive officer (as defined by
Securities and Exchange Commission rules) of the Company as of February 26,
1996, are listed below. Each of the officers, except for R. Keith Elliott,
Herbert K. Pattberg, and Vikram Jog, have during the past five years, served in
one or more executive capacities with the Company and/or its affiliates.  Mr.
Elliott served with Engelhard Corporation as Vice President of Finance, Chief
Financial Officer and Director from 1985 to 1988 and as Senior Vice President,
Chief Financial Officer and Director from 1988 to 1990.  Since joining Hercules
in 1991, Mr. Elliott has held the positions of Sr. Vice President, Chief
Financial Officer, and Executive Vice President and most recently President and
Chief Operating Officer.  Herbert Pattberg was employed by Henkel KgaA for 22
years, most recently as group vice president, Oleochemicals.  Mr. Pattberg
joined Hercules in 1993 in his present position of president, S.A. Hercules
Europe N.V., Brussels, Belgium. Vikram Jog has been with Hercules since 1992,
as director, Corporate Reporting, director, Corporate Analysis and now his
current position as Controller.  Prior to joining Hercules, Mr. Jog was
employed at Price Waterhouse LLP and Coopers & Lybrand L.L.P.  There are no
family relationships among executive officers.


<TABLE>                          
<CAPTION>                        
NAME                             AGE        CURRENT POSITION
<S>                              <C>        <C>
Thomas L. Gossage                61         Chairman and Chief Executive Officer
R. Keith Elliott                 54         President and Chief Operating Officer
Vincent J. Corbo                 52         Senior Vice President,Technology
Robert J. A. Fraser              46         Group Vice President and President,
                                              Hercules Food & Functional Products Company
C. Doyle Miller                  55         Group Vice President and President,
                                              Hercules Chemical Specialties Company
Michael B. Keehan                60         Vice President and General Counsel
George MacKenzie                 46         Vice President and Chief Financial Officer
Vikram Jog                       39         Controller
Jan M. King                      46         Treasurer
Israel J. Floyd                  49         Secretary and Assistant General Counsel
James D. Beach                   60         Vice President, Operations Support
Edward V. Carrington             53         Vice President, Human Resources
James R. Rapp                    57         Vice President, Investor Relations
Herbert K. Pattberg              52         President, Hercules Europe
</TABLE>                         
                                 
                                 



                                       5
<PAGE>   7
                                    PART II


ITEM 5.    MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
           STOCKHOLDER MATTERS:

    Hercules Incorporated 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.

    On December 8, 1994, the company announced a three-for-one split of its 
common stock effected in the form of a 200% tax-free stock dividend 
distributed on January 30, 1995, to shareholders of record as of January 9, 
1995.  The information presented below reflects the three-for-one stock split.

    The approximate number of holders of record of common stock
($25/48 stated value) as of January 31, 1996, was 20,862.

<TABLE>
<CAPTION>
                 Period                                                                     High    Low
                 ------                                                                     ----    ---
                 <S>                                                                      <C>      <C>
                 1994
                     First Quarter  . . . . . . . . . . . . . . . . . . . . . . . .       40 1/2   35 1/4
                     Second Quarter   . . . . . . . . . . . . . . . . . . . . . . .       38 1/2   32 1/8
                     Third Quarter  . . . . . . . . . . . . . . . . . . . . . . . .       36 7/8   32 7/8
                     Fourth Quarter   . . . . . . . . . . . . . . . . . . . . . . .       40       33 1/4

                 1995
                     First Quarter  . . . . . . . . . . . . . . . . . . . . . . . .       49 1/8   38 1/4
                     Second Quarter   . . . . . . . . . . . . . . . . . . . . . . .       53 5/8   46
                     Third Quarter  . . . . . . . . . . . . . . . . . . . . . . . .       62 1/4   48 1/4
                     Fourth Quarter   . . . . . . . . . . . . . . . . . . . . . . .       59 5/8   51 1/2
</TABLE>

On December 31, 1995, the closing price of the common stock was 56 3/8.

    The company has paid quarterly cash dividends as follows:

<TABLE>
<CAPTION>
                                                               1st Quarter      2nd Quarter      3rd Quarter      4th Quarter
                                                               -----------      -----------      -----------      -----------
                 <S>                                              <C>              <C>              <C>              <C>
                 1994         . . . . . . . . . . . . . .         $0.19            $0.19            $0.19            $0.19
                 1995         . . . . . . . . . . . . . .         $0.21            $0.21            $0.21            $0.21
</TABLE>





                                       6
<PAGE>   8
ITEM 6.    SELECTED FINANCIAL DATA:
    A summary of selected financial data for Hercules for the
years and year ends specified is set forth in the table below.

<TABLE>
<CAPTION>
                                                                       (Dollars and shares in millions, except per share)
=========================================================================================================================

FOR THE YEAR                                                1995          1994            1993         1992          1991
-------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>             <C>         <C>            <C>
Net Sales                                              $   2,427      $  2,821        $  2,773     $  2,865      $  2,929
Profit from Operations                                       363           419             308          244           187
Income Before Extraordinary Item and
    Effect of Changes in Accounting Principles               333           274             208          168            95
Net Income (Loss)                                            333           274            (33)          168            95
Dividends                                                     95            89              95          101           105
Per Share of Common Stock
   Earnings Before Extraordinary Item and
      Effect of Changes in Accounting Principles            2.93          2.29            1.62         1.23           .67
   Earnings (Loss)                                          2.93          2.29           (.26)         1.23           .67
   Dividends                                                 .84           .75             .75          .75           .75
Total Assets                                               2,493         2,941           3,162        3,228         3,467
Long-Term Debt                                               298           307             317          431           483
</TABLE>

Per-share amounts for all periods presented have been restated to give
retroactive recognition to the three-for-one stock split distributed January
30, 1995.

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

    This discussion should be read in connection with the information contained
in the Consolidated Financial Statements and Notes thereto.

    During 1995, Hercules divested its Aerospace segment and the Electronics &
Printing Division of its Food & Functional Products segment.  In December 1995,
the company signed a letter of intent to sell its Composite Products Division.
During 1994, the company completed the divestiture of its Packaging Films and
Liquid Molding Resins business units.  As discussed below and in the notes to
the financial statements, these transactions had significant effects on the
company's cash flow, results of operations, and the balance sheet.  (See Notes
16, 20, and 21 to the financial statements and "Liquidity and financial
resources" below.)  Following the Aerospace divestiture, Composite Products
Division information has been included in the "Corporate and other" segment;
previously it was reported in the Aerospace segment.  Prior year information
has been restated to conform with the 1995 presentation.

    RESULTS OF OPERATIONS
    (All comparisons are with the previous year, unless otherwise stated.)

    Net sales:  Chemical business (Chemical Specialties and Food & Functional
Products segments) sales increased 9%, or $174 million, in 1995.  Higher
selling prices, along with stronger foreign currencies relative to the dollar,
accounted for much of the improvement.  On a consolidated basis, however, net
sales declined 14%, or $394 million, reflecting divestitures of Aerospace in
March 1995 and Packaging Films in April 1994.  In 1994, sales  of Chemical
businesses increased 10% on increased volumes and prices, reflecting
improvement in western economies.  However, the divestiture of Packaging Films
and reduced Aerospace revenues resulted in relatively flat consolidated net
sales.

    Profit from operations in the Chemical businesses increased  by 15%, or $53
million, in 1995. However, loss of profits from the divested Aerospace segment
of $97 million and increased charges of $12 million in the Corporate and other
segment, primarily increased environmental expenses, resulted in a $56 million
decrease in consolidated profits from operations.  Chemical businesses gross
profit increased





                                       7
<PAGE>   9
by $88 million and margins improved from 34% to 36%, driven by higher selling
prices and manufacturing cost improvements.  Consolidated gross profit,
however, declined by $61 million, primarily as a result of the aforementioned
divestitures.  Selling, general, and administrative (SG&A) expenses declined
$7 million, primarily reflecting the elimination of costs relating to divested
businesses and the continuation of cost-management programs in continuing
businesses and the corporate organization.  These decreases, however, were
offset by a $40 million increase in employee incentive compensation programs,
primarily resulting from the early vesting of the 1993 and 1994 long-term
incentive compensation programs, as well as the grant of stock awards to all
Hercules employees.  Commencing in 1995, the long-term incentive compensation
program was revised.  Awards of restricted stock and performance shares were
substantially replaced by stock options, performance accelerated stock options,
and cash-value awards payable in shares of Hercules stock.  (See Note 9.)
Research and development (R&D) expenses declined as a result of business
divestitures; for Chemical businesses, R&D spending rose 11% to $45 million in
1995.  Other operating expenses, net (see Note 14), increased $8 million.
Higher environmental costs, as a result of ongoing negotiations with regulatory
agencies, particularly as they relate to the Jacksonville, Arkansas, site,
coupled with estimated losses related to the pending divestiture of Composite
Products, were partially offset by lower employee separation costs and
write-offs.  Environmental costs are discussed further below and in Note 22 to
the financial statements.

    In 1994, profit from operations rose 36%, or $111 million.  The strength of
the Chemical businesses led to higher gross profit (approximately $55 million,
or 7% improvement) and an increase in gross profit margins from 30% in 1993 to
32%.  Gross profit was helped by higher volumes and prices and by manufacturing
cost improvements.  These gains were partially offset by the sale of Packaging
Films and lower Aerospace margins.  SG&A expenses were flat, while R&D expenses
declined.  Cost savings from previous restructurings and ongoing
cost-management programs were offset by higher expenses for employee incentive
compensation programs (related to achieving above-target levels of performance)
and higher expenses for manufacturing support and marketing.  R&D expenses
reflect the impact of lower spending in the Aerospace segment and other
divested businesses.  Other operating expenses declined $48 million.  Lower
1994 environmental expenses and severance costs, coupled with 1993
restructuring charges related to the disposition of Liquid Molding Resins and a
company-wide reduction in personnel, account for the favorable change.
Environmental expenses declined from $35 million to $20 million as no new sites
were identified that required recognition of significant environmental
expenditures.

    Chemical Specialties: Net sales increased 7%, or $73 million, in 1995 from
improved pricing, stronger foreign currencies, and increased sales of
higher-value wet-strength resin products and polypropylene nonwoven fibers.
Market softness in the United States and Europe during the second half of the
year due to paper mill shutdowns and lower demand in adhesives markets reduced
overall Paper Technology and Resins volumes.

    Profit from operations increased 7%, or $14 million, in 1995.  Margins
were unchanged as gains from higher revenues and manufacturing cost
improvements were offset by higher raw material costs, lower production volume,
and increased SG&A costs, in the fourth quarter, associated with higher
incentive compensation.

    In 1994, net sales rose 11%, or $105 million, from higher prices for Resins
in adhesives, chewing gum, construction, and graphic arts markets along with
overall Resins volume growth.  Other positive factors were strong volumes for
polypropylene nonwoven fiber in the diaper coverstock market and increased
volumes of rosin size and emulsion products from higher utilization rates in
the paper industry. Profit from operations rose 32%, or $48 million, in 1994,
largely from higher revenues.  Operating profit also benefitted from lower
per-unit manufacturing cost derived from higher production volume.

    Food & Functional Products: Net sales increased 11%, or $101 million, in
1995.  Higher selling prices and stronger foreign currencies contributed to the
growth in both Aqualon and Food Gums.  Aqualon volumes were marginally higher;
however, lower demand in the food markets in the second half of the year
reduced overall volume.

    Profit from operations increased 26%, or $39 million, and the operating
profit margin increased from 16% to 18%.  Higher revenues, coupled with
manufacturing cost improvements, were partially offset by





                                       8
<PAGE>   10
higher raw material costs and lower yields, particularly in Food Gums.  Higher
SG&A costs in the fourth quarter, associated with higher incentive
compensation, also reduced operating profit.

    In 1994, net sales increased 9%, or $78 million.  Aqualon sales reflect
higher volumes and prices from strong demand in the paint, construction, and
regulated markets.  This improvement was partially offset by lower volumes in
oil and gas markets, along with declines in coatings from continued pricing
pressures by foreign manufacturers in furniture-coating applications.  Higher
volumes in Food Gums and printing product applications also added to revenue
improvement.  Profit from operations grew 31%, or $35 million, in 1994 from
price and volume improvements.  Contributing to operating profit improvement
were lower manufacturing costs, higher yields from process improvements, and
better utilization of capacity.

    Despite the strong financial performance in 1995, future results remain
difficult to predict.  The softness in demand experienced by segments of the
chemical industry during the second half of 1995 may continue into early 1996.
This could have an unfavorable impact on first quarter financial performance.
However, we expect markets to strengthen throughout the year, yielding overall
favorable results for 1996. We will continue to focus on delivering earnings
growth and shareholder value.*

    Corporate and other:  Net sales declined $34 million in 1995, primarily
from the divestiture of Packaging Films in April 1994.  Operating losses
increased $12 million, primarily reflecting higher environmental costs
partially offset by improvement in Composite Products' operating performance.

    In 1994, net sales declined $124 million, reflecting the Packaging Films
divestiture.  Operating losses declined $35 million because of restructuring
charges taken in 1993 coupled with lower environmental expenses.

    Equity in income of affiliated companies increased by $15 million.  The
improvement reflects equity earnings from Hercules' 30% stake in Alliant
Techsystems, acquired in divesting the Aerospace segment in March 1995.
Improved earnings from Tastemaker, a 50%-owned flavors joint venture, also
added to the improvement.  In 1994, income increased by $2 million, reflecting
improved earnings in Tastemaker, partially offset by the sale of several
affiliates in 1993.

    Interest and debt expense remained relatively flat as the effect of lower
average debt over the period was offset by decreased capitalized interest
related to lower capital spending.  In 1994, interest and debt expense declined
22% on reduced levels of average debt and increased capitalized interest
related to higher capital spending.

    Other income (expense), net (see Note 16), showed a favorable change of
$137 million in 1995. This increase relates primarily to the gains on the sale
of  Aerospace and the Electronics & Printing Division.  In 1994, the
unfavorable change of $24 million primarily reflects 1993 favorable litigation
settlements of $29 million.

    The provision for income taxes reflects effective tax rates of 34% in 1995
and 33% in 1994 and 1993. The 1995 rate was favorably affected by increased
utilization of foreign tax credits and a state income tax settlement related to
a prior year sale of an investment.  Both the 1994 and 1993 rates have been
favorably affected by research and experimentation tax credits of $4 million
and $10 million, respectively.  (See Note 17.)




 *  This paragraph contains forward-looking statements and is included here to
    provide safe harbor under the Private Securities Litigation Reform Act of
    1995.





                                       9
<PAGE>   11
    FINANCIAL CONDITION

    Liquidity and financial resources: Net cash flow from operations was $328
million, $297 million, and $659 million in 1995, 1994, and 1993, respectively.
The increase in 1995 primarily relates to reduced working capital requirements
and lower income tax payments.  1993 cash flow included recoveries related to
contract settlements in the divested Aerospace segment of approximately $262
million and cash proceeds from favorable litigation settlements.  Income taxes
on the contract settlements were paid in 1994.  As a result of these factors
and higher working capital requirements, 1994 cash flow was substantially lower
than in 1993.  Total cash flow was favorably affected by proceeds from asset
disposals of $376 million in 1995, $202 million in 1994, and $61 million in
1993.

    In the three-year period ended December 31, 1995, the company satisfied its
cash requirements for capital expenditures, other investing activities, and
dividends entirely from operating cash flows.

    In addition to internally generated cash, various credit sources are
available to the company.  These include short-term lines of credit, of which
$46 million was available at December 31, 1995, and revolving credit agreements
with several banks providing $380 million ($170 million of which was available
at December 31, 1995).  In addition, the company has a shelf registration in
the amount of $50 million available, subject to market conditions.

    Capital expenditures increased to $164 million in 1994 and declined to $117
million in 1995.  This increase and subsequent decrease relates primarily to
spending on a new methylcellulose facility in Doel, Belgium, which was
completed in late 1994.

    During 1995, the company increased the deductible for property insurance to
$50 million.  This change, which lowers premium costs, was prompted by the
favorable loss experience in the Chemical businesses and the divestiture of the
Aerospace segment.

    Commitments and capital structure: Total capitalization (stockholders'
equity plus debt) decreased 11% to $1.6 billion at December 31, 1995.
Stockholders' equity declined $212 million as share repurchases continued,
while total debt increased $9 million.  As a result, total debt as a percentage
of capitalization increased to 32% from 28%.  The company does not intend to
have this ratio exceed 40%.

    In January 1996, the company announced Board approval for the continuation
of the stock-repurchase program and authorized the repurchase of up to 15
million additional shares of Hercules stock.

    Fluctuations in interest and foreign currency exchange rates affect the
company's financial position and results of operations.  The company uses
several strategies to actively hedge interest rate and foreign currency
exposure and minimize the effect of such fluctuations on reported earnings.
(See "Foreign Currency Translation" and "Financial Instruments and Hedging" in
the Summary of Significant Accounting Policies and Notes 16 and 19.)  There are
presently no significant restrictions on the remittance of funds generated by
the company's operations outside the United States.

    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 $92
million and $280 million.  The company does not anticipate that its financial
condition will be materially affected by environmental remediation costs in
excess of amounts accrued, although quarterly or annual operating results could
be materially affected.  (See Note 22.)

    Environmental remediation expenses for nonoperating and operating sites
have been 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.

    A quarterly dividend has been paid without interruption since 1913, the
company's first year of operation.  The annual dividend of $.84 per share
during 1995 represents a total payout for the year of





                                       10
<PAGE>   12
$95 million.  Additionally, in December 1995, the company announced a 10%
quarterly dividend increase to $.23 per share, payable March 25, 1996, to
shareholders of record on March 8, 1996.

    During 1995, 23% of capital expenditures were related to increased
production capacity, compared with 43% in 1994 and 35% in 1993.  The remainder
mostly relates to cost-savings projects, regulatory requirements, and research
facilities.  Capital expenditures are expected to approximate $148 million
during 1996.  This amount includes funds for continuing and/or completing
existing projects related to cost savings and expansions.

    STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS NOT YET ADOPTED

    In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No.  121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of," for fiscal years beginning after December 15, 1995.  The provisions of
SFAS No. 121 require the company to review its long-lived assets for impairment
on an exception basis whenever events or changes in circumstances indicate that
the carrying amount of the assets may not be recoverable through future cash
flows.  Any loss will be recognized in the income statement and certain
disclosures regarding the impairment are to be made in the financial
statements. The company is evaluating the provisions of SFAS No. 121 and does
not anticipate a material effect on its financial position.

    In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation," for fiscal years beginning after December 15, 1995.  SFAS No.
123 allows companies to recognize compensation expense for grants of stock,
stock options, and other equity instruments to employees based upon fair value
or permits them to continue to apply the existing accounting rules contained in
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" (APB No. 25). Companies choosing to continue on APB No. 25 are
required to disclose pro forma net income and earnings per share data based on
fair value.  The company anticipates continuing to account for stock-based
compensation in accordance with APB No. 25 and therefore the adoption of SFAS
123 will not have an impact on the company's financial position or results of
operations.

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   . . . . . . . . . . . . . . . . . . . . . . . . . . . .        12
      Consolidated Statement of Operations for the Years Ended December 31, 1995, 1994,
          1993  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        13
      Consolidated Balance Sheet as of December 31, 1995 and 1994   . . . . . . . . . . . . . . .        14
      Consolidated Statement of Cash Flows for the Years Ended December 31, 1995,
          1994, and 1993  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        15
      Consolidated Statement of Stockholders' Equity for the Years Ended December 31,
           1995, 1994, and 1993 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        16
      Notes to Consolidated Financial Statements  . . . . . . . . . . . . . . . . . . . . . . . .       19-34

SUPPLEMENTARY DATA
      Summary of Quarterly Results (Unaudited)  . . . . . . . . . . . . . . . . . . . . . . . . .        35
      Subsidiaries of Registrant  . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .        36
</TABLE>





                                       11
<PAGE>   13
                       REPORT OF INDEPENDENT ACCOUNTANTS


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

We have audited the accompanying consolidated balance sheets of Hercules
Incorporated and subsidiary companies as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flow for each of the three years in the period ended December 31, 1995. These
financial statements are the responsibility of the company's management.  Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards.  Those standards 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.  An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.  We believe our audits provide a reasonable basis for
our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Hercules
Incorporated and subsidiary companies as of December 31, 1995 and 1994, and the
consolidated results of their operations and cash flow for each of the three
years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles.

As discussed in Notes 13 and 17 to the financial statements, in 1993, the
company changed its methods of accounting for postemployment benefits,
postretirement benefits other than pensions, and income taxes.



Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
February 7, 1996





                                       12
<PAGE>   14
Hercules Incorporated
Consolidated Statement of Operations    (Dollars in thousands, except per share)

<TABLE>
<CAPTION>
                                                                 Year Ended December 31,
--------------------------------------------------------------------------------------------------------------
                                                                         1995             1994            1993
                                                                 ---------------------------------------------
<S>                                                              <C>               <C>              <C>
Net sales                                                         $2,427,180       $2,821,015       $2,773,404
                                                                 ---------------------------------------------
Cost of sales                                                      1,591,715        1,924,342        1,931,015
Selling, general, and administrative expenses                        367,239          373,941          371,725
Research and development                                              58,547           64,780           76,121
Other operating expenses, net (Note 14)                               46,686           39,104           86,912
                                                                 ---------------------------------------------
Profit from operations                                               362,993          418,848          307,631
                                                                 
Equity in income of affiliated companies                              40,835           25,605           24,108
Interest and debt expense (Note 15)                                   28,383           28,137           36,159
Other income (expense), net (Note 16)                                129,198          (8,028)           15,606
                                                                 ---------------------------------------------
                                                                 
                                                                 
Income before income taxes, extraordinary item,                  
     and effect of changes in accounting principles                  504,643          408,288          311,186
Provision for income taxes (Note 17)                                 171,893          134,132          102,766
                                                                 ---------------------------------------------


Income before effect of extraordinary item and
     changes in accounting principles                                332,750          274,156          208,420
                                                                                     
Extraordinary charge for early retirement of debt                         --               --          (3,578)

Effect of changes in accounting principles (Notes 13 and 17)              --               --        (238,218)
                                                                 ---------------------------------------------

Net income (loss)                                                $   332,750       $  274,156      $  (33,376)
                                                                 =============================================

Earnings per share (Note 18):
Before effect of extraordinary item and
     changes in accounting principles                            $      2.93       $    2.29       $      1.62

Extraordinary charge for early retirement of debt                         --              --            ( .03)

Effect of changes in accounting principles (Notes 13 and 17)              --              --            (1.85)
                                                                 ---------------------------------------------


Earnings (loss) per share                                        $      2.93       $    2.29       $    ( .26)
                                                                 =============================================
</TABLE>



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





                                       13
<PAGE>   15
Hercules Incorporated
Consolidated Balance Sheet                                (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                                   December 31,
-----------------------------------------------------------------------------------------------------------------
                                                                                          1995            1994
                                                                                   ------------------------------
<S>                                                                                 <C>             <C>
ASSETS

Current assets
      Cash and cash equivalents                                                     $   72,941      $  111,637
      Accounts receivable, net (Note 1)                                                425,865         588,851

      Inventories (Note 2)                                                             308,080         362,254

      Deferred income taxes (Note 17)                                                   60,247          89,573
                                                                                   ---------------------------
             Total current assets                                                      867,133       1,152,315

Property, plant, and equipment, net (Note 11)                                          999,697       1,216,055

Investments (Note 3)                                                                   344,273         224,760

Prepaid pension (Note 12)                                                              174,689         222,412
Deferred charges and other assets                                                      107,686         125,711
                                                                                   ---------------------------

             Total assets                                                           $2,493,478      $2,941,253
                                                                                   ===========================

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities
      Accounts payable                                                              $  117,030      $  162,858
      Short-term debt (Note 5)                                                         206,799         188,347
      Accrued expenses (Note 11)                                                       362,892         416,265
                                                                                   ---------------------------
             Total current liabilities                                                 686,721         767,470

Long-term debt (Note 6)                                                                297,855         307,217
Deferred income taxes (Note 17)                                                         94,946         129,183
Other postretirement benefits (Note 13)                                                164,645         253,435
Deferred credits and other liabilities                                                 167,435         189,267

Stockholders' equity
      Series preferred stock (Note 7)                                                       --              --
      Common stock (Note 8)
              (shares issued: 1995--151,663,465; 1994--149,115,459)                     78,992          77,665
      Additional paid-in capital                                                       471,749         394,749
      Foreign currency translation adjustment                                           74,687          49,422
      Retained earnings                                                              1,712,286       1,474,329
                                                                                   ---------------------------
                                                                                     2,337,714       1,996,165
Reacquired stock, at cost (shares: 1995--43,176,841; 1994--32,480,067)               1,255,838         701,484
                                                                                   ---------------------------
             Total stockholders' equity                                              1,081,876       1,294,681
                                                                                   ---------------------------

             Total liabilities and stockholders' equity                             $2,493,478      $2,941,253
                                                                                   ===========================
</TABLE>

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





                                       14
<PAGE>   16
Hercules Incorporated
Consolidated Statement of Cash Flow                       (Dollars in thousands)
Increase (Decrease) in Cash and Cash Equivalents

<TABLE>
<CAPTION>
                                                                           Year Ended December 31,
-----------------------------------------------------------------------------------------------------------------------
                                                                                  1995             1994            1993
                                                                           --------------------------------------------
<S>                                                                        <C>              <C>              <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss)                                                           $  332,750       $  274,156      $ (33,376)
Adjustments to reconcile net income to net cash
provided from operations:
      Effect of changes in accounting principles                                    --               --         238,218
      Extraordinary charge for early retirement of debt                             --               --           3,578
      Depreciation                                                             132,536          147,974         169,292
      Contract deferrals and provisions                                        (7,000)         (48,000)          98,257
      Nonoperating gain on disposals                                         (131,784)         (14,437)         (5,505)
      Other nonoperating items                                                  70,272           57,522          48,285
      Accruals and deferrals of cash receipts and payments:
             Affiliates earnings less than dividends received                 (17,826)          (5,624)             191
             Accounts receivable                                                45,102         (17,791)         151,987
             Inventories                                                        27,024           35,924          31,507
             Accounts payable and accrued expenses                            (92,210)         (77,972)        (29,261)
             Deferred charges                                                  (8,311)         (15,508)           9,697
             Noncurrent credits and liabilities                               (22,123)         (38,492)        (23,382)
                                                                           --------------------------------------------
                          Net cash provided from operations                    328,430          297,752         659,488

CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures                                                         (116,809)        (164,182)       (149,466)
Proceeds of investment and fixed asset disposals                               376,237          202,007          60,829
Payments for businesses acquired, net of cash acquired                         (5,641)          (2,416)         (1,137)
Cash invested in unconsolidated affiliates, net                                     --               --         (5,540)
Other                                                                           12,124            5,262         (8,332)
                                                                           --------------------------------------------
                          Net cash provided from (used for)
                          investing activities                                 265,911           40,671       (103,646)

CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds                                                         96,806           80,008         194,588
Long-term debt repayments                                                     (77,633)        (138,420)       (221,294)
Change in short-term debt                                                       14,458           97,821        (28,247)
Common stock issued                                                             14,528            8,915          16,560
Common stock reacquired                                                      (584,080)        (342,035)       (320,488)
Dividends paid                                                                (94,793)         (89,045)        (94,962)
                                                                           --------------------------------------------
                          Net cash used for financing activities             (630,714)        (382,756)       (453,843)
Effect of exchange rate changes on cash                                        (2,323)            1,342           (923)
                                                                           --------------------------------------------
Net increase (decrease) in cash and cash equivalents                          (38,696)         (42,991)         101,076
Cash and cash equivalents at beginning of year                                 111,637          154,628          53,552
                                                                           --------------------------------------------
Cash and cash equivalents at end of year                                    $   72,941       $  111,637      $  154,628
                                                                           ============================================

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
      Interest (net of amount capitalized)                                  $   30,071       $   30,988      $   38,359
      Income taxes paid, net                                                   133,745          194,385         132,827
Noncash investing and financing activities:
      Conversion of notes and debentures                                        28,036           31,180          18,524
      Incentive plan stock issuances                                            58,113           41,233          61,600
      Accounts payable for common stock acquisitions                               570            7,946          22,046
      Premium for early retirement of debt                                          --               --           4,144
      Investment in unconsolidated affiliates                                  173,862               --              --
                                                                             ------------------------------------------
</TABLE>

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





                                       15
<PAGE>   17
Hercules Incorporated
Consolidated Statement of Stockholders' Equity            (Dollars in thousands)

<TABLE>
<CAPTION>
                                                                    Common   Paid-In  Translation     Retained     Reacquired
                                                                    Stock    Capital  Adjustment      Earnings       Stock
<S>                                                                <C>      <C>          <C>        <C>           <C>
Balances at January 1, 1993                                        $30,815   $386,591    $35,378    $2,083,343      $789,711
----------------------------------------------------------------------------------------------------------------------------
     (Common shares: issued 59,164,548; reacquired, 15,642,799)
----------------------------------------------------------------------------------------------------------------------------
Net loss                                                                --         --         --      (33,376)            --
Cash dividends, $.75 per common share                                   --         --         --      (94,962)            --
Foreign currency translation adjustment                                 --         --    (5,785)            --            --
Purchase of common stock, 3,959,300 shares                              --         --         --            --       340,770
     Issuance of common stock:
Incentive plans, net, 857,015 shares including
     539,804 from reacquired stock                                     166     48,655         --            --      (29,339)
Conversion of notes and debentures, 417,536 shares                     217     18,307         --            --            --

Balances at December 31, 1993                                      $31,198   $453,553    $29,593    $1,955,005    $1,101,142
----------------------------------------------------------------------------------------------------------------------------
     (Common shares: issued 59,899,295; reacquired, 19,062,295)
----------------------------------------------------------------------------------------------------------------------------
Net income                                                              --         --         --       274,156            --
Cash dividends, $.75 per common share                                   --         --         --      (89,045)            --
Foreign currency translation adjustment                                 --         --     19,829            --            --
Purchase of common stock, 2,981,500 shares                              --         --         --            --       327,935
     Issuance of common stock:
Incentive plans, net, 317,262 shares including
     217,106 from reacquired stock                                      52      4,764         --            --      (13,473)
Conversion of notes and debentures, 705,702 shares                     368     30,812         --            --            --
Retirement of reacquired stock, 11,000,000 shares                  (5,729)   (94,380)         --     (614,011)     (714,120)
Three-for-one common stock split effected in the
     form of a stock dividend: issued 99,410,306
     shares; 21,653,378 treasury shares                             51,776         --         --      (51,776)            --

Balances at December 31, 1994                                      $77,665   $394,749    $49,422    $1,474,329      $701,484
----------------------------------------------------------------------------------------------------------------------------
     (Common shares: issued 149,115,459; reacquired, 32,480,067)
----------------------------------------------------------------------------------------------------------------------------
Net income                                                              --         --         --       332,750            --
Cash dividends, $.84 per common share                                   --         --         --      (94,793)            --
Foreign currency translation adjustment                                 --         --     25,265            --            --
Purchase of common stock, 11,546,399 shares                             --         --         --            --       576,704
     Issuance of common stock:
Incentive plans, net, 1,476,805 shares including
     849,625 from reacquired stock                                     327     49,964         --            --      (22,350)
Conversion of notes and debentures, 1,920,826 shares                 1,000     27,036         --            --            --

Balances at December 31, 1995                                      $78,992   $471,749    $74,687    $1,712,286    $1,255,838
----------------------------------------------------------------------------------------------------------------------------
     (Common shares: issued 151,663,465; reacquired, 43,176,841)
----------------------------------------------------------------------------------------------------------------------------
</TABLE>


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



                                      16
<PAGE>   18


Hercules Incorporated
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION
     The consolidated financial statements include the accounts of Hercules
Incorporated and all wholly owned subsidiaries.  Investments in affiliated
companies with a 20% or greater ownership interest are accounted for on an
equity basis and, accordingly, consolidated income includes Hercules' share of
their income.

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.  Actual results could differ from those estimates.

RECLASSIFICATIONS
     On January 30, 1995, a three-for-one stock split was distributed in the
form of a 200% tax-free stock dividend to stockholders of record January 9.
Stockholders' equity at December 31, 1994, was adjusted by reclassifying the
par value of the additional shares arising from the split from retained
earnings to common stock.  All references in the financial statements to
per-share amounts, number of shares at December 31, 1994, and stock-option data
of the company's common stock have been restated.

     The Composite Products Division is included in segment Corporate and
other; previously it was reported in the Aerospace segment, which was divested
in March 1995.  Information for 1994 and 1993 has been restated to conform with
the 1995 presentation.

LONG-TERM CONTRACTS
     Aerospace sales typically were under long-term contracts and included
cost-reimbursement and fixed-price contracts.  Sales under cost-reimbursement
contracts were recognized for accounting purposes as costs were incurred and
included a proportion of the fees expected to be realized equal to the ratio of
costs incurred to date to total estimated costs.  Sales under fixed-price
contracts were recognized for accounting purposes as the actual cost of work
performed relates to the estimate at completion.  Cost or performance
incentives, which were incorporated in certain contracts, were recognized when
realization was assured and amounts could be reasonably estimated.  Estimated
amounts for contract changes and claims were included in contract sales only
when realization was probable.  Assumptions used for recording sales and
earnings were adjusted in the period of change to reflect revisions in contract
value and estimated costs.  In the period in which it was determined that a
loss would be incurred on a contract, the entire amount of the estimated loss
was charged to income.

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 the 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 represent 61%
of total inventories at December 31, 1995, are valued principally by the
average-cost method.



                                       17
<PAGE>   19


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 that
straight-line depreciation provides a better matching of costs and revenues
over the lives of the assets.

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

INCOME TAXES
     Income taxes are determined in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109, which requires an asset-and-liability
approach for financial accounting and reporting of income taxes. Changes in
enacted tax rates are reflected in the tax provision as they occur.  A
valuation allowance is recorded to reduce deferred tax assets when realization
of a tax benefit is unlikely.

     The company provides taxes on undistributed earnings of subsidiaries and
affiliates included in consolidated retained earnings to the extent such
earnings are planned to be remitted and not reinvested permanently.

FOREIGN CURRENCY TRANSLATION
     With the exception of operations in countries with highly inflationary
economies, 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 the foreign currency translation adjustment account in the
stockholders' equity section of the balance sheet.  The related allocation for
income taxes is not significant.  For operations in countries with highly
inflationary economies, financial statements are translated at either current
or historical exchange rates, as appropriate.   These adjustments, along with
gains and losses on currency transactions (denominated in currencies other than
local currency), are reflected in net income.  The translation loss of the
inflationary component of interest income related to holding marketable
securities in highly inflationary economies is classified as a reduction in
interest income.

FINANCIAL INSTRUMENTS AND HEDGING
     Derivative financial instruments are used to hedge risk caused by
fluctuating currency and interest rates.  The company enters into forward
exchange contracts and currency swaps to hedge foreign currency exposure.
Realized and unrealized gains and losses on these contracts are included in net
income, except for gains and losses on contracts to hedge specific foreign
currency commitments, which are deferred and accounted for as part of the
transaction.  Gains or losses on contracts used to hedge the value of
investments in certain non-U.S. subsidiaries are included in the foreign
currency translation adjustment account.  The company does not hold or issue
financial instruments for trading purposes.

     The company uses interest rate swap agreements to manage interest costs
and risks associated with changing rates.  The differential to be paid or
received is accrued as interest rates change and is recognized in interest
expense over the life of the agreements.  Counterparties to the forward
exchange, currency swap, and interest rate swap contracts are major financial
institutions.  Credit loss from counterparty nonperformance is not anticipated.




                                       18
<PAGE>   20

Hercules Incorporated
NOTES TO FINANCIAL STATEMENTS           (Dollars in thousands, except per share)

1.   ACCOUNTS RECEIVABLE, NET

Accounts receivable, net, consists of:
<TABLE>
<CAPTION>
                                                                                         1995             1994
                                                                                      ------------------------
             <S>                                                                     <C>              <C>
             Trade                                                                   $346,016         $537,383
             Other                                                                     85,407           58,675
                                                                                     -------------------------
                 Total                                                                431,423          596,058
             Less allowance for doubtful accounts                                       5,558            7,207
                                                                                      ------------------------
                                                                                     $425,865         $588,851
                                                                                     =========================
</TABLE>

      At December 31, 1995, net accounts receivable from customers located in
the United States, Europe, and other regions were $227,374, $157,834, and
$40,657, respectively.  At December 31, 1994, trade accounts receivable
included amounts under long-term contracts and subcontracts with the U.S.
Government or its contractors (related to the divested Aerospace segment) of
$171,705, net of progress payments of $297,200.  Included in these amounts were
unbilled accounts receivable of $94,369.

2.    INVENTORIES

The components of inventories are:
<TABLE>
<CAPTION>
                                                                                         1995             1994
                                                                                      ------------------------
             <S>                                                                     <C>              <C>
             Finished products                                                       $167,793         $171,891
             Materials, supplies, and work in process                                 140,287          190,363
                                                                                     -------------------------
                                                                                     $308,080         $362,254
                                                                                     =========================
</TABLE>

      Inventories valued on the LIFO method were lower than if valued under the
average-cost method, which approximates current cost, by $36,564 and $34,171 at
December 31, 1995 and 1994, respectively.

3.    INVESTMENTS

Total equity investments in affiliated companies were $260,920 and $133,810 at
December 31, 1995 and 1994, respectively.  Dividends received from affiliated
companies were $9,285 in 1995, $11,281 in 1994, and $18,381 in 1993.

      Other investments, at cost or less, were $83,353 and $90,950 for the
years ended December 31, 1995 and 1994, respectively.  Included in these
amounts are noncurrent marketable securities aggregating $39,978 and $53,242
for the corresponding years.  The company's investments in equity and debt
securities covered under the scope of SFAS No. 115, "Accounting for Certain
Investments in Debt and Equity Securities," are classified as "available for
sale."  The value of these investments, based on market quotes, approximates
book values.




                                       19
<PAGE>   21

      A summary of the results of operations and net assets for all affiliated
companies accounted for on the equity method is as follows:

<TABLE>
<CAPTION>
                                                                       1995              1994
                                                                  ---------------------------
<S>                                                               <C>
Results of Operations
---------------------
      Net sales                                                    $1,222,280       $ 328,970
      Profit from operations                                          141,273          54,127
      Net income                                                       84,844          41,596


Net Assets
----------
      Current assets                                                  553,713          165,683
      Other assets                                                    719,853          224,737
                                                                    --------------------------
             Total assets                                           1,273,566          390,420

      Current liabilities                                           (390,199)         (73,314)
      Other liabilities                                             (534,742)         (59,384)
      Interest of others                                            (189,576)        (133,103)
                                                                    --------------------------
</TABLE>



4.    CONTRACT DEFERRALS AND PROVISIONS

In 1993, the company settled contract claims related to the divested Aerospace
segment.  As a result, Hercules received payments of $262,000 in 1993 and
$21,700 in 1994.  Estimated costs at completion for these contracts were
reviewed quarterly and considered the progress of the contracts, changes in
contract terms and conditions, and other contingencies.  Year-end 1994
deferrals and provisions amounted to $63,097.




                                       20
<PAGE>   22


5.    SHORT-TERM DEBT

A summary of short-term debt follows:
<TABLE>
<CAPTION>
                                                                             1995                 1994
                                                                         -----------------------------
<S>                                                                      <C>                  <C>
Commercial paper                                                         $160,000             $100,000
Banks                                                                      46,577               35,600
Current maturities of long-term debt                                          222               52,747
                                                                         -----------------------------
                                                                         $206,799             $188,347
                                                                         =============================
</TABLE>

     Commercial paper is issued or renewed for varying periods, with interest
at prevailing market rates.  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 commercial
paper and bank borrowings approximate market value because of their short
maturity period.

     At December 31, 1995, Hercules had $46,467 of unused lines of credit that
may be drawn as needed, with interest at a negotiated spread over lenders' cost
of funds.  Lines of credit in use at December 31, 1995, were $43,860.  Weighted
average interest rates on short-term borrowings at December 31, 1995 and 1994,
were 6.78% and 6.01%, respectively.

6.   LONG-TERM DEBT

A summary of long-term debt follows:
<TABLE>
<CAPTION>
                                                                             1995                 1994
                                                                         -------------------------------
<S>                                                                      <C>                 <C>
Term loans due 1997-2000 (a)                                             $    804            $  52,393
6.5% convertible subordinated debentures due 1999 (b)                       1,981                4,242
7.85% notes due 2000                                                       25,000               25,000
6.625% notes due 2003 (c)                                                 124,861              124,842
8% convertible subordinated debentures due 2010 (d)                        41,130               66,905
Commercial paper (e)                                                       50,000                   --
Variable rate loans (f)                                                    46,600               75,400
Other                                                                       7,701               11,182
                                                                         -----------------------------
                                                                          298,077              359,964
Current maturities of long-term debt                                        (222)             (52,747)
                                                                         -----------------------------
Net long-term debt                                                       $297,855             $307,217
                                                                         =============================
</TABLE>

         (a) Term loans are with several banks and bear interest at various
rates at an agreed-upon spread over lenders' cost of funds.

         (b) Subordinated debentures are convertible into common stock at
$11.67 per share and are redeemable at the option of the company at varying
rates.

         (c) Par value of $125,000 issued June 1993.

         (d) 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 $5,000, beginning in 1996, has
been satisfied through conversions of debentures.

         (e) The company has both the intent and the ability, through its
revolving credit agreement, to refinance this amount on a long-term basis.

         (f) Uncollateralized bank borrowings with average maturities of 400
days, with interest at a negotiated spread over lenders' cost of funds.



                                       21
<PAGE>   23

         The company has entered into a revolving credit and competitive
advance facility agreement with several banks providing for commitments that
terminate in 2000.  Hercules may borrow up to a total of $380,000 (of which
$170,000 was available at December 31, 1995) at agreed-upon spreads over
various benchmark rates, such as London Interbank Offered Rate (LIBOR).  This
agreement requires the maintenance of certain financial ratios.

         Long-term debt maturities during the next five years are $222 in 1996,
$49,183 in 1997, $486 in 1998, $2,111 in 1999, and $27,715 in 2000.

7.       SERIES PREFERRED STOCK

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

8.       COMMON STOCK

Hercules common stock has a stated value of $25/48, and 150,000,000 shares are
authorized for issuance. At December 31, 1995, a total of 14,655,940 shares
were reserved for issuance for the following purposes:  879,999 shares for
sales to the Savings Plan Trustee; 7,423,525 shares for the exercise of awards
under the Stock Option Plan; 1,851,597 shares for awards under incentive
compensation plans; 2,933,783 shares for conversion of debentures and notes;
and 1,567,036 shares for employee stock purchases.

         For the company's stock repurchase program, from its start in 1991
through year-end 1995, the Board authorized the repurchase of up to 47,850,000
shares of company common stock, 4,350,000 shares of which was intended to
satisfy requirements of various employee benefit programs.   During this
period, a total of 46,621,799 shares of common stock was purchased in the open
market at an average price of $32.04 per share.

9.       STOCK-BASED INCENTIVE PLANS

The 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
nonemployee directors.

         Through 1994, shares of common stock awarded under these plans
normally were either restricted stock (shares subject to restrictions on
transfer and subject to risk of forfeiture until earned by continued
employment) or performance shares (shares subject to the same restrictions and
risk of forfeiture, whose ultimate distribution is contingent on performance as
measured against predetermined objectives over a specified period of time).
During the restriction period, award holders have the rights of stockholders,
including the right to vote and receive cash dividends, except for the right to
transfer ownership.  Shares 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.

         Restricted stock continues to be awarded with respect to certain
programs.  In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation.
Replacing restricted stock and performance shares for key management employees
are stock options, performance-accelerated stock options, and Cash Value Awards
(awards denominated in cash and payable in shares of common or restricted
stock, subject to the same restrictions and risk of forfeiture, whose ultimate
distribution is contingent on performance as measured against predetermined
objectives over a specified period of time).

         The number of awarded shares outstanding was 1,691,546; 3,269,250; and
2,863,341 at December 31, 1995, 1994, and 1993, respectively.  The cost of
stock awards and other market-based units, which is charged to income over the
restriction or performance period, amounted to $81,161 (including $38,759 in
the fourth quarter, primarily related to the early vesting of certain long-term
incentive compensation programs) during 1995 and $41,256 and $36,606 during
1994 and 1993, respectively (including fourth-quarter charges of




                                       22
<PAGE>   24

$14,858 and $19,954 in 1994 and 1993, respectively, related to increases in the
company's stock price and performance at above target levels).  At December 31,
1995, there were 1,851,597 shares of common stock available for award under the
plans.

         Under the company's stock option plans, two types of stock options are
awarded.  Regular stock options are granted at the market price on the date of
grant, are exercisable at various periods from one to five years after date of
grant, and expire 10 years after date of grant.  Performance accelerated stock
options are also granted at the market price on the date of grant, normally
exercisable after 9-1/2 years, with expiration 10 years after date of grant.
In the event of the achievement of predetermined performance goals over a
specified period of time, the options may become exercisable earlier.

         A summary status of the company's stock option plans:
<TABLE>
<CAPTION>
                                                                 Shares                
                                                   ------------------------------------
                                                     Available
                                                     for Grant            Outstanding                 Price Range
-----------------------------------------------------------------------------------------------------------------
<S>                                                <C>                    <C>                     <C>     <C>
January 1, 1993                                      4,197,540              3,473,295             $11.33 - $19.04
Authorized                                           1,800,000
Granted                                              (935,550)                935,550             $22.92 - $37.17
Exercised                                                                 (1,002,597)             $11.83 - $19.04
Cancelled                                                                     (5,700)             $11.83 - $19.04
-----------------------------------------------------------------------------------------------------------------
December 31, 1993                                    5,061,990              3,400,548             $11.33 - $37.17
Granted                                              (872,700)                872,700             $35.29 - $38.33
Exercised                                                                   (348,438)             $11.83 - $25.00
Cancelled                                                                    (11,850)             $12.25 - $16.21
-----------------------------------------------------------------------------------------------------------------
December 31, 1994                                    4,189,290              3,912,960             $11.33 - $38.33
Granted                                            (1,435,324)              1,435,324             $47.25 - $59.88
Exercised                                                                   (654,625)             $11.83 - $35.39
Cancelled                                                                    (24,100)             $11.83 - $19.04
-----------------------------------------------------------------------------------------------------------------
December 31, 1995                                    2,753,966              4,669,559             $11.33 - $59.88
</TABLE>

Options exercisable at December 31, 1995, 1994, and 1993 were 2,567,445;
2,242,950; and 1,834,878, respectively.

10.   EMPLOYEE STOCK PURCHASE PLAN

In April 1993, the company approved a qualified, noncompensatory Employee Stock
Purchase Plan, which allows eligible employees to acquire shares of common
stock through systematic payroll deductions.  The plan consists of three-month
subscription periods, starting July 1, 1993.  The purchase price for each share
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.  Currently, 1,800,000 shares of Hercules common stock are
registered for offer and sale under the plan. Shares issued at December 31,
1995 and 1994, were 232,965 and 143,787, respectively.




                                       23
<PAGE>   25

11.   ADDITIONAL BALANCE SHEET DETAIL

<TABLE>
<CAPTION>
                                                                                          1995            1994
                                                                                  ----------------------------
<S>                                                                               <C>              <C>
Property, plant, and equipment
     Land                                                                         $     24,868      $   32,368
     Buildings and equipment                                                         2,455,833       2,998,002
     Construction in progress                                                           83,539          70,379
                                                                                  -----------------------------
         Total                                                                       2,564,240       3,100,749
     Accumulated depreciation and amortization                                       1,564,543       1,884,694
                                                                                  -----------------------------
     Net property, plant, and equipment                                           $    999,697      $1,216,055
                                                                                  ============================

Accrued expenses
     Payroll and employee benefits                                                $    67,480       $   77,819
     Income taxes payable                                                              50,327           31,318
     Contract deferrals and provisions (Note 4)                                            --           63,097
     Other                                                                            245,085          244,031
                                                                                  ----------------------------
Accrued expenses                                                                  $   362,892       $  416,265
                                                                                  ============================
</TABLE>


12.  PENSION BENEFITS

Hercules and its consolidated subsidiaries maintain various defined benefit
pension plans covering substantially all employees.  Benefits for most plans
are based on average final pay and years of service, while benefits for certain
represented locations are based on stated amounts and years of service.  The
company's funding policy, consistent with statutory requirements and tax
considerations, is based on actuarial computations using the Entry Age Normal
method of calculation.

     Net periodic pension cost includes the following components:

<TABLE>
<CAPTION>
                                                       1995                     1994                      1993
                                                   -----------------------------------------------------------
<S>                                               <C>                      <C>                      <C>
Service cost (benefits earned
 during the year)                                 $  18,022                 $ 27,938                 $  28,347
Interest cost on projected
 benefit obligation                                  80,343                   99,671                    94,866
Return on plan assets                             (223,259)                    3,195                 (240,192)
Plan deferrals and amortization                     131,542                (111,348)                   130,651
Amortization of transition asset                   (15,005)                 (18,928)                  (18,952)
                                                  ------------------------------------------------------------
Net periodic pension expense (credit)             $ (8,357)                $     528                $  (5,280)
                                                  ============================================================
</TABLE>



                                       24
<PAGE>   26


      The company's pension plans have assets in excess of the accumulated
benefit obligation.  Plan assets include equity and fixed income securities and
real estate.  The following table presents a reconciliation of the funded
status of the pension plans to prepaid pension expense.

<TABLE>
<CAPTION>
                                                                                 1995                      1994
                                                                           ------------------------------------
<S>                                                                        <C>                       <C>
Plan assets at fair value                                                  $1,098,310                $1,268,463
                                                                           -----------------------------------

Actuarial present value of benefit
      obligations:
Accumulated benefit obligation
      (vested, 1995-$893,006;
      1994-$1,020,673)                                                        935,920                 1,063,070
Effect of increase in compensation                                            122,071                   117,947
                                                                            -----------------------------------

Projected benefit obligation                                                1,057,991                 1,181,017
                                                                            -----------------------------------

Plan assets in excess of projected benefit
      obligation                                                               40,319                    87,446
Unrecognized net loss                                                         159,749                   192,572
Unrecognized prior service cost                                                41,504                    52,391
Unrecognized transition asset                                                (66,883)                 (109,997)
                                                                            -----------------------------------

Prepaid pension expense                                                     $ 174,689                $  222,412
                                                                            ===================================
</TABLE>

      Significant assumptions used in determining pension obligations, and the
related pension expense, include a weighted-average discount rate of 7.25% at
December 31, 1995, and 8.6% at December 31, 1994, and an assumed rate of
increase in future compensation of 4.5% at both dates.  The decrease in the
discount rate reflects the significant decrease in interest rates in 1995.  The
expected long-term rate of return on plan assets was 9% for 1995 and 1994.

      The change in assumptions increased the accumulated and projected benefit
obligations by approximately $98,000 and $121,500, respectively.

      On March 15, 1995, Hercules transferred pension plan assets of $306,156
to an Alliant Techsystems pension plan in connection with the Aerospace
divestiture.  The underlying liabilities also were transferred to Alliant.  The
transfer of assets and liabilities resulted in curtailment and settlement
losses of $16,198 and $42,024, respectively, which were reflected in the net
gain on the sale of the Aerospace segment.  (See Note 16.)  The settlement loss
includes a reduction of $27,674 in the unrecognized transition asset.

13.   OTHER POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS

Hercules provides certain defined benefit postretirement health care and life
insurance benefits to retired employees.  Substantially all employees are
covered and become eligible for these benefits upon satisfying the appropriate
age and service requirements.

      Effective January 1, 1993, Hercules adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other than Pensions," which recognizes
these benefit costs on an accrual basis.  Prior to 1993, the costs were
expensed as incurred.  The effect of adopting this accounting standard resulted
in a $187,860 charge (net of a $115,140 tax benefit), or $1.46 per share,
against 1993 net income.  This charge represented the accumulated
postretirement benefit obligation existing at January 1, 1993, excluding
$60,000 related to employees of government-owned, contractor-operated plants
(GOCOs) that, based on opinion of company counsel, management believes is the
obligation of the U.S. Government.  In March 1995, the GOCO employees were
transferred, in conjunction with the sale of the Aerospace business, to Alliant
Techsystems.  The new accounting standard would have increased periodic benefit
expenses; however, modifications to the Hercules benefit plans in February 1993
have more than offset the increase.




                                       25
<PAGE>   27

      The following provides a reconciliation of the accumulated postretirement
benefit obligation (APBO) to the liabilities reflected in the company's balance
sheet at December 31, 1995 and 1994:

<TABLE>
<CAPTION>
                                                                        1995                  1994
                                                                  --------------------------------
<S>                                                                 <C>                   <C>
Accumulated postretirement benefit obligation:
      Retirees                                                      $153,050              $173,342
      Fully eligible employees                                        11,369                14,420
      Other employees                                                 18,713                23,474
                                                                    ------------------------------
Total accumulated postretirement benefit obligation                  183,132               211,236
Plan assets at fair value                                              9,344                 8,772
                                                                    ------------------------------
APBO in excess of plan assets                                        173,788               202,464
Unrecognized prior service benefit                                    32,696                59,013
Unrecognized gain (loss) on plan assets                                  679                 (457)
Unrecognized actuarial gain (loss)                                  (22,018)                16,993
                                                                    ------------------------------
Accrued postretirement benefit cost                                  185,145               278,013
Amount included in accrued expenses -- other                        (20,500)              (24,578)
                                                                    ------------------------------
Other postretirement benefits                                       $164,645              $253,435
                                                                    ==============================
</TABLE>

      The postretirement plans are contributory.  In August 1993, the company
established a Voluntary Employees' Beneficiary Association (VEBA) Trust and
contributed $10,000 to fund postretirement benefits for eligible employees.
Benefits for retirees not eligible under the Trust continue to be paid by the
company.  The company will periodically seek reimbursement from the Trust for
claims paid by the company that are eligible for reimbursement.  During 1995
and 1994, $1,998 and $2,005, respectively, in reimbursements were received from
the Trust.  The plan assets are invested primarily in equity funds.  The
weighted average of the expected long-term rate of return on plan assets is 9%.

      In January 1994, the company implemented managed care medical and
pharmacy programs for retirees.  These programs reduced the accumulated
postretirement benefit obligation by $8,205.  In February 1993, the company
modified its health care benefits.  The changes provided for increased
cost-sharing by current and future retirees.  The plan modifications reduced
the accumulated postretirement benefit obligation by $61,832.  These amounts
are being amortized over the average remaining service lives of the company's
active employees.  The components of net periodic benefit costs have been
reduced by $7,600 and $9,950 in 1995 and 1994, respectively, as a result of
these changes.

<TABLE>
<CAPTION>
                                                                         1995                 1994
                                                                     -----------------------------
<S>                                                                  <C>                   <C>
Service cost (benefits attributed to service during the year)        $   969               $ 1,832
Interest cost on accumulated postretirement benefit obligation        14,743                17,076
Plan deferrals and amortization                                      (2,223)               (4,747)
Return on plan assets                                                (2,570)                 (152)
                                                                     -----------------------------
Net periodic postretirement benefit cost                             $10,919               $14,009
                                                                     =============================
</TABLE>

      The weighted-average discount rate used to estimate the accumulated
postretirement benefit obligation was 7.25% and 8.6% at December 31, 1995 and
1994, respectively.  The decreased discount rate reflects the significant
decrease in interest rates in 1995.  The assumed health care cost trend rate at
December 31, 1995, was 8%, decreasing to 5% in 1998 and thereafter.  The
assumed health care cost trend rate at December 31, 1994, was 9%, decreasing to
4.5% in 1999 and thereafter.  At December 31, 1995 and 1994, the assumed
compensation increases for life insurance were based on graded scales averaging
4.4% for salaried employees and 3.4% for wage employees.  The change in the
discount rate assumption increased the accumulated postretirement benefit
obligation by $18,597 in 1995.

      A 1% increase in the assumed health care cost trend rate would have
increased the accumulated obligation as of December 31, 1995, and the net
benefit cost for 1995 by $11,000 and $1,100, respectively, and $17,000 and
$1,800, respectively, as of December 31, 1994.

       As a result of the sale of the Aerospace business, the company
recognized a curtailment gain in 1995 of $24,540, which is reflected in the net
gain on disposition of the Aerospace segment.  (See Note 16.)




                                       26
<PAGE>   28

      Hercules provides certain disability and workers' compensation benefits
to former or inactive employees. Effective January 1, 1993, Hercules adopted
SFAS No. 112, "Employers' Accounting for Postemployment Benefits," requiring
recognition of these benefits on an accrual basis.  Prior to 1993, disability
and workers' compensation benefits were expensed as claims were reported.  The
company's accrued liability under SFAS No. 112 at December 31, 1995 and 1994,
was $10,000 and $19,000, respectively. The decrease is primarily from lower
long-term disability and workers' compensation claims, as a  result of the sale
of Aerospace.  The effect of adopting SFAS No. 112 was recognized immediately
in 1993 as the effect of a change in accounting principle and resulted in a
$12,400 charge (net of a $7,600 tax benefit), or $.10 per share, against 1993
net income.  Adoption of this standard did not materially affect 1993 results
of operations.

14.   OTHER OPERATING EXPENSES, NET

Other operating expenses, net, include environmental cleanup costs of $35,006
in 1995, $20,366 in 1994, and $34,744 in 1993, principally for nonoperating
sites.  The 1995 expense also includes employee separation costs and write-offs
of $3,680 and a fourth-quarter charge of $8,000 related to estimated losses on
the pending Composite Products divestiture.  Other operating expenses, net, in
1994 included employee separation costs from a corporate-wide early retirement
incentive option, involuntary terminations, and write-offs of $18,738.

      Net restructuring and other write-offs in 1993 were $52,168, including
$25,000 of estimated operating losses, shutdown costs, and losses related to
the disposition of the Liquid Molding Resins business; $20,654 of severance
costs related to involuntary terminations; and $4,600 of asset write-downs
associated with an idle manufacturing facility.

15.   INTEREST AND DEBT EXPENSE

Interest and debt costs are summarized as follows:
<TABLE>
<CAPTION>
                                             1995                 1994               1993
                                       --------------------------------------------------
<S>                                       <C>                  <C>                <C>
Costs incurred                            $33,213              $36,038            $41,897
Amount capitalized                          4,830                7,901              5,738
                                       --------------------------------------------------
Amount expensed                           $28,383              $28,137            $36,159
                                       ==================================================
</TABLE>


16.  OTHER INCOME (EXPENSE), NET

Other income (expense), net, consists of the following:

<TABLE>
<CAPTION>
                                             1995                 1994               1993
                                        -------------------------------------------------
<S>                                     <C>                   <C>                <C>
Interest income                         $   9,251             $  8,191           $  8,695
Net gains on dispositions                 131,784               14,437              5,505
Gain from litigation settlements               --                   --             29,036
Miscellaneous expense, net               (11,837)             (30,656)           (27,630)
                                        -------------------------------------------------
                                         $129,198             $(8,028)            $15,606
                                        =================================================
</TABLE>

      Net gains on dispositions in 1995 primarily reflect gains from the sale
of the Aerospace segment of $38,700 and the fourth-quarter sale of the
Electronics & Printing Division of the Food & Functional Products segment of
$84,900.  In 1994 and 1993, net gains on dispositions primarily reflect the
sale of the company's interests in affiliated companies.  Gain from litigation
settlements in 1993 substantially relates to business acquired in the 1980s.
Miscellaneous expense, net, includes net foreign currency losses of $(15,936),
$(8,557), and $(1,132) in 1995, 1994, and 1993, respectively.

17.      INCOME TAXES

Effective January 1, 1993, Hercules adopted SFAS No. 109, "Accounting for
Income Taxes."  (See "Income Taxes" under Summary of Significant Accounting
Policies.)  Deferred tax balances at January 1, 1993, were remeasured in
accordance with SFAS No. 109, resulting in a charge of $37,958, or $.29 per
share, against net income.  The charge primarily represents the effect of
adjusting deferred taxes to recognize foreign tax credits




                                       27
<PAGE>   29

on a tax, rather than book, basis.  The effect of adopting this standard was
recognized immediately as the effect of a change in accounting principle.

         The domestic and foreign components of income before taxes on income
are presented below.

<TABLE>
<CAPTION>
                                             1995               1994                 1993
                                         ------------------------------------------------
<S>                                      <C>                <C>                  <C>
Domestic                                 $296,759           $243,211             $177,957
Foreign                                   207,884            165,077              133,229
                                         ------------------------------------------------
                                         $504,643           $408,288             $311,186
                                         ================================================
</TABLE>


         A summary of the components of the tax provision follows:

<TABLE>
<CAPTION>
                                             1995              1994                 1993 
                                      ---------------------------------------------------
<S>                                      <C>                <C>                 <C>
Currently payable
         U.S. Federal                    $121,359           $ 83,162             $105,792
         Foreign                           62,264             45,802               36,705
         State                              1,181              5,753                4,880

Deferred
         Domestic                        (14,985)            (5,200)             (41,707)
         Foreign                            2,074              4,615              (2,904)
                                       --------------------------------------------------
Provision for income taxes                171,893            134,132              102,766
         (excluding extraordinary
         item and effect of
         accounting changes)

Extraordinary item                             --                 --              (2,288)
Effect of accounting changes:
         Postretirement benefits               --                 --            (115,140)
         Postemployment benefits               --                 --              (7,600)
         Income taxes                          --                 --               37,958
                                       --------------------------------------------------
Total provision                          $171,893           $134,132             $ 15,696
                                       ==================================================
</TABLE>


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

<TABLE>
<CAPTION>
                                                                    1995                 1994
                                                             ---------------------------------
         <S>                                                  <C>                   <C>
         Depreciation                                           $156,369             $192,485
         Prepaid pension                                          72,037               87,984
         Inventory                                                 9,313                8,373
         Other                                                    15,601               12,801
                                                              -------------------------------
         Gross deferred tax liabilities                          253,320              301,643
                                                              -------------------------------
         Postretirement benefits other than pensions            (79,271)            (112,874)
         Accrued expenses                                       (97,797)            (100,388)
         Government contracts                                         --             (14,621)
         Loss carryforwards                                     (16,471)             (16,471)
         Other                                                  (40,276)             (32,873)
                                                              -------------------------------
         Gross deferred tax assets                             (233,815)            (277,227)
                                                              -------------------------------
         Valuation allowance                                      15,194               15,194
                                                              -------------------------------
                                                                $ 34,699            $  39,610
                                                              ===============================
</TABLE>

         During 1995, the provision for income taxes was favorably affected by
increased utilization of foreign tax credits and a state income tax settlement
related to the prior year sale of an investment.  In the fourth quarter of
1993, based upon clarification of tax law provisions for research and
experimentation (R&E) credits, the company recognized an R&E credit of $9,700.
Upon further clarification, the company recognized an additional $4,000 R&E
credit in 1994.  The tax credit relates to research and development
expenditures




                                       28
<PAGE>   30

incurred on certain government contracts.  Additional amounts of R&E credit may
be recorded in future years as clarifications of the R&E credit provisions
continue to occur.

         A reconciliation of the U.S. statutory income tax rate to the
effective rate (excluding extraordinary item and effect of changes in
accounting principles) follows:

<TABLE>
<CAPTION>
                                             1995                1994                1993
                                             --------------------------------------------
<S>                                          <C>                 <C>                 <C>
U.S.  statutory income tax rate               35%                 35%                 35%
R&E tax credit                                 --                 (1)                 (4)
Foreign dividends net of credits              (1)                   1                   4
State taxes                                     1                   1                   2
Difference in foreign tax rates                --                  --                   1
Valuation allowance                            --                 (1)                 (5)
Other                                         (1)                 (2)                  --
                                             --------------------------------------------
Effective tax rate                            34%                 33%                 33%
                                             ============================================
</TABLE>



         The undistributed earnings of subsidiaries and affiliates on which no
provision for foreign withholding or U.S. income taxes has been made amounted
to $370,643 at December 31, 1995.  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.

18.      EARNINGS PER SHARE

Primary earnings per share are calculated on the basis of the average number of
common and common-equivalent shares, using net income adjusted to reflect the
elimination of interest expense, net of taxes, on the 6.5% convertible
debentures.  Shares and interest expense used in the calculation are as
follows:

<TABLE>
<CAPTION>
                                         Shares                 Interest
                                     -----------------------------------
         <S>                            <C>                        <C>
         1995                           113,691,438                $ 114
         1994                           120,040,209                $ 149
         1993                           128,594,688                $ 226
</TABLE>

         Fully diluted earnings per share, which additionally assumes
conversion of the 8% convertible subordinated debentures, are not materially
different from primary earnings per share.  Equivalent shares are increased by
an additional 3,160,537 in 1995, 4,900,548 in 1994, and 6,843,036 in 1993, and
net income is further adjusted to eliminate interest expense, net of taxes, of
$2,197 for 1995, $3,855 for 1994, and $5,287 for 1993.

19.      FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Notional  Amounts and Credit Exposure of Derivatives
         The notional amounts of derivatives summarized below do not represent
amounts exchanged by the parties and, thus, are not a measure of the exposure
of the company through its use of derivatives.  The amounts exchanged are
calculated on the basis of the notional amounts and the other terms of the
derivatives, which relate to interest rates or exchange rates.

Interest Rate Risk Management
         In April 1992, the company entered into a three-year amortizing
interest rate swap agreement whereby 5.52% per year fixed-rate debt was
effectively converted to floating-rate debt.  Beginning in March 1993, the
company entered into a series of agreements, which effectively converted
floating rate debt into debt with a fixed rate ranging from 4.92% to 7.52% per
year.  For the years 1995 and 1994, these contracts resulted in a less than 1%
change in the effective interest rate on the weighted-average notional
principal amounts outstanding.  The aggregate notional principal amounts at the
end of the corresponding periods were $160,000.  Agreements mature from 1996
through the third quarter of 2000.



                                       29
<PAGE>   31


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

<TABLE>
<CAPTION>
                                                                      1995              1994
                                                                 ---------------------------
         <S>                                                      <C>              <C>
         Receive-fixed swaps-notional amount (at year end)        $       0        $  50,000
           Average receive rate                                        5.5%             5.5%
           Average pay rate                                            5.9%             4.3%
         Pay-fixed swaps-notional amount (at year end)              160,000          110,000
           Average pay rate                                            6.1%             6.1%
           Average receive rate                                        6.0%             4.5%
</TABLE>


         During 1995, the company entered into four additional agreements
effective March 1996 (notional amount of $75,000) to replace agreements
maturing in 1996 effectively converting floating-rate debt into debt with an
average fixed rate of 6.058%.

Foreign Exchange Risk Management
         The company selectively uses foreign currency forward contracts to
offset the effects of exchange rate changes on reported earnings, cash flow,
and net asset positions.  The primary exposures are denominated in Danish
kroner, Dutch guilder, Belgian franc, British pound sterling, and the German
mark. 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 one year.  At December 31, 1995 and 1994, the
company had outstanding forward exchange contracts to purchase foreign
currencies aggregating $24,057 and $50,946 and to sell foreign currencies
aggregating $281,670 and $283,782, respectively.  Non-U.S. dollar
cross-currency trades aggregated $302,920 and $401,756, respectively.  The
forward exchange contracts outstanding at December 31, 1995, will mature during
1996.  No currency swap agreements were outstanding at December 31, 1995 or
1994.  Additionally, there were no deferrals of gains or losses on forward
exchange contracts at December 31, 1995.  Fair values of derivative contracts
are indicative of cash that would have been required had settlement been
December 31, 1995.

Fair Values
         The following table presents the carrying amounts and fair values of
the company's financial instruments at December 31, 1995 and 1994.

<TABLE>
<CAPTION>
                                                         1995                                  1994              
                                        ---------------------------------------------------------------------
                                           Carrying          Fair               Carrying                Fair
                                            Amount           Value               Amount                 Value
                                        ---------------------------------------------------------------------
<S>                                     <C>               <C>                 <C>                   <C>
Investment securities                     $39,978           $39,978             $53,242               $53,242
Long-term debt                          (298,077)         (425,268)           (359,964)             (460,041)
Foreign exchange contracts                 (520)*             (520)            (1,100)*               (1,100)
Interest rate swap contracts               (882)*           (1,896)            (1,029)*                   862
</TABLE>

*The carrying amount represents the net unrealized gain (loss) or net interest
receivable (payable) associated with the contracts at the end of the period.

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.  
Foreign exchange contracts: Year-end exchange rates.  
Interest rate swap contracts: Bank or market quotes or discounted cash flows 
using year-end interest rates.

20.      PENDING DIVESTITURE

In December 1995, the company signed a letter of intent to divest its Composite
Products Division.  Net sales and operating profit (loss) for this division,
which are reported as part of the Corporate and other segment, were $98,026 and
$(1,821), respectively, in 1995; $85,602 and $(12,110), respectively, in 1994;
and $66,492 and $(5,516), respectively, in 1993.





                                       30
<PAGE>   32

21.      DIVESTITURES

In March 1995, the company disposed of its Aerospace segment to Alliant
Techsystems (Alliant) for $247,000 in cash and 3.86 million shares of Alliant
common stock.  Net sales and operating profits of this segment were $123,414
and $13,306, respectively, in 1995; $657,393 and $110,427, respectively, in
1994; and $687,955 and $110,224, respectively, in 1993.  In December 1995,
Hercules disposed of its Electronics & Printing Division of the Food &
Functional Products segment to MacDermid Incorporated for $100,000 in cash and
$30 million in preferred stock.  Net sales and operating profit of this
division were $66,131 and $15,816 in 1995, respectively; $66,519 and $11,648,
respectively, in 1994; and $57,105 and $4,676, respectively, in 1993. During
1994, the company completed the divestiture of its Packaging Films and Liquid
Molding Resins business units for $172,600 in cash.  The effect of the
divestitures on the results of operations is not significant.  Net sales of
these units were $46,825, $164,229, and $170,353 for the years ended December
31, 1994, 1993, and 1992.  Operating losses for the corresponding periods were
$0, $27,816 (including restructuring charges of $25,000), and $11,900.

22.      COMMITMENTS AND CONTINGENCIES

Leases:
Hercules has operating leases (including office space, transportation, and data
processing equipment) expiring at various dates.  Rental expense was $35,192 in
1995, $40,579 in 1994, and $46,005 in 1993.

         At December 31, 1995, minimum rental payments under noncancelable
leases aggregated $318,915 with subleases of $5,980.  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  $20,703 in
1996, $18,151 in 1997, $19,739 in 1998, $20,226 in 1999, and $18,959 in 2000.

Capital Expenditures:
Capital expenditures are expected to approximate $148,000 in 1996.

Environmental:
         Hercules has been identified as a potentially responsible party (PRP)
by U.S. federal and state authorities for environmental cleanup at numerous
sites.  The estimated range of the reasonably possible costs of remediation is
between $92,000 and $280,000.  The actual costs will depend upon numerous
factors, including the number of parties found liable at each environmental
site and their ability to pay, the actual method of remediation, outcome of
negotiations with regulatory authorities, outcome of litigation, changes in
environmental laws and regulations, technological developments, and the years
of remedial activity required, which could range up to 30 years.  Hercules
becomes aware of sites in which it may be, but has not yet been named, a PRP
principally through its knowledge of investigation of sites by the U.S.
Environmental Protection Agency (EPA) or other government agency or through
correspondence with previously named PRPs requesting information of Hercules'
activities at sites under investigation.  Hercules brought suit in 1992 against
its insurance carriers for past and future costs for remediation of certain
environmental sites.  Hercules has not included any insurance recovery in the
estimates set forth above.

         Hercules has established procedures for identifying environmental
issues at Hercules plant sites.  Environmental coordinators, a designated
position at all operating facilities, are familiar with environmental laws and
regulations and are resources for identification of environmental issues.
Hercules also has an environmental audit program, which is designed to identify
environmental issues at operating plant sites. Through these programs, Hercules
identifies potential environmental, regulatory, and remedial issues.

         Litigation over liability at Jacksonville, Arkansas, the most
significant site, has been pending since 1980.  As a result of a pretrial court
ruling in October 1993, Hercules has been held jointly and severally liable for
costs incurred, and for future remediation costs, at the Jacksonville site by
the District Court, Eastern District of Arkansas (the Court).  Appeal of the
Court's ruling will be filed promptly after issuance of a final court order.
In November 1993, an advisory jury found Uniroyal Chemical, Ltd., liable for
the Jacksonville site, but also found that Uniroyal had proven a reasonable
basis for allocation of responsibility.  That same advisory jury found Standard
Chlorine of Delaware is not a liable party for the Jacksonville site.  The
Court may take the jury's findings into consideration when reaching its
decision regarding these parties.  The Court has not




                                       31
<PAGE>   33

entered its ruling on the liability of Uniroyal and Standard Chlorine.  Appeals
of the Court's expected rulings with respect to Uniroyal and Standard Chlorine
are probable.

         Other defendants in this litigation have either settled with the
government or, in the case of the Department of Defense, have not been held
liable.  Hercules appealed the Court's order finding the Department of Defense
not liable.  On January 31, 1995, the 8th Circuit Court of Appeals upheld the
Court's order.  Hercules filed a petition to the U.S. Supreme Court requesting
review and reversal of the 8th Circuit Court ruling.  This petition was denied
on June 26, 1995, and the case has been remanded to the District Court for
further proceedings.

         Hercules' potential costs for remediation of the Jacksonville site are
presently estimated between $40,000 and $147,000.  These costs are based on
Hercules' assessment of potential liability, the level of participation by
other PRPs, and current estimates of remediation costs.  Remediation costs will
vary as Records of Decision are issued on each operable unit of the site and as
remediation methods are approved by the EPA.

         At December 31, 1995, the accrued liability 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 investigation at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of
costs among other PRPs.  The company does not anticipate that its financial
condition will be materially affected by environmental remediation costs in
excess of amounts accrued, although quarterly or annual operating results could
be materially affected.

Litigation:
Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business.  In these legal proceedings, no
director, officer, or affiliate is a party or a named defendant.  These suits
concern issues such as product liability, contract disputes, labor-related
matters, patent infringement, environmental proceedings, property damage, and
personal injury matters.  Hercules also is a defendant in two Qui Tam ("Whistle
Blower") lawsuits brought by former employees of the Aerospace segment sold to
Alliant Techsystems.  One suit involves allegations relating to submission of
false claims and records, delivery of defective products, and a deficient
quality control program.  The other suit involves allegations of mischarging of
work performed under government contracts, misuse of government equipment,
other acts of financial mismanagement, and wrongful termination claims.  The
government, after investigation of the allegations, declined to intervene in
either lawsuit.  The first of these lawsuits is presently scheduled for trial
in June 1996.  While damages claimed in the first suit are material, the
company believes no damages were incurred by the government, no false claims
were made to the government, and alleged damages are speculative and
insupportable.  The damages in the second suit were not defined.  The company
intends to vigorously defend these lawsuits.

         While it is not feasible to predict the outcome of all pending suits
and claims, management does not anticipate that the ultimate resolution of
these matters will have a material effect upon the consolidated financial
position of Hercules, although 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.

23.      OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
         (Dollars in millions)

Hercules operates worldwide, manufacturing chemical specialty products.  Core
businesses are Paper Technology, Resins, Fibers, Aqualon, and Food Gums.
Principal products and markets include wet-strength and sizing aids for paper
production, rosin in hydrocarbon resins for adhesives, polypropylene fiber for
disposable diapers, water-soluble polymers for latex paints, and natural gums
for food and beverages.




                                       32
<PAGE>   34

         Sales to the U.S. Government and other customers under government
contracts, principally by the divested Aerospace segment, aggregate $123, $602,
and $633 in 1995, 1994, and 1993, respectively. Intersegment sales are
eliminated and insignificant.

         Operating results and other financial data are prepared on an "entity
basis," meaning that net sales, profit (loss) from operations, and assets of a
legal entity are included in the geographic area where the legal entity is
located.  A direct sale from the United States to an unaffiliated customer in
Europe is reported as a U.S. sale.  Interarea sales between Hercules locations
are made at transfer prices that approximate market price and have been
eliminated from consolidated net sales.  Operating profit for the individual
area does not include the full profitability generated by sales of Hercules
products imported from other geographic areas.

         Identifiable assets include net trade accounts receivable,
inventories, and net property, plant and equipment.

         Consolidated foreign subsidiaries had net assets (including
translation adjustment) of $605 at December 31, 1995, $574 at December 31,
1994, and $520 at December 31, 1993,  and net income excluding the
extraordinary item and effect of changes in accounting principles of $144 in
1995, $115 in 1994, and $99 in 1993.

         Direct export sales from the United States to unaffiliated customers
were $291, $286, and $256 for 1995, 1994, and 1993, respectively.




                                       33
<PAGE>   35

23.      OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA
         (Dollars in millions) continued

<TABLE>
<CAPTION>
                                                    Food &
                                  Chemical        Functional                        Corporate &
Industry Segments                Specialties       Products        Aerospace**        Other*            Total
=============================================================================================================
<S>                                <C>                <C>              <C>              <C>            <C>
1995                                                                                                              
-------------------------------------------------------------------------------------------------------------
Net sales                          $1,154             $1,046           $123             $104           $2,427
Profit (loss) from operations         211                187             13             (48)              363
Identifiable assets                   748                747              0              165            1,660
Capital expenditures                   61                 43              6                7              117
Depreciation                           51                 67              2               13              133

1994                                                                                                         
-------------------------------------------------------------------------------------------------------------
Net sales                           1,081                945            657              138            2,821
Profit (loss) from operations         197                148            110             (36)              419
Identifiable assets                   715                780            543               83            2,121
Capital expenditures                   52                100              9                3              164
Depreciation                           49                 53             35               11              148

1993                                                                                                        
-------------------------------------------------------------------------------------------------------------
Net sales                             976                867            688              242            2,773
Profit (loss) from operations         149                113            110             (64)              308
Identifiable assets                   676                699            592              287            2,254
Capital expenditures                   51                 68             21                9              149
Depreciation                           55                 55             39               21              170
</TABLE>

<TABLE>
<CAPTION>
                                  United
Geographic Areas                  States           Europe            Other     Eliminations            Total
============================================================================================================
<S>                               <C>                <C>              <C>         <C>                 <C>
1995                                                                                                              
------------------------------------------------------------------------------------------------------------
Net sales to
  unaffiliated customers          $1,393             $831             $203        $      --           $2,427
Interarea sales                      117               92               11            (220)               --
                                 ---------------------------------------------------------------------------
           Total                   1,510              923              214            (220)            2,427
Profit from operations               159              181               23               --              363
Identifiable assets                  905              655              100               --            1,660

1994                                                                                                        
------------------------------------------------------------------------------------------------------------
Net sales to
  unaffiliated customers           1,921              709              191               --            2,821
Interarea sales                      103               97               12            (212)               --
                                 ---------------------------------------------------------------------------
           Total                   2,024              806              203            (212)            2,821
Profit from operations               250              145               24               --              419
Identifiable assets                1,406              622               93               --            2,121

1993                                                                                                        
------------------------------------------------------------------------------------------------------------
Net sales to
  unaffiliated customers           1,994              624              155               --            2,773
Interarea sales                       87               76               16            (179)               --
                                 ---------------------------------------------------------------------------
           Total                   2,081              700              171            (179)            2,773
Profit from operations               193              111                4               --              308
Identifiable assets                1,627              546               82               --            2,255
</TABLE>

*   In 1995, Composite Products data is included in Corporate & Other.
    Previously it was reported in the Aerospace segment.  1994 and 1993
    information has been restated to conform with the 1995 presentation.

**  Reflects results of operations through March 14, 1995.




                                       34
<PAGE>   36

Hercules Incorporated
Summary of Quarterly Results (Unaudited)
(Dollars in millions, except per share)

<TABLE>
<CAPTION>
                                         1st Quarter       2nd Quarter     3rd Quarter      4th Quarter           Year    
-------------------------------------------------------------------------------------------------------------------------
                                         1995    1994     1995    1994     1995    1994     1995   1994     1995     1994
-------------------------------------------------------------------------------------------------------------------------
<S>                                      <C>     <C>      <C>     <C>      <C>     <C>      <C>    <C>    <C>      <C>
OPERATING RESULTS
Net sales                                $693    $680     $614    $706     $571    $681     $549   $754   $2,427   $2,821
Cost of sales                             462     476      392     490      367     466      370    491    1,591    1,923
SG&A and R&D                              109     110      102     106       94     104      121    121      426      440
Other operating expenses, net               8      16        3       9        5       6       31      8       47       39
                                         --------------------------------------------------------------------------------

Profit from operations                    114      78      117     100      105     106       27    134      363      419
Equity income                               7       6       14       8       11       7        9      5       41       26
Interest and debt expense                   7       7        7       7        7       7        7      7       28       28
Other income (expense), net                27       1      (8)     (4)       11     (6)       98      1      129      (8)
                                         --------------------------------------------------------------------------------

Income before taxes                       141      78      116      97      120     100      127    133      505      408
Income taxes                               52      26       37      32       40      34       43     42      172      134
                                         --------------------------------------------------------------------------------

Net income                               $ 89    $ 52     $ 79    $ 65     $ 80    $ 66     $ 84   $ 91    $ 333    $ 274
                                         ================================================================================

Earnings per share                       $.76    $.43     $.70    $.54     $.72    $.55     $.75   $.77    $2.93    $2.29
                                         ================================================================================


NET SALES BY INDUSTRY SEGMENT
Chemical Specialties                     $289    $255     $299    $272     $286    $271     $280   $283   $1,154   $1,081
Food & Functional Products                257     222      287     244      260     243      242    235    1,046      945
Aerospace                                 123     139       --     162       --     147       --    234      123**    657  *
Corporate & other                          24      64       28      28       25      20       27      2      104      138  *
                                         --------------------------------------------------------------------------------   

    Total                                $693    $680     $614    $706     $571    $681     $549   $754   $2,427   $2,821
                                         ================================================================================

PROFIT (LOSS) FROM OPERATIONS
    BY INDUSTRY SEGMENT
Chemical Specialties                     $ 59     $43     $ 61    $ 54     $ 55    $ 53      $35   $ 47     $211     $197
Food & Functional Products                 47      33       59      40       56      43       25     32      187      148
Aerospace                                  13      13       --      14       --      18       --     61       13**     98  *
Corporate & other                         (5)    (11)      (3)     (8)      (6)     (8)     (33)    (6)     (48)     (24)  *
                                       ----------------------------------------------------------------------------------   

    Total                                $114     $78     $117    $100     $105    $106      $27   $134     $363     $419
                                         ================================================================================
</TABLE>



*   Pursuant to the divestiture of the Aerospace segment in March 1995,
    Composite Products data is included in Corporate and other.  Previously it
    was reported in the Aerospace segment.  1994 information has been restated
    to conform with the 1995 presentation.

**  Reflects results of operations through March 14, 1995.




                                       35
<PAGE>   37

Principal Consolidated, Wholly Owned Subsidiaries (Directly or Indirectly)


ARGENTINA
Hercules Fibers Argentina S.A.,
Buenos Aires

AUSTRIA
Patex Chemie GmbH, Traun

THE BAHAMAS
Hercules International Trade Corporation Limited
(HINTCO), Nassau

BELGIUM
Hercules Belgium N.V., Doel/Beringen
S.A. Hercules Europe N.V., Brussels

BERMUDA
Curtis Bay Insurance Co., Ltd., Hamilton

BRAZIL
Aqualon do Brasil S.A., Sao Paulo
Hercules do Brasil Produtos Quimicos Ltda., Sao
Paulo

CANADA
Hercules Canada Inc., Mississauga, Ontario
Genu Products Canada Ltd., Pubnico, Nova Scotia

CZECH REPUBLIC
Hercules CZ S.R.O., Prague

DENMARK
Copenhagen Pectin A/S, Lille Skensved

ENGLAND
Hercules Limited, Surrey

FINLAND
Oy Hercofinn Ab, Helsinki

FRANCE
Aqualon France B.V., Rueil
Hercules S.A., Rueil

GERMANY
Hercules GmbH, Dusseldorf
Pomosin GmbH, Grossenbrode

HONG KONG
Hercules China Limited, Hong Kong

ITALY
Hercules Italia S.p.A., Milan

JAPAN
Hercules Japan Ltd., Tokyo

MEXICO
Quimica Hercules, S.A. de C.V., Mexico, D.F.

THE NETHERLANDS
Hercules B.V., Rijswijk
PFW Aroma Chemicals, Barneveld

SINGAPORE (REPUBLIC OF)
Hercules Singapore Pte Ltd., Singapore

SPAIN
Hercules Quimica, S.A., Tarragona
Hercules Aerospace Espana, S.A., Madrid

SWEDEN
Hercules AB, Goteborg

VIRGIN ISLANDS
Hercules Overseas Corporation,
St. Thomas
                 



                                      36
<PAGE>   38
                 
ITEM 9.      CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
             FINANCIAL DISCLOSURE: 
             Not Applicable.



                                    PART III


ITEM 10.     DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT:
             Information regarding directors and nominees for directors of the
Company is included under the caption entitled "Election of Three Directors
(Proxy Item No. 1)" on page 2 of the Proxy Statement and is incorporated
herein by reference.  Information regarding executive officers is contained on
pages 17 through 19 of that report.

             Disclosure of information for directors, officers, and other
persons not meeting the timely reporting requirements under section 16(a) of
the Exchange Act is contained in the Proxy Statement under the caption entitled
"Compliance with Section 16(a) of the Securities Exchange Act of 1934" on page
9 and is incorporated herein by reference.


ITEM 11.     EXECUTIVE COMPENSATION:
             Information regarding executive compensation of Hercules'
directors and executive officers is included in the Proxy Statement under the
caption entitled "Corporate Governance - Directors and Executives" on pages 6
through 9, and the caption entitled "Executive Compensation" on pages 9 through
13, respectively, and is incorporated herein by reference.


ITEM 12.     SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT:
             Information regarding beneficial ownership of the Common Stock by
certain beneficial owners and by management of the Company is included under
the caption entitled "Security Ownership of Certain Beneficial Owners" on pages
4 and 5 of the Proxy Statement and is incorporated herein by reference.


ITEM 13.     CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS:
             Information regarding certain relationships and related
transactions with management is included under the caption entitled "Certain
Relationships and Related Transactions" on page 6 of the Proxy Statement and is
incorporated herein by reference.




                                       37
<PAGE>   39

                                    PART IV


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

     (a) Documents filed as part of this Report:

         1.  Financial Statements

             These documents are listed in the Index to Consolidated Financial
             Statements.  See Item 8.

         2.  Financial Statement Schedules:

             All 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 given in the Exhibit
             Index which precedes the exhibits filed with this Report.

     (b) Reports on Form 8-K.

         Hercules was not required to file any reports on Form 8-K for the
         quarter ended December 31, 1995.




                                       38
<PAGE>   40

                                   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 28, 1996.

                                    HERCULES INCORPORATED

                          By       GEORGE MACKENZIE 
                             --------------------------------------
                                George MacKenzie, Vice President
                                  and Chief Financial 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 28, 1996.

<TABLE>
<S>                                                                                   <C>
PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:
   Chairman and                                                                         THOMAS L. GOSSAGE       
   Chief Executive Officer                                                         -----------------------------
                                                                                         Thomas L. Gossage


PRINCIPAL FINANCIAL OFFICER:
   Vice President and                                                                    GEORGE MACKENZIE       
   Chief Financial Officer                                                         -----------------------------
                                                                                          George MacKenzie


PRINCIPAL ACCOUNTING OFFICER:
   Controller                                                                                VIKRAM JOG         
                                                                                   -----------------------------
                                                                                            Vikram Jog

DIRECTORS:


           R. KEITH ELLIOTT                                                             RALPH L. MACDONALD, JR.   
--------------------------------------                                             -------------------------------
           R. Keith Elliott                                                             Ralph L. MacDonald, Jr.   
                                                                                                                  
                                                                                                                  
      RICHARD M. FAIRBANKS, III                                                            H. EUGENE MCBRAYER     
--------------------------------------                                             -------------------------------
      Richard M. Fairbanks, III                                                            H. Eugene McBrayer     
                                                                                                                  
           EDITH E. HOLIDAY                                                                  PAULA A. SNEED       
--------------------------------------                                             -------------------------------
           Edith E. Holiday                                                                  Paula A. Sneed       
                                                                                                                  
                                                                                                                  
            ROBERT G. JAHN                                                                   LEE M. THOMAS        
--------------------------------------                                             -------------------------------
            Robert G. Jahn                                                                   Lee M. Thomas        
                  
                  
           GAYNOR N. KELLEY
--------------------------------------
           Gaynor N. Kelley
</TABLE>



                                       39
<PAGE>   41
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
                  Number             Description                                   Incorporated by  Reference to
                 <S>        <C>                                                      <C>
                    3-A     Restated Certificate of Incorporation of Hercules        Exhibit 3-A, Annual Report on Form 10-K,
                            Incorporated as revised and amended July 6, 1988.        filed March 26, 1993.


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

                 4-A        Form of Rights Agreement between the Company and         Form 8-A filed July 10, 1987*.
                            Manufacturers Hanover Trust Company, dated as of
                            June 24,1987.

                 4-B        The Company 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. Pursuant to paragraph
                            4(iii)(A) of Item 601(b) of Regulation S-K, the
                            Company agrees to furnish a copy of such instruments
                            to the Securities and Exchange Commission upon
                            request.

                 10-A       Hercules Incorporated Unit Incentive Plan.               Appendix A, Notice of Annual Meeting and
                                                                                     Proxy Statement Dated February 10, 1969*.


                 10-B       Hercules Executive Survivor Benefit Plan.                Exhibit 10-D, Annual Report on Form
                                                                                     10-K, filed March 27, 1981*.

                 10-C       Hercules Incorporated Phantom Stock Plan.                Exhibit E, Notice of Annual Meeting and
                                                                                     Proxy Statement Dated February 14, 1986*.

                 10-D       Hercules Incorporated Restricted Stock Plan of 1986.     Exhibit B, Notice of Annual Meeting and
                                                                                     Proxy Statement Dated February 14, 1986*.


                 10-E       Hercules Incorporated Stock Option Plan of 1986.         Exhibit D, Notice of Annual Meeting and
                                                                                     Proxy Statement Dated February 14, 1986*.

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

                 10-G       Hercules Incorporated Long Term Incentive                Exhibit 4.1, Registration Statement on Form
                            Compensation Plan.                                       S-8, filed July 1, 1993.

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

                 10-I       Hercules Incorporated 1993 Nonemployee Director Stock    Exhibit 4.1, Registration  Statement on
                            Accumulation Plan.                                       Form S-8, filed July 16, 1993.
</TABLE>





                                       40
<PAGE>   42
                             EXHIBIT INDEX (CONT'D)

<TABLE>
<CAPTION>
                 Number              Description                                    Incorporated by Reference to
                 <S>        <C>                                                      <C>
                 10-J       Hercules Incorporated Deferred Compensation Plan         Exhibit 10-J, Annual Report on Form 10-K,
                            for Nonemployee Directors.                               filed March 26, 1993.

                 10-K       Hercules Incorporated Retirement Plan for                Exhibit 10-K, Annual Report on Form 10-K,
                            Nonemployee Directors.                                   filed March 26, 1993.

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

                 10-M       Form of Employment Contract between the Company and      Exhibit 10-J, Annual Report on Form 10-K,
                            certain directors and officers of the Company.           filed March 29, 1988*.

                 10-N       Form of Indemnification Agreement between the Company    Annex II, Notice of Annual Meeting and
                            and certain directors and officers of the Company.       Proxy Statement Dated February 19, 1987*.

                 10-O       Employment contract between the Company and R. Keith     Exhibit 10-O, Annual Report on Form 10-K,
                            Elliott entered into April 19, 1991.                     filed March 26, 1993.

                 10-P       Hercules Incorporated Long Term Incentive                Exhibit 10-P, Amended and restated as of
                            Compensation Plan                                        April 17, 1995.

                 21         Subsidiaries of the Registrant.                          Page 36 of 1995 Form 10-K.  See Part II,
                                                                                     Item 8.
                                                                                     
                 23-A       Consent of Independent Accountants.                      Page 42 of 1995 Form 10-K.

                 23-B       Consent of Company Counsel.                              Page 42 of 1995 Form 10-K.

                 27         Financial Data Schedule
</TABLE>


*     Previously filed as indicated and incorporated herein by reference.
      Exhibits incorporated by reference should be located in SEC File No.
      1-496.





                                       41
<PAGE>   43
EXHIBIT 23-A. CONSENT OF INDEPENDENT ACCOUNTANTS

We consent to the incorporation by reference in the registration statements of
Hercules Incorporated and subsidiary companies on Form S-8 [Registration No.
33-37279 (which includes Registration No. 33-21668), No. 33-14912, No.
33-15052, No. 33-21667, No. 33-47664, No. 33-51178, No. 33-52621, No. 33-66136
and No. 33-65352] and on Form S-3 (Registration No. 33-15104 and No. 33-33768)
of our report, which includes an explanatory paragraph regarding a change, in
1993, in the methods of accounting for postemployment benefits, postretirement
benefits other than pensions, and income taxes, dated February 7, 1996 on our
audits of the consolidated financial statements of Hercules Incorporated and
subsidiary companies as of December 31, 1995 and 1994, and for each of the
three years in the period ended December 31, 1995, which report is included in
this Annual Report on Form 10-K.




Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania 19103
March 25, 1996







EXHIBIT 23-B. CONSENT OF COMPANY COUNSEL

I hereby consent to the reference to Company Counsel in Note 13 of Notes to the
Consolidated Financial Statements.





Wilmington, Delaware                                         Michael B. Keehan
March 25, 1996                                              Vice President and
                                                               General Counsel
                                                         Hercules Incorporated
                                                         


                                                         




                                       42