##### Table of Contents

---

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549



---



FORM 10-K/A

Amendment No. 1



---



|x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ------------------------------------------------------------------------------------



|                                             |  |                             
|-------------------------------------------- |  | ----------------------------
|For the fiscal year ended: December 31, 2004 |  | Commission file number: 1-71



---



BORDEN CHEMICAL, INC.



LOGO



---



|                                         |  |                                     
|---------------------------------------- |  | ------------------------------------
|New Jersey                               |  | 13-0511250                          
|(State of incorporation)                 |  | (I.R.S. Employer Identification No.)
|                                         | 
|180 East Broad St., Columbus, OH 43215   |  | 614-225-4000                        
|(Address of principal executive offices) |  | (Registrants telephone number)     



---



SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:



|                    |  |                                          
|------------------- |  | -----------------------------------------
|Title of each class |  | Name of each exchange on which registered
|None                |  | None                                     



SECURITIES
REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:

NONE



---



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 ̈No  x



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 any amendment to this
Form 10-K.  x.



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



Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ̈Yes    x  No



Aggregate market value in thousands of the voting stock held by nonaffiliates of the Registrant based upon the average bid and asked prices of such stock on March 18,
2005: $0.



Number of shares of common stock, par value $0.01 per share,
outstanding as of the close of business on March 18, 2005: 96,905,936



DOCUMENTS INCORPORATED BY REFERENCE



|         |  |             
|-------- |  | ------------
|Document |  | Incorporated
|none     |  | none        



---



The Exhibit Index is Located herein at sequential pages 101 through 103.



---

##### Table of Contents

BORDEN CHEMICAL, INC.



EXPLANATORY NOTE



Borden Chemical, Inc. (which may be referred to as we,
our, us, BCI or the Company) is filing this amendment to its Annual Report on Form 10-K filed on March 28, 2005 for the year ended December 31, 2004 to reclassify certain transaction related costs
included in its Consolidated Statement of Operations for the year ended December 31, 2004. See the disclosure in Note 21 to the consolidated financial statements. This amendment reflects only the reclassification discussed above, as well as Notes 1,
2, 6, 18 and 19, and has no impact on the consolidated balance sheets or statements of cash flows. All other information is unchanged and reflects the disclosures made at the time of the original filing on March 28, 2005.



This Amendment No. 1 on Form 10-K/A amends Part II of its Annual Report on Form 10-K filed on
March 28, 2005 to include the following amendments: Part II, Item 1 Business; Part II, Item 6 Selected Financial Data; Part II, Item 7 Managements Discussion and Analysis of Financial Condition and Results of
Operations; Part II, Item 8 Financial Statements and Supplementary Data; Part III, Item 13 Certain Relationships and Related Transactions; and Part IV, Item 15 Exhibits and Financial Statement Schedules.



INDEX



|                                                                                                                      |  |    
|--------------------------------------------------------------------------------------------------------------------- |  | ---
|PART I                                                                                                                |  |    
|Item 1  Business                                                                                                     |  | 3  
|Item 2  Properties                                                                                                   |  | 9  
|Item 3  Legal Proceedings                                                                                            |  | 11 
|Item 4  Submission of Matters to a Vote of Security Holders                                                          |  | 12 
|                                                                                                                      | 
|PART II                                                                                                               |  |    
|Item 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 12 
|Item 6  Selected Financial Data                                                                                      |  | 13 
|Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations                        |  | 14 
|Item 7A  Quantitative and Qualitative Disclosures About Market Risk                                                  |  | 33 
|Item 8  Financial Statements and Supplementary Data                                                                  |  | 34 
|Borden Chemical, Inc. Consolidated Financial Statements                                                               |  |    
|Consolidated Statements of Operations, years ended December 31, 2004, 2003 and 2002                                   |  | 35 
|Consolidated Balance Sheets, December 31, 2004 and 2003                                                               |  | 36 
|Consolidated Statements of Cash Flows, years ended December 31, 2004, 2003 and 2002                                   |  | 38 
|Consolidated Statements of Shareholders Deficit, years ended December 31, 2004, 2003 and 2002                        |  | 40 
|Notes to Consolidated Financial Statements                                                                            |  | 42 
|Report of Independent Registered Public Accounting Firm                                                               |  | 89 
|Item 9  Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 90 
|Item 9A - Controls and Procedures                                                                                     |  | 90 
|Item 9B  Other Information                                                                                           |  | 90 
|                                                                                                                      | 
|PART III                                                                                                              |  |    
|Item 10  Directors and Executive Officers of the Registrant                                                          |  | 90 
|Item 11  Executive Compensation                                                                                      |  | 93 
|Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters              |  | 98 
|Item 13  Certain Relationships and Related Transactions                                                              |  | 98 
|Item 14  Principal Accountant Fees and Services                                                                      |  | 101
|                                                                                                                      | 
|PART IV                                                                                                               |  |    
|Item 15  Exhibits and Financial Statement Schedules                                                                  |  | 102
|Signatures                                                                                                            |  | 135





2



---

##### Table of Contents

Part I



ITEM 1. BUSINESS

(Dollars in thousands except per share data)



Description of Business



Borden Chemical, Inc. (which may be referred to as we, us,
our, BCI or the Company) is a leading global integrated producer of thermoset-based resins and adhesives for the global forest products and industrial markets. In addition, we are the worlds largest producer
by volume of formaldehyde, an important and versatile building block chemical used in a wide variety of applications. We are the largest North American producer by volume of thermoset-based resins used in the production of engineered wood products,
including structural wood panels, beams and non-structural panels, furniture, decorative flooring, door and window assemblies and wallboards. We are also a leading producer of resin-coated proppant systems in North America, which are used in
oilfield and natural gas production, and, through HA-International, LLC, or HAI, of foundry resins, which are used in the production of cores and molds for metal castings. We have a strong presence in the production of specialty resins used in the
industrial, automotive and electronics markets. Our materials are designed to deliver superior binding and bonding performance to manufacturers of thousands of common, everyday products that enhance modern living. Our strong position in North
America is complemented by our significant operations in Latin America and Europe. The Company was incorporated on April 24, 1899.



Our strategically located network of facilities provides us with logistical benefits, which minimize delivery expense due to our proximity to our customers. Our customers
operate in diverse end-markets, such as new home construction, repair and remodeling, furniture, automotive, oil and gas, chemicals, electronics, communications and agriculture. The diversity of our customer base helps to insulate us from a downturn
in any one sector of the economy. Our customer contracts generally allow us to pass raw material price increases on to our customers, which leads to stable gross margins.



Our Strategy



Our key business strategies are:



| |  | Leverage Our Leading Market Position in Our Core Forest Product Business. We are a leading global producer of thermoset-based forest product resins. We have been able to
achieve this position by building our infrastructure close to the facilities of the leading wood industry customers, allowing us to effectively provide increased products and services to our customers as they grow. We intend to continue to leverage
our competitive advantage to increase our sales of existing products and introduce new products.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Leverage Existing Technologies to Grow Internationally and Enter New Markets. We will continue to grow internationally by expanding our product sales to our multi-national
customers outside of North America and by entering new markets. We believe that our leading formaldehyde and formaldehyde-based resin technology and our relationships with large multi-national customers as a supplier of choice of
formaldehyde offers us a significant competitive advantage as we enter new markets. Our expansion strategy involves employing a total systems approach to meet customer needs. This approach involves using our global technology and experience in order
to deliver the appropriate resin for the customers application and production process and subsequently providing ongoing in-plant technical support and service.
|- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Develop and Market New Products. We will continue to expand our product offerings through internal product innovation and joint research and development initiatives with our
customers and research partnership formations. We employ a systematic approach to new product development and have identified promising new technologies that have begun to yield significant results.
|- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Improve Our Position as a Low Cost Producer. We will continue to focus on opportunities to optimize our resources, improve our cost position and drive new product innovation.
In late 2002, we implemented a Six Sigma process initiative, which is adding discipline and focus to the way we approach productivity. In addition, in 2003 we implemented a significant restructuring program which has enabled us to achieve
significant cost savings.
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  | Strategic Relationship with Other Affiliate Companies.We believe there are substantial cost reduction and revenue growth opportunities achievable via strategic relationships
with other companies affiliated with Apollo Management, L.P. (Apollo). Through combined purchasing initiatives, we intend to target reductions in raw material expenses. In addition, we believe there are potential cross-selling
opportunities with those Apollo affiliated companies that sell different products to our target markets. We may determine to try to realize such opportunities through potential business combinations with such affiliated chemical companies controlled
by Apollo.
|- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





3



---

##### Table of Contents

Our business consists of three reportable segments: Forest Products, Performance Resins and International. See Note 18 to
the Consolidated Financial Statements.



Historical Perspective



On July 6, 2004, Apollo announced that it had signed a definitive agreement
to acquire the Company. Previously, on May 7, 2004, the Company filed a registration statement with the U.S. Securities and Exchange Commission for a proposed initial public offering (IPO) of its common stock. This IPO was suspended and
the registration statement withdrawn on August 31, 2004.



On August 12, 2004,
BHI Investment, LLC, an affiliate of Apollo, acquired all of the outstanding capital stock of Borden Holdings, Inc. (BHI), the Companys parent at that time, for total consideration of approximately $1.2 billion, including
assumption of debt. In conjunction with this transaction, all of the outstanding capital stock of the Company held by management was redeemed and non-vested restricted stock was cancelled. In addition, the Company redeemed approximately 102,069
shares from BHI for cash totaling $294,918.



Immediately following the
acquisition of BHI, BHI Investment, LLC reorganized the existing corporate structure of the Company so that the Company became directly owned by BHI Acquisition Corporation (BHI Acquisition), a subsidiary of BHI Investment, LLC.
Following the acquisition of BHI by Apollo, the Company reorganized its foreign subsidiaries.



The acquisition of BHI, and the payment of transaction fees and expenses, was financed with the net proceeds of a $475 million second-priority senior secured private debt offering (the Second Priority
Notes) by two newly formed, wholly owned subsidiaries of the Company and certain equity contributions to BHI Acquisition from Apollo. With a portion of the proceeds, we redeemed our 9.25% debentures on August 12, 2004 for total cash of
$49,249. Included in the total cash paid was $47,295 for the principal of the debentures, $1,069 of accrued interest and an early redemption premium of $885. See Note 9.



Collectively, the transactions described above are referred to as the Apollo Transaction.



The Second Priority Notes are guaranteed by the Company and certain of its domestic
subsidiaries (the Guarantors). The Second Priority Notes and the related guarantees are senior obligations secured by a second-priority lien (subject to certain exceptions and permitted liens) on certain of the Guarantors existing
and future domestic assets, including the stock of the Companys Canadian subsidiary.



As a result of the suspended IPO and the subsequent acquisition by Apollo, we incurred expenses of $55,586 in 2004. These amounts included charges for investment banking, accounting and legal fees, fees paid to
Apollo, payments for cancellation of restricted stock, exercises of stock options and management bonuses pertaining to the activity. These amounts are included within Transaction related costs.



Prior to the Apollo Transaction, the Company was controlled by an affiliate of Kohlberg
Kravis Roberts & Co. (KKR) since 1995. The Companys immediate parent, BHI, was a wholly owned subsidiary of BW Holdings, LLC (BWHLLC), an entity controlled by KKR.



Acquisitions and Divestitures



On October 6, 2004, we entered into an agreement to purchase all outstanding shares of
capital stock of Bakelite Aktiengesellschaft (Bakelite) for a net purchase price ranging from approximately 175 million to 200 million, subject to certain adjustments. Completion of the purchase is subject to regulatory and
other customary closing conditions including European Commission merger clearance. The Company and Bakelite will continue to operate independently until those conditions are satisfied and the closing occurs.



4



---

##### Table of Contents

Following is a summary of acquisitions and divestitures we made in the past five years.



In the fourth quarter of 2003, we acquired Fentak Pty Ltd. (Fentak) in Australia
and Malaysia, a producer of specialty chemical products for engineered wood, laminating and paper impregnation markets. We also acquired the business and technology assets of Southeastern Adhesives Company (SEACO), a domestic producer of
specialty adhesives.



In 2001, through a series of transactions with
affiliates, we sold Consumer Adhesives for total proceeds of $94,120 (the Consumer Adhesives Sale). We retained continuing investments in Consumer Adhesives in the form of preferred stock and notes receivable. We sold the notes
receivable to BHI in the fourth quarter of 2001 for their carrying value of $57,691. The preferred stock, with a carrying value of $110,000, was redeemed during the first quarter of 2002 for a $110,000 note receivable from Consumer Adhesives, which
we subsequently sold to BHI for face value plus accrued interest and used the proceeds to repay affiliated debt.



Also in 2001, we merged our North American foundry resins and coatings businesses with similar businesses of Delta-HA, Inc. to form HA-International, LLC
(HAI), in which we have a 70% interest.



In 2000, the Company
acquired the formaldehyde and certain other assets from Borden Chemicals and Plastics Operating Limited Partnership, which was an affiliate of the Company, and acquired East Central Wax, a wax emulsions producer for the forest products business.



Products



The product lines included in our Forest Products operating segment are formaldehyde and forest product resins. The product lines in our
Performance Resins operating segment are oilfield, foundry and specialty resins. The products of our International operating segment are formaldehyde, forest product and performance resins and consumer products.



Forest Products



Forest Products Resins. We are the leading producer of forest products
thermoset-based resins in North America. Our thermoset-based resin systems are used by our customers to bind wood particles and bond wood segments to provide strength and durability to oriented strand board (OSB), particleboard, medium
density fiberboard (MDF) and plywood. The primary end-markets for our forest products resins are new home construction, furniture and repair and remodeling.



|                       |  |                                                                                                                                                                 
|---------------------- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------
|Products               |  | Key Applications                                                                                                                                                
|Engineered Wood Resins |  | Softwood and hardwood plywood, OSB and laminated veneer lumber                                                                                                  
|                       | 
|Special Wood Adhesives |  | Laminated beams, structural and nonstructural fingerjoints, wood composite I-beams, cabinets, doors, windows, furniture, mold and millwork and paper laminations
|                       | 
|Wax Emulsions          |  | Sizing agent for composite products                                                                                                                             
|                       | 
|Wood Fiber Resins      |  | Particleboard, MDF and hardboard                                                                                                                                



We provide a comprehensive range of
resin systems to the worlds leading producers of engineered wood products. Our resins and adhesives, together with our wax sizing agents and other complementary products, are used to produce the following products: OSB, plywood and other
construction panel systems; laminated beams, joists and trusses for structural applications; millwork, cabinetry and window and door assemblies; and particleboard and MDF for furniture, flooring and other applications. Used in combination with wood
from plantation-grown trees, our resins help provide economical alternatives to traditional solid wood products that consume old-growth timber, while delivering products that achieve superior performance. Depending on the application and customer
requirements, our resins are produced by mixing formaldehyde with other chemicals, including urea, phenol, melamine and resorcinol. The result is a completed thermoset resin system.



A key component of our success in the engineered wood market is our total systems approach to meeting customer needs. This approach involves
first using our global technology and experience in order to deliver the right resin for the customers application and production process and then providing in-plant technical support and service.



Formaldehyde. We are the worlds largest producer of formaldehyde by volume and
the largest provider of formaldehyde to end-users in North America. We manufacture more than five billion pounds of formaldehyde solution each year, of which approximately half is consumed internally for resin production and the other half is sold
to external customers. Formaldehyde is a versatile building block chemical used in thousands of diverse end-use applications such as resin systems for forest



5



---

##### Table of Contents

products and industrial bonding, household products, including shampoo, cosmetics, disinfectants and fabric softeners,
and specialty fabrics, paper products, fertilizers and animal feeds.



|                               |  |                                                                                                                                             
|------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------
|Products                       |  | Key Applications                                                                                                                            
|Formaldehyde                   |  | Herbicides and fungicides, fabric softeners, oil and gas applications, urea formaldehyde, melamine formaldehyde, phenol formaldehyde and MDI
|                               | 
|Hexamine                       |  | Accelerator for rubber curing, propellant to solid rocket booster engines and phenolic-based resins for brake shoes                         
|                               | 
|Methaform                      |  | Clear automotive topcoats and other coating applications                                                                                    
|                               | 
|Urea Formaldehyde Concentrates |  | Precursor for UF resins used in particleboard, plywood, shingles and slow release fertilizers                                               



We manufacture synthetic formaldehyde
by reacting methanol with a silver or metal oxide catalyst. Formaldehyde is sold in a water-based solution and also is blended with other materials for specific customer applications.



Performance Resins



Specialty Resins. We are a major supplier of high performance specialty resins used in the binding and bonding of a diverse range of materials, primarily in the
construction, automotive, electronics and steel industries. Typical end-use product applications include electronics for circuit boards, adhesives for brake linings and other friction products, flame-resistant composites for trains and planes,
acoustical insulation for automobiles and glass matting for roofing shingles and thermal insulation.



|                                                                            |  |                                                                                                                                                                                                                                                                          
|--------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Products                                                                    |  | Key Applications                                                                                                                                                                                                                                                         
|Automotive PF Resins                                                        |  | Acoustical insulation, filters, friction materials, grinding wheels, interior components, molded electrical parts and assemblies                                                                                                                                         
|                                                                            | 
|Composites PF Resins                                                        |  | Aircraft interiors, air ducts, brakes, ballistic applications, industrial grating, pipe and space shuttle engine nozzles                                                                                                                                                 
|                                                                            | 
|Construction PF Resins, UF Resins, Ketone Formaldehyde and Melamine Colloid |  | Decorative laminates, fiberglass insulation, floral foam, lamp cement for light bulbs, molded appliance and electrical parts, molding compounds, sandpaper, fiberglass mat, laminates,
coatings, crosslinker for thermoplastic emulsions and specialty wet strength paper
|                                                                            | 
|Electronics PF Resins                                                       |  | Electrical laminates, computer chip encasement, molding compounds and photolithography                                                                                                                                                                                   
|                                                                            | 
|Refractory PF Resins                                                        |  | Steel mill refractory bricks, monolithic shapes, tap hole mix, tundish liners and nozzle visios                                                                                                                                                                          



Our manufacturing complex in
Louisville, Kentucky is one of the worlds largest sites producing specialty resins. We have additional manufacturing capacity for these materials dispersed throughout our international network of plants.



Foundry Resins. Through HAI, we are the leading producer by volume of foundry resins
in North America. We pioneered the development of thermoset-based resins as binders for sand cores and molds used in metal castings over 40 years ago and continue to serve the North American market with a broad distribution network and significant
production capability. Our foundry resin manufacturing capabilities include the largest foundry resin plant in the United States, which is located in Louisville, Kentucky. Our foundry resin systems are used by major automotive and industrial
companies in the production of engine blocks, transmissions, brake and drive train components and various other casting products.





6



---

##### Table of Contents

|                                                                               |  |                                                                                                                                                                                                                                                                                                                                                         
|------------------------------------------------------------------------------ |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Products                                                                       |  | Key Applications                                                                                                                                                                                                                                                                                                                                        
|Lost Foam Coatings                                                             |  | Specialty refractory coatings for lost foam casting operations featuring high permeability and pattern coverage properties                                                                                                                                                                                                                              
|                                                                               | 
|Refractory Coatings                                                            |  | General purpose products for ferrous and nonferrous applications                                                                                                                                                                                                                                                                                        
|                                                                               | 
|Resin-Coated Sand (RCS)Super F®, FII® and FT®                                 |  | General purpose high-curing speed RCS for most applications                                                                                                                                                                                                                                                                                             
|                                                                               | 
|ResinsSigmaCure®, SigmaSet®, Super Set®, ALpHASET®, BETASET® and Plastiflake® |  | A comprehensive selection of synthetic resins for bonding sand cores and molds in a variety of applications including phenolic urethane cold box resins, phenolic urethane nobake resins, furan
and phenolic acid curing resins, ester cured phenolic nobake resins, methyl formate cured phenolic cold box resins and phenolic resins for shell process
|                                                                               | 
|Shake-Free® Coated Sand                                                        |  | Specialty RCS for aluminum and light alloy applications                                                                                                                                                                                                                                                                                                 
|                                                                               | 
|Sigma Sand® Coated Sand                                                        |  | Specialty RCS formulated for reduced emissions and nitrogen levels                                                                                                                                                                                                                                                                                      



Our foundry resins business provides
PF resin systems, specialty coatings and ancillary products used to produce finished metal castings.



Oilfield Products. We are a leading producer of resin-coated proppant systems in North America. Our innovative flow back control technology allows oil and gas service providers to improve yields and extract oil
and gas from deeper and more complex geological formations.



|                                         |  |                                                                   
|---------------------------------------- |  | ------------------------------------------------------------------
|Products                                 |  | Key Applications                                                  
|AcFrac®, Ceramax® and XRT Resin Systems |  | Control flowback and increase well yields using various substrates
|                                         | 
|Curable Resin-Coated Sand                |  | Bonds down hole to prevent proppant flowback                      
|                                         | 
|Curable Resin-Coated Ceramics            |  | Control flowback and increase conductivity                        
|                                         | 
|Precured Resin-Coated Sand               |  | Excellent crush resistance and high flow capacities               



Maximizing flow capacity is critical
for oil and gas production around the world, both on land and off-shore. We supply the leading service providers in the oil and gas field industry with products that increase the yields of working wells. Our extensive line of PF resin systems,
resin-coated sand and resin-coated ceramic proppants are used in the hydraulic fracturing process to create and maintain pathways from the well bore to the oil or gas-bearing formation. This process enhances the recovery of hydrocarbons and can
extend the wells life.



Marketing and Distribution



Products are sold to industrial users in the U.S. primarily through our sales force. To the
extent practicable, our international distribution techniques parallel those used in the U.S. However, raw materials, production considerations, pricing competition, government policy toward industry and foreign investment and other factors may vary
substantially from country to country.



7



---

##### Table of Contents

Competition



We compete with a variety of companies in each of our product lines. However, we believe that no single company competes with us across all of our existing product lines.
The following chart sets forth our principal competitors by segment:



|                   |  |                                                          |  |                                                                                         
|------------------ |  | -------------------------------------------------------- |  | ----------------------------------------------------------------------------------------
|Segment            |  | Product Line                                             |  | Principal Competitors                                                                   
|Forest Products    |  | Forest Products Resins                                   |  | Dynea International Oy and Georgia-Pacific Corporation                                  
|                   |  |                                                         
|                   |  | Formaldehyde                                             |  | Dynea International Oy and Georgia-Pacific Corporation                                  
|                   |  |                                                         
|Performance Resins |  | Specialty Resins                                         |  | Dynea International Oy, Occidental Petroleum Corporation and Sumitomo Bakelite Co., Ltd.
|                   |  |                                                         
|                   |  | Foundry Resins                                           |  | Ashland Inc. and Technisand Inc.                                                        
|                   |  |                                                         
|                   |  | Oilfield Products                                        |  | Carbo Ceramics Inc. and Santrol Corporation                                             
|                   |  |                                                         
|International      |  | Product lines produced and sold outside of North America |  | Ashland Inc. and Dynea International Oy                                                 



Manufacturing and Raw Materials



The primary raw materials used in our manufacturing processes, for all of
our operating segments, are methanol, phenol and urea. Raw materials are available from numerous sources in sufficient quantities but are subject to price fluctuations that cannot always be passed on to customers. We use long-term purchase
agreements for our primary and certain other raw materials in certain circumstances to assure availability of adequate supplies at specified prices. These agreements generally do not have minimum purchase requirements.



The following table illustrates the average annual price from 1995 to 2004 for methanol,
phenol and urea:



|             |  |        |  |        |  |        |  |        |  |       |  |        |  |        |  |        |  |        |  |       
|------------ |  | ------ |  | ------ |  | ------ |  | ------ |  | ----- |  | ------ |  | ------ |  | ------ |  | ------ |  | ------
|             |  | Year  
|Raw Material |  | 1995   |  | 1996   |  | 1997   |  | 1998   |  | 1999  |  | 2000   |  | 2001   |  | 2002   |  | 2003   |  | 2004  
|Methanol(1)  |  | 65.77  |  | 44.03  |  | 58.43  |  | 36.08  |  | 34.59 |  | 54.48  |  | 58.98  |  | 52.30  |  | 74.58  |  | 80.03 
|Phenol(2)    |  | 34.00  |  | 32.00  |  | 35.50  |  | 31.17  |  | 23.00 |  | 25.88  |  | 26.63  |  | 28.13  |  | 34.48  |  | 50.92 
|Urea(3)      |  | 200.16 |  | 182.65 |  | 137.96 |  | 113.05 |  | 91.63 |  | 140.38 |  | 133.85 |  | 115.08 |  | 172.17 |  | 204.04

---

|(1) | Prices based on U.S. cents per gallon (Source: Chemical Market Associates, Inc.)
|--- | --------------------------------------------------------------------------------

|(2) | Prices based on U.S. cents per pound (Source: Chemical Market Associates, Inc.)
|--- | -------------------------------------------------------------------------------

|(3) | Prices based on U.S. dollars per short ton (Source: Blue, Johnson & Associates)
|--- | -------------------------------------------------------------------------------



Customers



Our business does not depend on any single customer nor are any of our operating segments limited to a particular group of customers, the loss of which would have a
material adverse effect on the operating segment. In 2004, our largest customer accounted for approximately 5% of our net sales, and our top ten customers accounted for approximately 24% of our net sales. Our primary customers consist of
manufacturers, and the demand for our products is generally not seasonal.



Patents and Trademarks



We own various patents, trademark
registrations, patent and trademark applications and technology licenses in our operating segments around the world which are held for use or currently used in our operations. We own two material trademarks, Borden® and Elsie®. We use
Borden® in our operations and license both trademarks to third parties for use on non-chemical products. A majority of our patents relate to the development of new products and processes for manufacturing and use thereof and will expire at
various times between 2005 and 2023. Other than the Borden® and Elsie® trademarks, no individual patent or trademark is considered to be material; however, our overall portfolio of patents and trademarks are valuable assets.



Environmental Regulations



Our operations involve the use, handling, processing, storage, transportation and disposal
of hazardous materials and are subject to extensive environmental regulation at the Federal, state and international level and are exposed to the risk of claims for environmental remediation or restoration. In addition, our production facilities
require operating permits that are subject to renewal or modification. Violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines, penalties, damages or other costs, any of which
could have a material adverse effect on our business, financial condition, results of operations or cash flows.



Accruals for environmental matters are recorded in accordance with the guidelines of AICPA Statement of Position 96-1, Environmental Remediation Liabilities,
when it is probable that a liability has been incurred and the amount of the



8



---

##### Table of Contents

liability can be estimated. Although environmental policies and practices are designed to ensure compliance with
international, Federal and state laws and environmental regulations, future developments and increasingly stringent regulation could require us to make additional unforeseen environmental expenditures. In addition, our former operations, including
our ink, wallcoverings, film, phosphate mining and processing, thermoplastics, food and dairy operations, pose additional uncertainties for claims relating to our period of ownership. There can be no assurance that, as a result of former, current or
future operations, there will not be some future impact on us relating to new regulations or additional environmental remediation or restoration liabilities.



We are actively engaged in complying with environmental protection laws, including various Federal, state and foreign statutes and regulations relating to manufacturing,
processing and distributing our many products. We anticipate incurring future costs for capital improvements and general compliance under environmental laws, including costs to acquire, maintain and repair pollution control equipment. We incurred
related capital expenditures of $4,529 in 2004, $5,234 in 2003 and $3,641 in 2002. We estimate that approximately $5,300 will be spent for capital expenditures in 2005 for environmental controls at our facilities. This estimate is based on current
regulations and other requirements, but it is possible that material capital expenditures in addition to those currently anticipated could be required if regulations or other requirements change.



Research and Development



Our research and development and technical services expenditures were $19,744, $17,998 and
$19,879 in 2004, 2003 and 2002, respectively. Development and marketing of new products are carried out by our operating segments and are integrated with quality control for existing product lines. In addition, we have an agreement with a
not-for-profit research center to assist in certain research projects and new product development initiatives.



Employees



At December 31, 2004, we had
approximately 2,400 employees. Relationships with our union and non-union employees are generally good.



Where You Can Find More Information



Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and amendments to these reports are available to the public through our internet website atwww.bordenchem.com/home.aspunder About
Us, from the Securities and Exchange Commission at its website www.sec.gov or free of charge from Investor Relations at our administrative offices in Columbus, Ohio.



ITEM 2. PROPERTIES



As of December 31,
2004, we operated 27 domestic production, manufacturing and distribution facilities in 16 states, the most significant of which is a plant in Louisville, Kentucky. In addition, we operated 22 foreign production, manufacturing and distribution
facilities primarily in Canada, Brazil, the United Kingdom, Australia, Malaysia and China. Our production and manufacturing facilities are generally well maintained and effectively utilized. We believe our production and manufacturing facilities are
adequate to operate our business.



9



---

##### Table of Contents

Our executive and administrative offices, production, manufacturing and distribution facilities at December 31, 2004 are
shown in the following table:



|                                        |  |                                             |  |                    
|--------------------------------------- |  | ------------------------------------------- |  | -------------------
|Location                                |  | Function                                    |  | Nature of Ownership
|Domestic                                |  |                                             |  |                    
|                                        |  |                                            
|Alexandria, LA                          |  | Manufacturing                               |  | Owned              
|Aurora, IL                              |  | Manufacturing                               |  | Owned              
|Baytown, TX                             |  | Manufacturing                               |  | Owned              
|Bellevue, WA                            |  | Executive and Administration                |  | Leased             
|Brady, TX                               |  | Manufacturing                               |  | Owned              
|Cincinnati, OH                          |  | Manufacturing                               |  | Owned              
|Columbus, GA                            |  | Manufacturing                               |  | Owned              
|Columbus, OH                            |  | Executive and Administration                |  | Leased             
|Demopolis, AL                           |  | Manufacturing                               |  | Owned              
|Diboll, TX                              |  | Manufacturing                               |  | Owned              
|Dutchtown, LA                           |  | Storage Terminal                            |  | Owned              
|Fayetteville, NC                        |  | Manufacturing                               |  | Owned              
|Fremont, CA                             |  | Manufacturing                               |  | Owned              
|Geismar, LA                             |  | Manufacturing                               |  | Owned              
|Gonzales, LA                            |  | Manufacturing                               |  | Owned              
|High Point, NC                          |  | Manufacturing                               |  | Owned              
|Hope, AR                                |  | Manufacturing                               |  | Owned              
|Houston, TX                             |  | Executive and Administration                |  | Leased             
|Houston, TX                             |  | Laboratory                                  |  | Leased             
|LaGrande, OR                            |  | Manufacturing                               |  | Owned              
|Louisville, KY                          |  | Manufacturing                               |  | Owned              
|Louisville, KY                          |  | Executive and Administration                |  | Leased             
|Missoula, MT                            |  | Manufacturing                               |  | Owned              
|Moreau, NY                              |  | Manufacturing                               |  | Owned              
|Morganton, NC                           |  | Manufacturing                               |  | Owned              
|Mt. Jewett, PA                          |  | Manufacturing                               |  | Owned              
|Oregon, IL                              |  | Manufacturing                               |  | Owned              
|Portland, OR                            |  | Manufacturing                               |  | Owned              
|Sheboygan, WI                           |  | Manufacturing                               |  | Owned              
|Springfield, OR                         |  | Manufacturing                               |  | Owned              
|Toledo, OH                              |  | Manufacturing                               |  | Owned              
|Virginia, MN                            |  | Manufacturing                               |  | Owned              
|                                        |  |                                            
|International                           |  |                                             |  |                    
|                                        |  |                                            
|Brisbane, Queensland, Australia         |  | Manufacturing                               |  | Owned              
|Laverton North, Victoria, Australia     |  | Manufacturing                               |  | Owned              
|Somersby, New South Wales, Australia    |  | Manufacturing                               |  | Owned              
|Boituva, Brazil                         |  | Manufacturing                               |  | Owned              
|Cotia, Brazil                           |  | Manufacturing                               |  | Owned              
|Curitiba, Brazil                        |  | Manufacturing                               |  | Owned              
|Edmonton, AB, Canada                    |  | Manufacturing                               |  | Owned              
|Laval, PQ, Canada                       |  | Manufacturing                               |  | Owned              
|St. Romuald, PQ, Canada                 |  | Manufacturing                               |  | Owned              
|Vancouver, BC, Canada                   |  | Manufacturing                               |  | Owned              
|Heyuan, Peoples Republic of China      |  | Manufacturing                               |  | Owned              
|Shanghai, Peoples Republic of China    |  | Executive, Administration and
Manufacturing |  | Leased             
|Yumbo, Colombia                         |  | Manufacturing                               |  | Owned              
|Rouen, France                           |  | Distribution                                |  | Owned              
|Kedah, Malaysia                         |  | Manufacturing                               |  | Owned              
|Kuantan, Malaysia                       |  | Manufacturing                               |  | Owned              
|Prai, Malaysia                          |  | Manufacturing                               |  | Owned              
|Rotterdam, The Netherlands              |  | Manufacturing                               |  | Owned              
|Barry, South Wales, United Kingdom      |  | Manufacturing                               |  | Owned              
|Chandlers Ford, England, United Kingdom |  | Manufacturing                               |  | Owned              
|Cowie, Scotland, United Kingdom         |  | Manufacturing                               |  | Owned              
|Peterlee, England, United Kingdom       |  | Manufacturing                               |  | Owned              



10



---

##### Table of Contents

ITEM 3. LEGAL PROCEEDINGS



Environmental Proceedings



We have been
notified that the Company is or may be responsible for environmental remediation at 31 sites in the U.S. Five of these sites, located in four states, involve active proceedings brought under state or Federal environmental laws: Geismar, Louisiana;
Fairlawn, New Jersey; Fremont, California; Lakeland, Florida and Newark, California. The most significant of these sites is the site formerly owned by the Company in Geismar, Louisiana. While we cannot predict with certainty the total cost of such
cleanups, we have recorded liabilities of approximately $22,800 and $23,400 at December 31, 2004 and 2003, respectively, for environmental remediation costs related to these five sites.



For the remaining 26 sites, we have been notified that the Company is or may be a potentially responsible party (PRP) in active
proceedings in 16 states brought under the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA) or similar state superfund laws. While we cannot predict with certainty the total cost of such cleanup,
we have recorded liabilities of approximately $7,900 and $7,600 at December 31, 2004 and 2003, respectively, for environmental remediation costs related to these 26 sites. The Company generally does not bear a significant level of responsibility for
these sites and has little control over the costs and timing of cash flows. At 16 of the 26 sites, our share is less than 1%. At the remaining ten sites, the Company has a share of up to 8.8% of the total liability. The Companys ultimate
liability will depend on many factors including: its volumetric share of waste, the financial viability of other PRPs, the remediation methods and technology used, the amount of time necessary to accomplish remediation and the availability of
insurance coverage. Our insurance provides very limited, if any, coverage for environmental matters.



In addition to the 31 sites referenced above, we are conducting voluntary remediation at 24 other locations. We have recorded liabilities of approximately $7,500 and $7,600 at December 31, 2004 and 2003, respectively,
for remediation and restoration liabilities at these locations. See Note 11 to the Consolidated Financial Statements.



Imperial Home Décor Group



In 1998, pursuant to a merger and recapitalization transaction sponsored by The Blackstone Group (Blackstone) and financing arranged by Chase Manhattan Bank,
Borden Decorative Products Holdings, Inc. (BDPH), a wholly owned subsidiary of the Company, was acquired by Blackstone and subsequently merged with Imperial Wallcoverings to create Imperial Home Décor Group (IHDG).
Blackstone provided $84,500 in equity, a syndicate of banks funded $198,000 of senior secured financing and $125,000 of senior subordinated notes were privately placed. We received approximately $309,000 in cash and 11% of IHDG common stock for our
interest in BDPH at the closing of the merger. On January 5, 2000, IHDG filed for reorganization under Chapter 11 of the U. S. Bankruptcy Code. The IHDG Litigation Trust (the Trust) was created pursuant to the plan of reorganization in
the IHDG bankruptcy to pursue preference and other avoidance claims on behalf of the unsecured creditors of IHDG. In November 2001, the Trust filed a lawsuit against the Company and certain of its affiliates seeking to have the IHDG recapitalization
transaction voided as a fraudulent conveyance and asking for a judgment to be entered against the Company for $314,400 plus interest, costs and attorney fees. An effort to resolve this matter through non-binding mediation was unsuccessful in
resolving the case, and the parties are moving forward with discovery in preparation for trial.



We have accrued approximately $3,600 for defense costs related to this matter at December 31, 2004. We have not recorded a liability for any potential losses because a loss is not considered probable based on current
information. We believe that we have strong defenses to the Trusts allegations, and we intend to defend the case vigorously. While it is reasonably possible that the resolution of this matter may result in a loss due to the many variables
involved, management is not able to estimate the range of possible outcomes at this time.



Brazilian Excise Tax Administrative Appeal



In 1992, the State of Sao Paulo Tax Bureau issued an assessment against our primary Brazilian subsidiary claiming that excise taxes were owed on certain intercompany loans made for centralized cash management purposes, characterized by the
Tax Bureau as intercompany sales. Since that time, we have held discussions with the Tax Bureau, and our subsidiary has filed an administrative appeal seeking cancellation of the assessment. In December 2001, the Administrative Court upheld the
assessment, valued at $60.8 million Brazilian Reais, or approximately US$22,900 at December 31, 2004, an amount which includes tax, penalties, monetary correction and interest. In September 2002, our subsidiary filed a second appeal with the
highest-level administrative court, again seeking cancellation of the assessment on the grounds that it was unlawfully issued. Argument was made to the court in September 2004, and we are awaiting the courts ruling. We believe we have a strong
defense against the assessment and will pursue the appeal vigorously; however, no assurance can be given that the assessment will not be upheld. At this time, we do not believe a loss is probable; therefore, only related legal fees have been
accrued. Reasonably possible losses resulting from the resolution of this matter range from zero to $22,900.



11



---

##### Table of Contents

HAI Grand Jury Investigation



HAI, a joint venture in which the Company has a 70% interest, received a grand jury subpoena dated November 5, 2003 from the U.S. Department
of Justice Antitrust Division relating to a foundry resins Grand Jury investigation. HAI has provided documentation in response to the subpoena. As is frequently the case when such investigations are in progress, various antitrust lawsuits have been
filed against the Company alleging that the Company and HAI, along with various other entities, engaged in a price fixing conspiracy. These cases have been consolidated in federal court in Ohio. At this time, we do not believe a loss is probable;
therefore, only related legal fees have been accrued. We do not have sufficient information to determine a range of possible outcomes for this matter at this time.



CTA Acoustics



From the third quarter of 2003 to first quarter 2004, six lawsuits were filed against us in the 27thJudicial District, Laurel County Circuit Court, in Kentucky, arising from an explosion at a customers plant where seven plant workers were killed and
over 40 other workers were injured. The lawsuits primarily seek recovery for wrongful death, emotional and personal injury, loss of consortium, property damage and indemnity. We expect that a number of these suits will be consolidated. The
litigation also includes claims by our customer against its insurer and the Company and a claim against a third party that performed services for the Company in connection with sales to the customer. We are pursuing a claim for indemnity against our
customer, based on language in our contract with the customer, and a claim against a third party that performed services for us in connection with the sales to the customer. We have insurance coverage which will address any payments and legal fees
in excess of the $5,000 deductible, which was previously accrued.



Other
Legal Proceedings



The Company is involved in various product liability,
commercial and employment litigation, personal injury, property damage and other legal proceedings which are considered to be in the ordinary course of business. In large part, as a result of the bankruptcies of many asbestos producers,
plaintiffs attorneys are increasing their focus on peripheral defendants, including the Company, and asserting that even products that contained a small amount of asbestos caused injury. Plaintiffs are also focusing on alleged harm caused by
other products we have made or used, including those containing silica and vinyl chloride monomer. We believe we have adequate reserves and insurance to cover currently pending and foreseeable future claims.



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



During the fourth quarter of 2004, no matters were submitted to a vote of our security holder.



Part II



ITEM 5. MARKET FOR THE REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES



(a) There is no established public trading market for our common stock.



(b) As of March 1, 2005, 96,905,936 common shares were held by our parent, BHI Acquisition Corp.



(c) We declared no dividends on common stock in 2004, 2003 or 2002. Our ability to pay dividends on our common stock is restricted by our
Loan and Security Agreement with certain banks (see the discussion in Note 9 to the Consolidated Financial Statements and under Liquidity and Capital Resources in the Managements Discussion and Analysis of Financial Condition and Results of
Operations).



(d) There are no compensation plans that authorize the issuance
of our stock to employees or non-employees.





12



---

##### Table of Contents

ITEM 6. SELECTED FINANCIAL DATA



Five Year Selected Consolidated Financial Data



The following
summarizes our selected financial data for the past five years. See pages 14 through 33 for items impacting comparability between 2004, 2003 and 2002.



|                                                                            |  |         |           |   |         |   |           |  |   |           |   |  |         |           |   |  |   |           |  
|--------------------------------------------------------------------------- |  | ------- | --------- | - | ------- | - | --------- |  | - | --------- | - |  | ------- | --------- | - |  | - | --------- | -
|For the years                                                               |  | (1)2004 |           |   | (2)2003 |   | (3)2002   |  |   | (4)2001   |   |  | (5)2000 |          
|Summary of Earnings                                                         |  |         |           |   |         |   |           |  |   |           |   |  |         |           |   |  |   |           |  
|Net sales                                                                   |  | $       | 1,686,021 |   |         | $ | 1,434,813 |  | $ | 1,247,885 |   |  | $       | 1,372,141 |   |  | $ | 1,377,845 |  
|(Loss) income from continuing operations                                    |  |         | (179,668  | ) |         |   | 22,976    |  |   | (6,758    | ) |  |         | (136,604  | ) |  |   | (72,259   | )
|Net (loss) income applicable to common stock                                |  |         | (179,668  | ) |         |   | 22,976    |  |   | (36,583   | ) |  |         | (186,646  | ) |  |   | (39,750   | )
|Basic and diluted (loss) income per common share from continuing operations |  | $       | (1.12     | ) |         | $ | 0.11      |  | $ | (0.03     | ) |  | $       | (0.69     | ) |  | $ | (0.36     | )
|Basic and diluted (loss) income per common share                            |  |         | (1.12     | ) |         |   | 0.11      |  |   | (0.18     | ) |  |         | (0.94     | ) |  |   | (0.20     | )
|Dividends per share                                                         |  |         |           |   |         |   |           |  |   |           |   |  |         |           |   |  |   |           |  
|Common share                                                                |  | $       |          |   |         | $ |          |  | $ |          |   |  | $       | 0.18      |   |  | $ | 0.31      |  
|Preferred series A                                                          |  |         |          |   |         |   |          |  |   |          |   |  |         | 2.52      |   |  |   | 3.00      |  
|Average number of common shares outstanding during the year-basic           |  |         | 159,923   |   |         |   | 199,310   |  |   | 199,319   |   |  |         | 198,997   |   |  |   | 198,975   |  
|Average number of common shares outstanding during the year-dilutive        |  |         | 159,923   |   |         |   | 200,267   |  |   | 199,319   |   |  |         | 198,997   |   |  |   | 198,975   |  
|Financial Statistics                                                        |  |         |           |   |         |   |           |  |   |           |   |  |         |           |   |  |   |           |  
|Total assets                                                                |  | $       | 1,044,114 |   |         | $ | 993,866   |  | $ | 1,011,780 |   |  | $       | 1,123,278 |   |  | $ | 1,520,597 |  
|Long-term debt                                                              |  |         | 955,816   |   |         |   | 529,966   |  |   | 523,287   |   |  |         | 532,497   |   |  |   | 530,530   |  

---

|(1) | On August 12, 2004, we were acquired by Apollo Management L.P., suspended a proposed initial public offering of our common stock and issued Second Priority Notes totaling $475,000.
Our operating results include costs related to the Apollo Transaction of $55,586, which are included in Transaction related costs. Our business realignment expense and impairments totaled $4,427 for the year. Also, primarily in response to changes
in circumstances in connection with the Apollo Transaction, we recorded a charge of approximately $87,000 in Income tax expense to increase the valuation reserves related to our net domestic deferred tax asset and an additional provision of
approximately $63,000 for taxes associated with the unrepatriated earnings of our foreign subsidiaries.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Our 2003 operating results include $4,748 of business realignment expense and impairments.
|--- | ------------------------------------------------------------------------------------------

|(3) | In 2002, we adopted Statement of Financial Accounting Standard No. 142, Goodwill and Other Intangible Assets, and recorded a charge upon adoption of $29,825 as
Cumulative effect of change in accounting principle. Our operating results include $19,699 in business realignment expense and impairments consisting of plant closure costs of $12,584, severance of $3,265 and non-cash impairments of $6,315 partially
offset by a $2,465 gain on the sale of a closed facility.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | In 2001, we sold Consumer Adhesives, closed Melamine and impaired the related assets and sold a common stock equity investment. Additionally, in 2001, our prepaid pension asset was
reclassified to equity as a minimum pension adjustment. Operating results in 2001 include $126,408 of business realignment expense and impairments consisting of $98,163 in impairment charges, $23,285 in plant closure costs, $12,582 in severance and
$2,885 related to the discontinued construction of a new plant. These charges were partially offset by a $10,507 gain on the sale of a closed facility. Our 2001 results also include a $27,000 impairment expense related to investments in and
receivables from affiliates.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | In 2000, we acquired a formaldehyde operation from BCP Operating Limited Partnership and East Central Wax, a wax emulsions producer. Our operating results in 2000 include business
realignment expense of $38,100 consisting entirely of plant closure costs, and our operating results also include a $25,330 charge to exit certain long-term raw material contracts. These charges were partially offset by a $10,500 gain on the sale of
certain rights to harvest shellfish. Our 2000 results also include a $67,969 charge to write-down investments in affiliates.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





13



---

##### Table of Contents

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

(Dollars in
thousands)



Forward-Looking and Cautionary Statements



As management of the Company, we may, from time to time, make written or
oral statements regarding the future performance of the Company, including statements contained in this report and our other reports filed with the Securities and Exchange Commission. Investors should be aware that these statements, which may
include words such as believe, expect, anticipate, estimate or intend, are based on our currently available financial, economic, and competitive data and on current business plans. Such
statements are inherently uncertain, and investors should recognize that events could cause our actual results to differ materially from those projected in forward-looking statements made by us on behalf of the Company. Such risks and uncertainties
are primarily in the areas of results of operations by business unit, liquidity, legal and environmental liabilities and industry and economic conditions.



Apollo Transaction



On July 6, 2004, Apollo Management L.P., referred to herein as Apollo, announced that it had signed a definitive agreement to acquire BCI. Previously, on May 7, 2004, BCI
filed a registration statement with the U.S. Securities and Exchange Commission, the SEC, for a proposed initial public offering, or IPO, of BCIs common stock. This IPO was suspended and the registration statement withdrawn on August 31, 2004.



On August 12, 2004, BHI Investment, LLC, an affiliate of Apollo, acquired all
of the outstanding capital stock of our parent, Borden Holdings, Inc., which we call BHI, for total consideration of approximately $1.2 billion, including debt assumed. In addition, all of the outstanding capital stock of BCI held by management was
redeemed or otherwise cancelled.



Immediately following the acquisition, BHI
Investment, LLC reorganized our existing corporate structure so that BCI became directly owned by BHI Acquisition Corporation, which we call BHI Acquisition, a subsidiary of BHI Investment, LLC. Immediately following the acquisition of BHI, we also
reorganized the ownership of BCIs foreign subsidiaries.



Collectively,
these transactions described above are referred to as the Apollo Transaction.



The acquisition of BHI, and the payment of transaction fees and expenses, was financed by the net proceeds of a $475 million second-priority senior secured private debt offering, which we refer to as the Second Priority Notes, issued by two
newly formed, wholly owned subsidiaries of BCI, and with certain equity contributions to BHI Acquisition from Apollo and management. With a portion of the proceeds, we redeemed our 9.25% debentures on August 12, 2004 for total cash of $49,249.
Included in the total cash paid was $47,295 for the principal of the debentures, $1,069 of accrued interest and an early redemption premium of $885.



The Second Priority Notes are guaranteed by the Company and certain of its domestic subsidiaries, which we refer to collectively as the Guarantors. The Second Priority
Notes and the related guarantees are senior obligations of BCI secured by a second-priority lien (subject to certain exceptions and permitted liens) on certain of the Guarantors existing and future domestic assets, including the stock of
BCIs Canadian subsidiary.



We elected to keep our accounting records on
the Companys historical basis of accounting under the public debt exemption permitted by the SEC.



Overview



We are a leading
global integrated producer of thermoset-based resins and adhesives for the global forest products and industrial markets. In addition, we are the worlds largest producer by volume of formaldehyde, an important and versatile building block
chemical used in a variety of applications. We are the largest North American producer by volume of thermoset-based resins used in the production of engineered wood products, including structural wood panels, beams and non- structural panels,
furniture, door and window assemblies and wallboards. We are also the largest North American producer by volume of resin-coated proppant systems, which are used in oilfield and natural gas production, and (through HAI) of foundry resins, which are
used in the production of cores and molds for metal castings. We have a strong presence in the production of specialty resins used in the industrial, automotive and electronics markets.



14



---

##### Table of Contents

Our business is managed as three operating segments: Forest Products, Performance Resins and International. Our results
also include general corporate and administrative expenses disclosed as Corporate and Other and activities related to our melamine crystal business, which we refer to as Melamine, which was shut down in 2002 and is disclosed as
Divested Business. These are also presented to provide a complete picture of our results.



Forest Products includes the forest product resins and formaldehyde product lines produced in North America. The key business drivers for Forest Products are housing starts, furniture demand, panel production capacity
and chemical intermediates sector operating conditions.



Performance Resins
includes the specialty resins, foundry resins and oilfield product lines produced in North America. Performance Resins key business drivers are housing starts, auto builds, active gas drilling rigs and the general industrial sector
performance.



International includes production operations in Europe, Latin
America and Asia Pacific. Principal countries of operation are the U.K., Brazil, Australia and Malaysia. Product lines include formaldehyde, forest product and performance resins and consumer products. The key business drivers for International are
export levels, panel production capacity, housing starts, furniture demand and the local political and general economic environments.



Corporate and Other represents general and administrative expenses and income and expenses related to assets and liabilities retained from legacy businesses.



Industry Conditions



As is true for many industries, our results are impacted by the effect on our customers of economic upturns or downturns, as well as the
impact on our own costs to produce, sell and deliver our products. Our customers use most of our products in their production processes; therefore, factors impacting their industries could significantly affect our results.



In 2004, the continuing strong U.S. housing market positively impacted us. According to
Resource Information Systems, Inc. (RISI), housing starts were up approximately 5% in 2004 compared to 2003, driving a 6% increase in structural panel consumption. Oriented strand board, or OSB, consumption was up 5% in 2004 compared to
2003, while plywood consumption was up 7%. The shift in our sales mix from plywood to OSB also benefited us, as OSB, on a per square foot basis, uses approximately twice the amount of our resins as plywood.



U.S. consumption of particleboard, a major end-use for our urea-formaldehyde, or UF, resins,
was up 3% in 2004 due primarily to the strong housing and remodeling markets, as well as due to an increase in furniture production in 2004 of 5% compared to 2003, according to RISI. Medium density fiberboard, or MDF, the other major end-use for our
UF resins, continued its strong growth in 2004 with an increase of 18% from 2003. Primarily the strong laminate flooring markets, used in both new homes and remodeling, drove this increase. Current forecasts for 2005 by RISI are predicting that
particleboard and MDF consumption will increase at slower rates in 2005 than in 2004 due to the predicted slowdown in the record-setting new housing market.



Continued higher natural gas prices, while hurting us from a processing cost perspective, increased the demand for our oilfield proppants used in the gas drilling
industry. The number of North American gas drilling rigs in active production at the end of 2004 were 11% higher than at the end of 2003, helping to drive a 25% increase in sales in our oilfield products. We believe continued elevated natural gas
prices and the need to replenish depleted reserves should continue to drive strong demand for these products in 2005.



Raw Material Costs



Raw material costs make up approximately 80% of our product costs. The primary raw materials that we use are methanol, phenol and urea. During the past four years, the price of these materials has been volatile. In
2004, for example, the average prices of methanol, phenol and urea increased by 7%, 48% and 19% respectively. To help mitigate this volatility, we have purchase and sale contracts with many of our vendors and customers with periodic price adjustment
mechanisms. Due to differences in timing of the pricing mechanism trigger points between our sales and purchase contracts there is often a lead-lag impact during which margins are negatively impacted for the short term in periods of
rising raw material prices and positively impacted in periods of falling raw material prices. In addition, the pass through of raw material price changes can result in significant variances in sales comparisons from year to year. In 2004, we had a
favorable impact as raw material price increases throughout 2003 and 2004 were passed through to customers, having a significant impact on 2004 sales versus 2003.



15



---

##### Table of Contents

Regulatory Environment



Various government agencies are conducting formaldehyde health research and evaluating the need for additional regulations. Although formaldehyde has been heavily
regulated for several years, further regulation of formaldehyde could follow over time. In 2004, the International Agency for Research on Cancer (IARC) reclassified formaldehyde as carcinogenic to humans, a higher
classification than previous IARC evaluations based principally on a study linking formaldehyde exposure to nasopharyngeal cancer, a rare form of cancer in humans. IARC also concluded that there was strong but not sufficient evidence for a finding
of a causal association between leukemia and occupational exposure to formaldehyde, although IARC could not identify a mechanism for leukemia induction. We believe that our production facilities will be able to comply with any likely regulatory
impact without any material impact on the business.



We support appropriate
scientific research and risk-based policy decision-making, and we are working with industry groups, including the Formaldehyde Council, Inc., to ensure that governmental assessments and regulations are based on sound scientific information. We
believe that we have credible stewardship programs and processes in place to provide compliant and cost-effective resin systems to our customers.



In addition, in October 2003, the European Union published the Registration, Evaluation and Authorisation of Chemicals proposal (REACH), which would require
manufacturers, importers and consumers of certain chemicals to register such chemicals and evaluate their potential impacts on human health and the environment. Based on the results of the evaluation, a newly created regulatory body would then
determine if the chemical should be further tested, regulated, restricted or banned from use. If REACH is enacted in its current form, it is possible that significant market restrictions could be imposed on the current and future uses of chemicals
sold by us in the European Union.



Competitive Environment



The chemical industry has been historically competitive, and we expect this competitive
environment to continue in the foreseeable future. We compete with companies of varying size, financial strength and availability of resources. Price, customer service and product performance are the primary areas in which we compete.



Other Factors Impacting Our Results



Other pressures on our profit margins include rising utility costs and increasing benefit,
general insurance and legal costs. We are taking a number of steps to control these costs. In addition, we are continuing to analyze our business structure, consolidating plants and functions where we can realize significant cost savings and
productivity gains. These consolidations have resulted in asset impairment charges and severance costs, which are more specifically discussed in the following sections and in Note 4 to Consolidated Financial Statements. Future consolidations or
productivity initiatives may include additional asset impairment charges and severance costs.



We believe that these factors will continue in the foreseeable future. These market dynamics will require us to continue to focus on productivity improvements and risk mitigation strategies to enhance and protect our
margins. In the Risk Management section of our report, you will see how we are taking other steps to manage factors impacting our margins through hedges of natural gas and foreign exchange exposures.



Overview of Results



Our consolidated net sales were $1,686,021 in 2004 versus $1,434,813 in 2003, an increase of
$251,208, or 17.5%. The pass through of raw material price increases and favorable product mix in Forest Products and Performance Resins contributed to the increase. Nets sales also benefited from volume increases in Forest Products, Performance
Resins, Latin America and Europe. Favorable currency translation, in all foreign countries that we operate in, also contributed to the increase. Fentak, a 2003 acquisition, contributed $7,717 of incremental sales in 2004.



We reported a net loss of $179,668 for 2004 versus net income of $22,976 for 2003. The
primary driver of the loss for 2004 was income tax expense of $146,337, which primarily consisted of a noncash charge of approximately $87,000 to increase valuation reserves related to certain deferred tax assets, as well as an additional provision
of approximately $63,000 for taxes associated with the unrepatriated earnings of our foreign subsidiaries. These charges were made primarily in response to changes in circumstances in connection with the Apollo Transaction. Also contributing to the
net loss were Transaction related costs of $55,586, which are included in Transaction related costs, and higher interest expense of $18,045 in 2004 primarily related to the Second Priority Notes (see Liquidity and Capital Resources) issued in
connection with the Apollo Transaction. Legal accruals related to legacy legal proceedings of approximately $10,300 also contributed to the net loss in 2004. Partially offsetting these increased expenses were our ability to recover the higher costs
of key raw materials, improved volumes in our higher margin products, cost savings related to the 2003 realignment program and amendments to the other post-employment benefits (OPEB) medical plan in 2003 and 2004.



16



---

##### Table of Contents

Our consolidated net sales increased $186,928, or 15.0%, in 2003 versus 2002. This increase was primarily a result of the
pass through of raw material cost increases. In addition, sales benefited from favorable currency translation in Canada, Latin America and Australia and increased demand for oilfield products and formaldehyde. Slightly offsetting these increases
were declines in Forest Products resins volumes in products servicing the furniture markets due to continued production declines in the North American furniture market and customer inventory reductions.



We reported net income of $22,976 for fiscal year 2003 versus a net loss of $36,583 for
fiscal year 2002. Of the $59,559 improvement, income from operations increased $32,834 reflecting decreased general and administrative, business realignment, impairment and management fee expenses. In addition, in 2002, we recognized a $29,825
charge taken for goodwill impairments upon the adoption of new accounting rules, which is reflected in the Cumulative effect of change in accounting principle in our 2002 Consolidated Statement of Operations.



Critical Accounting Policies:



In preparing our financial statements in conformity with generally accepted accounting
principles, we have to make estimates and assumptions about future events that affect the amounts of reported assets, liabilities, revenues and expenses, as well as the disclosure of contingent assets and liabilities in the financial statements and
accompanying notes. Some of these accounting policies require the application of significant judgment by management in the selection of appropriate assumptions for determining these estimates. By their nature, these judgments are subject to an
inherent degree of uncertainty; therefore, we cannot assure you that actual results will not differ significantly from estimated results. We base these judgments on our historical experience, advice from experienced consultants, forecasts and other
available information, as appropriate. Our significant accounting policies are more fully described in Note 2 to the Consolidated Financial Statements.



Our most critical accounting policies, which reflect significant management estimates and judgment in determining reported amounts in the Consolidated Financial
Statements and the related Notes, are as follows:



Environmental
remediation and restoration liabilities



Accruals for environmental
matters are recorded when we believe it is probable that a liability has been incurred and we can reasonably estimate the amount of the liability. Our accruals are established following the guidelines of Statement of Position 96-1,
Environmental Remediation Liabilities. We have accrued approximately $38,200 and $38,600 at December 31, 2004 and 2003, respectively, for all probable environmental remediation and restoration liabilities, which is our best estimate of
these liabilities. Based on currently available information and analysis, we believe that it is reasonably possible that the costs associated with such liabilities may fall within a range of $25,000 to $77,000. This estimate of the range of
reasonably possible costs is less certain than the estimates upon which reserves are based, and in order to establish the upper limit of this range, we used assumptions that are less favorable to the Company among the range of reasonably possible
outcomes, but we did not assume we would bear full responsibility for all sites, to the exclusion of other potentially responsible parties (PRPs).



Factors influencing the possible range of costs for environmental remediation include:



| |  |  | The success of the selected method of remediation / closure procedures
| | - |  | ----------------------------------------------------------------------



| |  |  | The development of new technology and improved procedures
| | - |  | ---------------------------------------------------------



| |  |  | The possibility of discovering additional contamination during monitoring / remediation process
| | - |  | -----------------------------------------------------------------------------------------------



| |  |  | The financial viability of other PRPs, if any, and their potential contributions
| | - |  | --------------------------------------------------------------------------------



| |  |  | The time period required to complete the work, including variations in anticipated monitoring periods
| | - |  | -----------------------------------------------------------------------------------------------------



| |  |  | For projects in their early stages, the outcome of negotiations with governing regulatory agencies regarding plans for remediation
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



Income tax assets and liabilities



Deferred income taxes represent the tax effect of temporary differences between amounts of
assets and liabilities recognized for financial reporting purposes and the amounts recognized for tax purposes. Deferred tax assets are reduced by a valuation allowance when, in our opinion, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. In 2004, primarily in response to changes in circumstances in connection with the Apollo Transaction, we recorded a charge of approximately $87,000 to increase the valuation reserves related to our net
domestic deferred tax asset and an additional provision of approximately $63,000 for taxes associated with the unrepatriated earnings of our foreign subsidiaries. We believe our reserves established for probable tax liabilities are appropriate at
December 31, 2004. See Note 17 to the Consolidated Financial Statements for additional information.





17



---

##### Table of Contents

In estimating accruals necessary for tax exposures, including estimating the outcome of audits by governing tax
authorities, we apply the guidance of Statement of Financial Accounting Standards (SFAS) No. 5, Accounting for Contingencies, as well as SFAS No. 109, Accounting for Income Taxes. These estimates require
significant judgment and, in the case of audits by tax authorities, may often involve negotiated settlements.



Factors influencing the final determination of tax liabilities include:



| |  |  | Future taxable income
| | - |  | ---------------------



| |  |  | Execution of business strategies
| | - |  | --------------------------------



| |  |  | Negotiations of tax settlements with taxing authorities
| | - |  | -------------------------------------------------------



Pension assets and liabilities



The amounts recognized in our financial statements related to pension benefit obligations are determined from actuarial valuations. Inherent in these valuations are
certain assumptions including:



| |  |  | Rate to use for discounting the liability (average weighted rates (AWR) were 5.5% for 2004 and 5.8% for 2003)
| | - |  | ---------------------------------------------------------------------------------------------------------------



| |  |  | Expected long-term rate of return on pension plan assets (AWR were 8.2% for 2004 and 2003)
| | - |  | ------------------------------------------------------------------------------------------



| |  |  | Rate of salary increases (AWR were 4.0% for 2004 and 4.2% for 2003)
| | - |  | -------------------------------------------------------------------



| |  |  | Mortality rate table (used 1983 GAM Table)
| | - |  | ------------------------------------------



The most significant of these estimates is the expected long-term rate of return on pension plan assets. The actual return of our domestic pension plan assets in 2004 was
approximately 11%. Future returns on plan assets are subject to the strength of the financial markets, which we cannot predict with any accuracy.



These assumptions are updated annually. Actual results that differ from our assumptions are accumulated and amortized over future periods; therefore, these variances
affect our expenses and obligations recorded in future periods. Future pension expense and required contributions will also depend on future investment performance, changes in future discount rates and various other factors related to the population
of participants in our pension plans.



Results of Operations by
Segment:



Following is a comparison of Net sales and Segment EBITDA.
Segment EBITDA is determined by taking net income before depreciation and amortization, interest expense, other non-operating expenses or income, income taxes and other adjustments (which include costs included in operating income associated with
the Apollo Transaction, business realignment activities, certain costs primarily related to legacy businesses, dispositions and pension settlement charges, if any). Segment EBITDA is presented by segment and for Corporate and Other and Divested
Business for the years ended December 31, 2004, 2003 and 2002. Segment EBITDA is the measure used by our management team in the evaluation of our operating results and in determining allocations of capital resources among the business segments. This
is also the profitability measure we use to set management and executive incentive compensation.



|                                     |  |      |           |   |      |   |           |      |  |   |           |  
|------------------------------------ |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|Net Sales to Unaffiliated Customers: |  |      |           |   |      |   |           |      |  |   |           |  
|                                     |  |      |          
|                                     |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Forest Products                      |  | $    | 896,089   |   |      | $ | 755,767   |      |  | $ | 634,619   |  
|Performance Resins                   |  |      | 426,546   |   |      |   | 364,347   |      |  |   | 340,791   |  
|International                        |  |      | 363,386   |   |      |   | 314,693   |      |  |   | 264,541   |  
|Divested Business                    |  |      |          |   |      |   | 6         |      |  |   | 7,934     |  
|                                     |  |      |           |   |      |   |           |      |  |   |           |  
|                                     |  | $    | 1,686,021 |   |      | $ | 1,434,813 |      |  | $ | 1,247,885 |  
|                                     |  |      |           |   |      |   |           |      |  |   |           |  
|                                     |  |      |          
|Segment EBITDA:                      |  |      |           |   |      |   |           |      |  |   |           |  
|                                     |  |      |          
|                                     |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Forest Products                      |  | $    | 111,359   |   |      | $ | 92,548    |      |  | $ | 92,918    |  
|Performance Resins                   |  |      | 49,505    |   |      |   | 46,661    |      |  |   | 45,127    |  
|International                        |  |      | 31,083    |   |      |   | 32,250    |      |  |   | 28,630    |  
|Corporate and Other                  |  |      | (37,496   | ) |      |   | (43,713   | )    |  |   | (44,949   | )
|                                     |  |      |           |   |      |   |           |      |  |   |           |  
|                                     |  | $    | 154,451   |   |      | $ | 127,746   |      |  | $ | 121,726   |  
|                                     |  |      |           |   |      |   |           |      |  |   |           |  





18



---

##### Table of Contents

Reconciliation of Segment EBITDA to Net (Loss) Income:



|                                                    |  |      |          |   |      |   |         |      |  |   |         |  
|--------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                    |  | 2004 |          |   | 2003 |   |         | 2002 | 
|Segment EBITDA:                                     |  |      |          |   |      |   |         |      |  |   |         |  
|Forest Products                                     |  | $    | 111,359  |   |      | $ | 92,548  |      |  | $ | 92,918  |  
|Performance Resins                                  |  |      | 49,505   |   |      |   | 46,661  |      |  |   | 45,127  |  
|International                                       |  |      | 31,083   |   |      |   | 32,250  |      |  |   | 28,630  |  
|Corporate and Other                                 |  |      | (37,496  | ) |      |   | (43,713 | )    |  |   | (44,949 | )
|                                                    |  |      |         
|Reconciliation:                                     |  |      |          |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                       |  |      | (49,724  | ) |      |   | (47,319 | )    |  |   | (47,947 | )
|Adjustments to Segment EBITDA (see pages 22-23)     |  |      | (72,472  | ) |      |   | (13,885 | )    |  |   | (40,071 | )
|Interest expense                                    |  |      | (64,183  | ) |      |   | (46,138 | )    |  |   | (47,315 | )
|Affiliated interest expense                         |  |      | (138     | ) |      |   | (558    | )    |  |   | (1,402  | )
|Other non-operating (expense) income                |  |      | (1,265   | ) |      |   | (1,529  | )    |  |   | 5,989   |  
|Income tax (expense) benefit                        |  |      | (146,337 | ) |      |   | 4,659   |      |  |   | 2,262   |  
|Cumulative effect of change in accounting principle |  |      |         |   |      |   |        |      |  |   | (29,825 | )
|                                                    |  |      |          |   |      |   |         |      |  |   |         |  
|Net (loss) income                                   |  | $    | (179,668 | ) |      | $ | 22,976  |      |  | $ | (36,583 | )
|                                                    |  |      |          |   |      |   |         |      |  |   |         |  



2004 vs. 2003



|                   |  |                                                    |   |  |           |    |  |             |   |  |       |   |  |       |  
|------------------ |  | -------------------------------------------------- | - |  | --------- | -- |  | ----------- | - |  | ----- | - |  | ----- | -
|Net Sales Variance |  | 2004 as a percentage increase (decrease) from 2003 |  
|                   |  | Volume                                             |   |  | Price/Mix |    |  | Translation |   |  | Other |   |  | Total |  
|Forest Products    |  | 5.8                                                | % |  | 10.2      | %  |  | 2.6         | % |  |      |   |  | 18.6  | %
|Performance Resins |  | 10.0                                               | % |  | 6.4       | %  |  | 0.1         | % |  | 0.6   | % |  | 17.1  | %
|International      |  | 5.3                                                | % |  | (0.4      | )% |  | 8.8         | % |  | 1.8   | % |  | 15.5  | %



Forest Products



Forest Products net sales of $896,089 in 2004 were an increase of $140,322, or 18.6%,
compared to 2003. Favorable pricing and mix and improved volumes primarily drove the increase in sales. Strong pricing for our phenolic-based, or PF, resins and UF resins was primarily due to the pass through of raw material price increases. We also
experienced favorable product mix in our formaldehyde and performance adhesives products. The improved volumes, across all of our products, were due to increased end-use consumption resulting from the continued strong housing market and increased
demand for flooring on the resin side and higher demand in the general chemical sector for formaldehyde. Sales also benefited from favorable currency translation as the Canadian dollar strengthened versus the U.S. dollar.



Segment EBITDA for Forest Products increased $18,811, or 20.3%, in 2004 versus the prior
year. The increase was primarily due to higher volumes and favorable currency translation. Our margins improved despite unprecedented prices for methanol and phenol. The improvement is due to the positive impact of the 2003 realignment program,
purchasing productivity and other productivity initiatives, which more than offset the unfavorable lag in passing along raw material price increases.



Performance Resins



Performance Resins net sales in 2004 of $426,546 were an increase of $62,199 or 17.1%, over 2003. Improved volumes and increased selling prices were the main drivers of the increase. Improved volumes for our
oilfield products and foundry, non-woven and industrial resins were partially offset by volume declines for our UV coatings products. Volumes for oilfield products increased due to increased drilling activity in East and South Texas, Canada and
Russia. Improved volumes in foundry resins were due to continued general recovery in the non-automotive casting segments. Non-woven resins volumes increased due to strong demand in the glass mat market, and industrial resins volumes increased
due to strong demand from customers in the friction and felt bonding markets. The decline in UV coatings products volumes was due to continued depressed demand for fiber optic cable. Selling price increases for our foundry resins, oilfield products,
industrial resins and electronics also contributed to the sales increase and were slightly offset by selling price declines for our laminates and melamine derivative, or LMD, products.



19



---

##### Table of Contents

Segment EBITDA for Performance Resins increased $2,844, or 6.1%, in 2004 versus last year, driven by volume increases in
oilfield, foundry, electronics and industrial resins and margin improvements in our oilfield products. These positive factors were partially offset by margin declines in our UV coatings, foundry resins and industrial resins. Also offsetting the
positive factors were volume declines in LMD products, increased processing costs for oilfield products and increased selling, general and administrative related to increased investments in new product development and geographic expansion.



International



International net sales of $363,386 increased $48,693, or 15.5%, in 2004 versus last year.
Improved volumes in Latin America and Europe were partially offset by price pressures and adverse mix, primarily in Europe. Volume improvements in Latin America were due to increased demand driven by increased exports of wood products. European
volume increases were driven by increased demand for formaldehyde and performance resins. The 2003 Fentak acquisition contributed sales of $5,746 to the International segment in 2004. In addition, sales benefited from favorable currency translation
across all three international regions.



Segment EBITDA for International
decreased $1,167, or 3.6%, in 2004 versus the prior year. Improved volumes in Europe and Latin America, favorable currency translation across all three areas and improved processing costs in Europe were more than offset by the impact of costs
associated with a mechanical failure at a Brazilian formaldehyde plant and margin reductions due to pricing pressures. We believe the majority of the impact of the mechanical failure is covered by insurance.



Corporate and Other



Our Corporate and Other expenses decreased $6,217 in 2004 compared to 2003. Net costs related to specific legal and environmental cases were
approximately $2,100 lower in 2004, while general insurance costs declined about $2,200 due to 2003 reserve increases for specific cases and revised estimates. In addition, benefit-related costs decreased approximately $2,000. The amendment we made
to our OPEB medical benefit plan in 2003 reduced expenses by approximately an additional $2,800 in 2004 compared to 2003. Additionally, our rent costs declined approximately $1,100 in 2004. Offsetting these improvements were the absence of gains
reported in 2003 of $2,826 related to a Brazilian foreign exchange claim and $2,355 related to the sale of our airplane.



2003 vs. 2002



|                   |  |                                                    |    |  |           |   |  |             |   |  |       |   |  |       |  
|------------------ |  | -------------------------------------------------- | -- |  | --------- | - |  | ----------- | - |  | ----- | - |  | ----- | -
|Net Sales Variance |  | 2003 as a percentage increase (decrease) from 2002 |   
|                   |  | Volume                                             |    |  | Price/Mix |   |  | Translation |   |  | Other |   |  | Total |  
|Forest Products    |  | (1.0                                               | )% |  | 16.3      | % |  | 3.6         | % |  | 0.2   | % |  | 19.1  | %
|Performance Resins |  | 3.2                                                | %  |  | 3.6       | % |  |            |   |  | 0.1   | % |  | 6.9   | %
|International      |  | (0.9                                               | )% |  | 14.2      | % |  | 5.4         | % |  | 0.3   | % |  | 19.0  | %



Forest Products



Our Forest Products net sales increased $121,148, or 19.1%, in 2003 compared to 2002.
Higher selling prices resulting from the pass through of raw material price increases was the primary reason for the increase. Favorable currency translation also contributed to the sales improvement as the Canadian dollar strengthened versus the U.
S. dollar throughout 2003. These improvements were partially offset by a slight decline in volumes. Softer market conditions in the North American furniture sector during the year led to a decrease in demand for MDF and particleboard which are made
with our UF resins. Volume for UF resins was also impacted by increased competitive pressures. This decline in UF resin volumes was largely offset by improved formaldehyde volumes due to demand from the general chemical sector and increased volumes
in the PF resins driven by the strong housing market and demand for plywood and OSB, which are made with PF resins.



Segment EBITDA for Forest Products decreased $370, or 0.4%, in 2003 compared to 2002, primarily due to increased processing and freight costs and the volume decline. Our
processing costs increased because of higher energy and insurance costs in 2003. The mix of our formaldehyde product sales changed during 2003, resulting in increased freight costs. Freight costs per pound vary depending on whether product is
shipped via pipeline, rail or tanker. These negative factors were largely offset by margin improvements, driven primarily by resins product formulation initiatives and purchasing productivity.



20



---

##### Table of Contents

Performance Resins



Our Performance Resins net sales increased $23,556, or 6.9%, in 2003 compared to 2002, primarily due to overall higher selling prices and increased volumes. Higher
selling prices, primarily in specialty resins and oilfield products, were a result of the pass through of raw material price increases and an improved mix of oilfield products. Improvements in volumes, primarily for oilfield products, also
contributed to the increase in sales. The improvement in our oilfield products volumes resulted from increased demand due to an expansion in natural gas exploration and drilling activity in 2003. Volume declines in our foundry and specialty
resins products reflected continuing weak market conditions in the automotive, felt bonding, laminated flooring and furniture markets, as well as competitive pressures.



Segment EBITDA for Performance Resins increased $1,534, or 3.4%, in 2003 compared to 2002. This improvement is primarily due to improved
volumes and reduced selling, general and administrative expenses. Improved oilfield volumes, although partially offset by volume declines in foundry and specialty resins, positively impacted Segment EBITDA. Reduced general and administrative
expenses were a result of workforce reductions, open positions and a reduction in bad debt expense in 2003 versus 2002, when we experienced several customer bankruptcies. These improvements were partially offset by higher distribution and processing
costs. Distribution costs increased because of fuel surcharges and higher freight costs due to shipping oilfield products over a wider geographic area. Higher processing costs were a result of increased energy, equipment repair and insurance costs
and higher costs associated with the production of oilfield products.



International



Our International net sales for 2003 increased
by $50,152, or 19.0%, compared to 2002, with our Latin American, Asia Pacific and European businesses all contributing to the sales increase. Latin American sales increased by $15,802 due to favorable currency translation and strong price
improvements, slightly offset by a decline in volumes due to adverse market conditions, competitive pressures and market share losses in the consumer products market. Asia Pacifics $17,000 increase in sales reflected favorable currency
translation and improvements in pricing and volumes. Europes sales increase of $17,350 was due to strong price improvements, partially offset by unfavorable currency translation and a reduction in volumes due to the difficult market
environment. For all three markets, the pricing improvements were a result of the pass through of raw material price increases.



International Segment EBITDA increased $3,620, or 12.6%, in 2003 compared to 2002. This improvement was essentially related to a $2,345 gain from the favorable settlement
of a Brazilian foreign exchange claim and a $1,100 reserve reduction due to a revised estimate of a potential liability related to an excess duty imposed on the importation of inventory in Brazil. Also contributing to the improvement were
productivity improvements in Europe and favorable currency translation in Asia Pacific and Latin America. These improvements were substantially offset by unfavorable product mix and reduced volumes in Latin America and Europe and increased
processing costs in Latin America and Asia Pacific due to increased energy and equipment repair costs.



Corporate and Other



Our Corporate and
Other expenses decreased $1,236 in 2003 compared to 2002. Contributing to this net decline in expenses were the following factors: we amended our OPEB medical benefit plan during 2003, resulting in a reduction in plan expenses of approximately
$11,500; we settled a Brazilian foreign exchange claim relating to a sold business for a gain of $2,826 and we recognized a $2,355 gain on the sale of the Companys airplane. In addition, salary and benefit costs were lower in 2003 due to a
reduction in workforce. Offsetting these reductions in expense were increased insurance and legal costs of approximately $13,100, and the absence of a 2002 adjustment that reduced our allowance for doubtful accounts.



Divested Business



Amounts reported as Divested Business in both years represents the disposition of remaining inventory and other assets of Melamine, which
was closed in early 2002. We sold this business to a third party in the second quarter of 2003.





21



---

##### Table of Contents

Adjustments To Segment EBITDA



We rely primarily on Segment EBITDA in the evaluation of operating results and the allocation of capital resources. The following tables
detail items not included in Segment EBITDA for purposes of this evaluation of our operating segments. We monitor these activities separately from our operating results. These (expense) income items primarily relate to costs incurred associated with
the Apollo Transaction (see Note 1 to the Consolidated Financial Statements) and to our realignment programs.



|                             |  |               |        |   |           |   |      |            |  |   |        |   |  |       |         |   |  |   |         |  
|---------------------------- |  | ------------- | ------ | - | --------- | - | ---- | ---------- |  | - | ------ | - |  | ----- | ------- | - |  | - | ------- | -
|Year Ended December 31, 2004 |  | Plant Closure |        |   | Severance |   |      | Impairment |  |   | Other  |   |  | Total |        
|Forest Products              |  | $             | 139    |   |           | $ | (334 | )          |  | $ | (75    | ) |  | $     | (803    | ) |  | $ | (1,073  | )
|Performance Resins           |  |               | (251   | ) |           |   | (80  | )          |  |   | (1,552 | ) |  |       | 1,007   |   |  |   | (876    | )
|International                |  |               | (3,369 | ) |           |   | (119 | )          |  |   | (397   | ) |  |       | (25     | ) |  |   | (3,910  | )
|Corporate and Other          |  |               | 13     |   |           |   | 156  |            |  |   |       |   |  |       | (66,782 | ) |  |   | (66,613 | )
|                             |  |               |        |   |           |   |      |            |  |   |        |   |  |       |         |   |  |   |         |  
|Total                        |  | $             | (3,468 | ) |           | $ | (377 | )          |  | $ | (2,024 | ) |  | $     | (66,603 | ) |  | $ | (72,472 | )
|                             |  |               |        |   |           |   |      |            |  |   |        |   |  |       |         |   |  |   |         |  



As part of our ongoing
realignment program designed to improve productivity and reduce our costs, we recorded plant closure costs totaling $3,468 in 2004. These costs include environmental remediation costs of $1,399 and $812 for sites previously closed in Brazil and
Europe, respectively, additional costs of $1,296 for the conversion of our French manufacturing facility into a distribution center, offset by other income of $39 related to adjustments of reserves at various other sites.



Our severance costs of $377 relate to the 2003 realignment program.



The asset impairment of $2,024 relates to production assets that were written-down due to
changes in our manufacturing footprint.



Other expenses of $66,603 not
included in Segment EBITDA in 2004 related primarily to costs of $55,586 incurred in connection with the Apollo Transaction and legal accruals of approximately $10,300 related primarily to legacy-related legal proceedings. These costs are included
in Transaction related costs and General & administrative expense, respectively.



|                             |  |               |        |   |           |   |        |            |  |   |        |   |  |       |        |   |  |   |         |  
|---------------------------- |  | ------------- | ------ | - | --------- | - | ------ | ---------- |  | - | ------ | - |  | ----- | ------ | - |  | - | ------- | -
|Year Ended December 31, 2003 |  | Plant Closure |        |   | Severance |   |        | Impairment |  |   | Other  |   |  | Total |       
|Forest Products              |  | $             | (932   | ) |           | $ | (1,125 | )          |  | $ |       |   |  | $     | (90    | ) |  | $ | (2,147  | )
|Performance Resins           |  |               | 94     |   |           |   | (397   | )          |  |   | (1,000 | ) |  |       |       |   |  |   | (1,303  | )
|International                |  |               | (7,720 | ) |           |   | (643   | )          |  |   | (2,183 | ) |  |       | 11,692 |   |  |   | 1,146   |  
|Corporate and Other          |  |               | (146   | ) |           |   | (4,672 | )          |  |   |       |   |  |       | (8,732 | ) |  |   | (13,550 | )
|Divested Business            |  |               | 1,716  |   |           |   |       |            |  |   |       |   |  |       | 253    |   |  |   | 1,969   |  
|                             |  |               |        |   |           |   |        |            |  |   |        |   |  |       |        |   |  |   |         |  
|Total                        |  | $             | (6,988 | ) |           | $ | (6,837 | )          |  | $ | (3,183 | ) |  | $     | 3,123  |   |  | $ | (13,885 | )
|                             |  |               |        |   |           |   |        |            |  |   |        |   |  |       |        |   |  |   |         |  



We recorded 2003 plant closure costs
of $6,988 consisting of plant employee severance of approximately $3,900, asset write-downs related to the closure and consolidation of plants of approximately $3,200, environmental remediation costs relating to plant closures in Brazil of
approximately $800 and other costs of approximately $700. These costs were partially offset by a net reduction of reserves of approximately $1,600 no longer required for Melamine due to its sale in the second quarter of 2003.



We also recorded severance costs of $6,837 in 2003 related principally to administrative
workforce reduction programs, primarily for the 2003 realignment program.



The
impairment charges we recorded in 2003 relate to a reduction in our estimate of net realizable value for a facility held for sale, the impairment of goodwill related to our Malaysian operations resulting from our year-end analysis of goodwill and
the recognition of fixed asset impairments at several international manufacturing facilities.



Other income not reflected in 2003 Segment EBITDA primarily represent gains of $12,260 on the sale of a former plant site in the U.K. and on the sale of Melamine, both of which were closed as part of our realignment
programs. These gains were partially offset by a $5,929 charge related to legal settlements reached with BCPM Liquidating LLC and BCP Liquidating LLC in connection with the settlement of claims related to the bankruptcies of a former subsidiary and
its investee and severance expense included in General & administrative expense relating to positions to be replaced as part of the June 2003 realignment program.





22



---

##### Table of Contents

|                             |  |               |         |   |           |   |        |            |  |   |        |   |  |       |         |   |  |   |         |  
|---------------------------- |  | ------------- | ------- | - | --------- | - | ------ | ---------- |  | - | ------ | - |  | ----- | ------- | - |  | - | ------- | -
|Year Ended December 31, 2002 |  | Plant Closure |         |   | Severance |   |        | Impairment |  |   | Other  |   |  | Total |        
|Forest Products              |  | $             | (1,107  | ) |           | $ | (250   | )          |  | $ |       |   |  | $     |        |   |  | $ | (1,357  | )
|Performance Resins           |  |               | (1,950  | ) |           |   | (102   | )          |  |   | (1,040 | ) |  |       |        |   |  |   | (3,092  | )
|International                |  |               | (2,844  | ) |           |   | (795   | )          |  |   | (5,275 | ) |  |       | 2,465   |   |  |   | (6,449  | )
|Corporate and Other          |  |               |        |   |           |   | (2,118 | )          |  |   |       |   |  |       | (19,850 | ) |  |   | (21,968 | )
|Divested Business            |  |               | (6,683  | ) |           |   |       |            |  |   |       |   |  |       | (522    | ) |  |   | (7,205  | )
|                             |  |               |         |   |           |   |        |            |  |   |        |   |  |       |         |   |  |   |         |  
|Total                        |  | $             | (12,584 | ) |           | $ | (3,265 | )          |  | $ | (6,315 | ) |  | $     | (17,907 | ) |  | $ | (40,071 | )
|                             |  |               |         |   |           |   |        |            |  |   |        |   |  |       |         |   |  |   |         |  



Plant closure costs recorded in 2002
as part of our realignment programs totaled $12,584 and consisted of plant employee severance of $2,721 and demolition, environmental and other costs relating to plant closure and consolidations of $9,863, including the closure of Melamine.



Our 2002 severance costs of $3,265 related primarily to administrative
workforce reduction programs.



The impairment charges we recorded in 2002
pertain to a reduction in net realizable value for a facility held for sale and to fixed assets at several international manufacturing facilities.



Other expenses not reflected in 2002 Segment EBITDA primarily represent a pension settlement charge of $13,600 triggered by lump sum settlements paid to participants. In
addition, we recorded additional management fees of $5,500 related to the wind-down of Capital. These expenses were partially offset by a $2,465 gain recognized on the sale of land associated with a closed plant in Spain.



Non-Operating Expenses and Income Tax Expense:



Non-operating expense



|                                     |  |      |        |      |   |        |  |   |        |  
|------------------------------------ |  | ---- | ------ | ---- | - | ------ |  | - | ------ | -
|                                     |  | 2004 |        | 2003 |   | 2002   | 
|Interest expense                     |  | $    | 64,183 |      | $ | 46,138 |  | $ | 47,315 |  
|Affiliated interest expense, net     |  |      | 138    |      |   | 558    |  |   | 1,402  |  
|Other non-operating expense (income) |  |      | 1,265  |      |   | 1,529  |  |   | (5,989 | )
|                                     |  |      |        |      |   |        |  |   |        |  
|                                     |  | $    | 65,586 |      | $ | 48,225 |  | $ | 42,728 |  
|                                     |  |      |        |      |   |        |  |   |        |  



Our total non-operating
expenses increased $17,361 in 2004 as compared to 2003. Non-affiliated interest expense increased $18,045 over 2003 due to higher average debt balances resulting from our issuance of the Second Priority Notes in August of 2004 as part of the Apollo
Transaction (see Liquidity and Capital Resources). Interest expense in 2004 also reflects the write-off of approximately $1,100 of deferred costs relating to our credit facility, which was amended and restated effective with the Apollo Transaction,
and the write-off of deferred costs of approximately $570 relating to the 9.25% debentures that we redeemed, also in conjunction with the Apollo Transaction. Included in Other non-operating expense was a loss on the settlement of an interest rate
swap of $610, a charge of $885 incurred due to the early redemption of our 9.25% debentures and a charge of $568 incurred due to the early termination of our credit facility. These charges were offset by a $2,076 gain on the mark to market of a deal
contingent forward held by us (see Risk Management).



In 2003, our
interest and net affiliated interest expense decreased $2,021 versus 2002 due to lower debt balances and lower interest rates. Other non-operating expenses increased $7,518. We incurred a $1,367 loss on the settlement of an intercompany loan
resulting from foreign currency translation. In addition, interest income declined by $1,409 in 2003 due to lower interest rates and lower average cash balances. The remainder of the variance is primarily related to gains realized in 2002 on
interest rate swaps and debt buybacks (see below).



In 2002, we recognized a
gain of $2,741 on the repurchase of debt in the open market and recorded a gain on an interest rate swap of $1,722.





23



---

##### Table of Contents

Income tax expense (benefit)



|                             |  |      |         |      |   |        |      |  |   |        |  
|---------------------------- |  | ---- | ------- | ---- | - | ------ | ---- |  | - | ------ | -
|                             |  | 2004 |         | 2003 |   |        | 2002 | 
|Income tax expense (benefit) |  | $    | 146,337 |      | $ | (4,659 | )    |  | $ | (2,262 | )
|Effective tax rate           |  |      | N/M     |      |   | N/M    |      |  |   | 25     | %



Our 2004 consolidated tax rate
reflects a valuation allowance in the amount of $86,541 recorded against our deferred tax assets as our management determined that it is more likely than not that these deferred tax assets will not be fully utilized in the future. The increase in
our valuation allowance from prior year is due primarily to a change in circumstances in connection with the Apollo Transaction. In 2004, we also made a determination that the unrepatriated earnings from our foreign subsidiaries were no longer
permanently reinvested. As such, our 2004 consolidated tax rate reflects an additional provision of $62,514 for taxes associated with the unrepatriated earnings of our foreign subsidiaries. In addition, the 2004 consolidated tax rate reflects income
tax expense of $14,018, which primarily pertains to Apollo Transaction costs, which are not deductible for income tax purposes. These amounts are partially offset by a net tax benefit of $10,948 relating to certain state and Internal Revenue Service
(IRS) settlements, as well as changes in prior estimates.



Our 2003
consolidated rate reflects a benefit of $19,936 from the sale of the stock of Melamine in 2003. The tax basis of the stock exceeded the tax basis of the assets and we could not recognize this additional basis until the stock sale was completed in
2003. This benefit is a capital loss carryforward that can only be used against capital gains; therefore, we established a valuation reserve for the full amount of this benefit. Other 2003 activities reflected in the 2003 consolidated rate include a
reduction of a valuation reserve in the amount of $14,534 related to tax assets we believe we are more likely than not to realize. Our 2003 tax rate also reflects the elimination of $1,624 of deferred tax liabilities associated with the BCP
Management, Inc. (BCPM) bankruptcy. In addition, we reduced reserves for prior years Canadian and U.S. tax audits by $3,997 as a result of preliminary settlements of certain matters in the fourth quarter of 2003. The effective rate
also reflects additional income tax expense of $9,324 on foreign dividend income and on deemed dividend income related to loans and guarantees from foreign subsidiaries.



Our 2002 consolidated tax rate reflects a valuation allowance recorded against the deferred benefit of interest expense deductions in the
amount of $16,672 that are no longer more likely than not to be used due to limitations imposed by the IRS. During 2002, we reached preliminary settlement with the IRS regarding tax years 1998 and 1999. The outcome of this settlement was favorable
to us, and as a result, we were able to reduce our accruals related to these years by $20,000.



Tax Legislation



In 2004, the American Jobs Creation Act of 2004 was signed into law. This Act effectively phases out benefits from the utilization of foreign sales corporations, reduces
the number of foreign tax credit limitation categories, creates a temporary incentive for U.S. companies to repatriate foreign earnings at a significantly reduced effective U.S. tax rate and domestically provides a number of revenue enhancing and
reducing provisions in the taxation of corporations. Our management does not anticipate a material impact from this legislation for the 2004 tax year.



Cash Flows:



|                                        |  |      |         |   |      |   |         |      |  |   |          |  
|--------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                        |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Cash provided by (used in):             |  |      |         |   |      |   |         |      |  |   |          |  
|Operating activities                    |  | $    | 24,565  |   |      | $ | 31,940  |      |  | $ | 11,296   |  
|Investing activities                    |  |      | (26,007 | ) |      |   | (42,314 | )    |  |   | 81,464   |  
|Financing activities                    |  |      | 92,165  |   |      |   | 21,710  |      |  |   | (101,716 | )
|Effect of exchange rates on cash flow   |  |      | 3,226   |   |      |   | 2,086   |      |  |   | (936     | )
|                                        |  |      |         |   |      |   |         |      |  |   |          |  
|Net change in cash and cash equivalents |  | $    | 93,949  |   |      | $ | 13,422  |      |  | $ | (9,892   | )
|                                        |  |      |         |   |      |   |         |      |  |   |          |  



Operating Activities



Our 2004 operating activities provided cash of $24,565. This includes cash
generated by operations of $17,282 and by net trading capital, consisting of accounts receivable, inventory and accounts and drafts payable, of $41,910. Our positive cash flow in net trading capital resulted from improvement in the timing of
payments of our accounts payable. These positive cash flows were partially offset by cash outflows related to income taxes of approximately $15,100, payments related primarily to legacy-related legal and environmental matters of approximately
$13,400, realignment expenditures of $11,400 and payments for legal settlements with BCPM Liquidating LLC and BCP Liquidating LLC of $7,050.



24



---

##### Table of Contents

Our 2003 operating activities provided cash of $31,940. This includes cash generated by operations of $82,781 and by net
trading capital of $10,006. Our positive cash flow in net trading capital resulted from our continued focus on working capital management during 2003. We focused on reducing days outstanding for accounts receivable, increasing inventory turns and
improving the timing of payments of our accounts payable. These positive cash flows were partially offset by tax payments of $19,368 due primarily to international taxes and realignment expenditures of $11,801.



Our 2002 operating activities provided cash of $11,296 in 2002. Cash generated from earnings
of approximately $77,000 was substantially offset by interest payments of $46,928, net trading capital outflows of $18,347 and taxes paid of $978.



Investing Activities



Our 2004 net investing activities used cash of $26,007. We used cash of $39,757 for capital expenditures primarily for plant expansions and other improvements. We received cash of $12,061 related to the sale of
assets, primarily from the collection of a note receivable for the 2003 sale of land associated with a closed plant in the U.K. and the 2004 sales of previously closed plants. Proceeds from the sale of venture interest of $2,124 were from the sale
of 5% of our interest in HA-International LLC, which we call HAI, to Delta-HA (see Note 3 to the Consolidated Financial Statements).



Our 2003 net investing activities used cash of $42,314. We spent $41,820 for capital expenditures, primarily for plant expansions and improvements. We also spent $14,691
making two acquisitions in 2003: Fentak and the business and technology assets of SEACO. We realized proceeds of $14,197 from the sale of land associated with a closed plant in the U.K. and other miscellaneous assets.



Our 2002 cash inflow for investing activities of $81,464 primarily related to the sale of a
note receivable from Consumer Adhesives of $110,000 to BHI and to other assets sales to unrelated parties for $10,237. Our 2002 capital expenditures totaled $38,773 and related primarily to plant expansions and improvements.



Financing Activities



Our financing activities in 2004 provided cash of $92,165. Net cash generated by financing activities was primarily due to the issuance of
debt related to the Apollo Transaction. Approximately $296,000 was used to redeem common shares of the Company from BHI and BCI management. In addition, we paid fees totaling $22,965 related to the debt issuance and credit facility amendment.



Our 2003 financing activities provided cash of $21,710. Capital contributions
from affiliates of $9,300 and net external borrowings primarily related to the Fentak acquisition accounted for the cash inflow. Early in the third quarter of 2003, we completed the process of converting letters of credit from our uncommitted letter
of credit (LOC) facility to our Credit Facility (see Liquidity and Capital Resources) resulting in the release of restricted cash of $67,049, most of which was used to repay borrowings from affiliates; thus these net transactions had
little impact on total financing cash generated.



Our 2002 financing activities
used cash of $101,716. The 2002 activities included an increase in restricted cash of $66,165 relating to our establishment of a temporary uncommitted LOC facility, a repayment of a $31,581 note due to a former subsidiary and net repayments of
borrowings of $3,379.



Liquidity and Capital Resources:



Our primary source of liquidity is cash flow generated from
operations. We also have availability under our asset-based revolving line of credit in our senior secured credit facility (see below), subject to certain conditions. Our primary liquidity requirements are for debt service, working capital
requirements, contractual obligations and capital expenditures.



We are a
highly leveraged company. Our liquidity requirements are significant, primarily due to our debt service requirements. At December 31, 2004, we had $967,404 principal amount of outstanding indebtedness, of which $150,000 constituted floating rate
notes and $817,404 constituted fixed rate indebtedness. We had no amounts borrowed under our senior secured credit facility at December 31, 2004. In 2004 and 2003, our annual debt service payment obligations were approximately $58,300 and $48,200,
respectively.



In conjunction with the Apollo Transaction, we formed two wholly
owned finance subsidiaries that borrowed a total of $475 million through a private debt offering. Of the debt, $325 million is second-priority senior secured notes due 2014, referred



25



---

##### Table of Contents

to herein as the Fixed Rate Notes, which bear an interest rate of 9%. The remaining $150 million of debt is
second-priority senior secured floating rate notes due 2010, which we call the Floating Rate Notes. In February 2005, we filed a registration statement with the SEC to consummate an exchange offer on the Fixed Rate and Floating Rate Notes.



Interest on the Floating Rate Notes is paid each January 15, April 15, July 15
and October 15. Interest on the Floating Rate Notes accrues at an annual rate, reset quarterly, equal to LIBOR plus 475 basis points. At December 31, 2004, the interest rate on the Floating Rate Notes was 6.82%. The Floating Rate Notes mature July
15, 2010. The Floating Rate Notes may be redeemed at any time on or after July 15, 2006. In addition, up to 35% of the aggregate principal amount of the Floating Rate Notes may be redeemed prior to July 15, 2006 with cash proceeds from certain
equity offerings. Prior to July 15, 2009, the Floating Rate Notes may be redeemed at a price equal to 100% of the principal amount plus accrued interest plus the make- whole premium as defined in the indenture for the notes. The Floating
Rate Notes may also be redeemed upon certain changes in tax laws or upon a change in control. The specific pricing and terms of redemption are described in the indenture for the notes. There is no sinking fund for the Floating Rate Notes.



Interest on the Fixed Rate Notes will be paid each January 15 and July 15. The
Fixed Rate Notes mature July 15, 2014. These notes may be redeemed at any time on or after July 15, 2009. In addition, up to 35% of the aggregate principal amount of the Fixed Rate Notes may be redeemed prior to July 15, 2007 with cash proceeds from
certain equity offerings. Prior to July 15, 2009, the Fixed Rate Notes may be redeemed at a price equal to 100% of the principal amount plus accrued interest plus the make-whole premium as defined in the indenture for the notes. The
Fixed Rate Notes may also be redeemed upon certain changes in tax laws or upon a change in control. The specific pricing and terms of redemption are described in the indenture for the notes. There is no sinking fund for the Fixed Rate Notes.



We entered into a three-year asset based revolving credit facility in the
third quarter of 2002, which we refer to herein as our Credit Facility, under which we can borrow in aggregate up to $175,000. We amended this Credit Facility, which we refer to as our Amended Credit Facility, on August 12, 2004 as part of the
Apollo Transaction. The Amended Credit Facility provides for loans and letters of credit in a total principal amount of up to $175,000 and will mature in five years. The Amended Credit Facility includes a $57,000 revolving credit subfacility for our
Canadian subsidiary, a $30,000 revolving credit subfacility for our U.K. subsidiary and a letter of credit subfacility of at least $100,000.



Our Amended Credit Facility is secured with inventory and accounts receivable in the U.S., Canada and the U.K., a portion of property and equipment in Canada and the U.K.
and the stock of certain subsidiaries. At December 31, 2004, the net book value of the collateral securing the Amended Credit Facility, excluding the stock of subsidiaries, was approximately $266,000. The maximum borrowing allowable under our
Amended Credit Facility is calculated monthly (quarterly, if availability is greater than $100,000) and is based upon specific percentages of eligible accounts receivable, inventory, fixed assets and cash. This Amended Credit Facility contains
restrictions on dividends, capital expenditures ($37,500 from August 12, 2004 to December 31, 2004; $75,000 in 2005) and payment of management fees ($3,000 per year or 2% of EBITDA, as defined in the agreement). It also includes a minimum trailing
twelve-month fixed charge coverage ratio of 1.1 to 1.0, if aggregate availability is less than $50,000. The trailing twelve-month fixed charge coverage ratio requirement does not apply when aggregate availability exceeds $50,000. At December 31,
2004, our maximum borrowing allowable under the Amended Credit Facility was approximately $174,700 of which about $127,800, after outstanding LOCs and other draws, was unused and available. As a result, we have no fixed charge coverage ratio
requirements at year-end 2004.



The $34,000 Ascension Parish Industrial Revenue
Bonds, or IRBs, are related to the acquisition, construction and installation of air and water pollution control facilities that are no longer owned by the Company. The tax-exempt status of the IRBs is based upon there being no change in the use of
the facilities, as defined by the Internal Revenue Code. The Company continues to monitor the use of the facilities by the current owner. If a change in use were to occur, the Company could be required to take remedial action, including redeeming
all of the bonds.



We redeemed our 9.25% debentures on August 12, 2004, with
interest paid through September 12, 2004. The total cash outflow associated with the redemption was $49,249. Included in the total cash paid was $47,295 for the principal of the debentures, $1,069 of accrued interest and an early redemption premium
of $885.



We also had a borrowing arrangement with BWHLLC, a former affiliate,
evidenced by a demand promissory note bearing interest at a variable rate, which terminated upon the completion of the Apollo Transaction. In 2003, we, along with HAI, had similar arrangements with Borden Foods Holdings Corporation, a former
affiliate. The loans were reported as Loans payable to affiliates on the Consolidated Balance Sheets and totaled $18,260 at December 31, 2003. Of the total loans outstanding, HAI owed $6,000 at December 31, 2003. Net affiliated interest expense
totaled $138, $558 and $1,402 for the years ended December 31, 2004, 2003 and 2002 respectively.



26



---

##### Table of Contents

HAI replaced its loan agreement with Foods on January 28, 2004, when they entered into a three-year asset based revolving
credit facility, which provides for a maximum borrowing of $15,000, as amended on October 29, 2004 (the HAI Facility). Maximum borrowing allowable under this facility is based upon specific percentages of eligible accounts receivable and
inventory and is secured with the inventory, accounts receivable and property and equipment of HAI. At December 31, 2004, the net book value of the collateral securing the HAI Facility was approximately $33,600. The HAI Facility restricts HAI on the
payment of dividends, affiliate transactions, additional debt, minimum availability ($2,000) and capital expenditures ($2,000 in 2005). In addition, HAI must maintain a minimum trailing twelve-month debt coverage ratio of 1.5 to 1.0 and a monthly
debt to tangible capital ratio of less than 2.5 to 1.0. At December 31, 2004, maximum borrowing allowable under the HAI Facility was approximately $13,800, of which about $11,800 was unused and available, after the minimum availability requirement.



Our Australian subsidiary entered into a five-year secured credit facility in
the fourth quarter of 2003 (the Australian Facility), which provides for a maximum borrowing of AUD$19,900, or approximately $15,500. The Australian Facility provided the funding for our Fentak acquisition (See Note 3 to the Consolidated
Financial Statements for additional information on the acquisition), and it is secured by liens against substantially all of the assets of the Australian business including the stock of Australian subsidiaries. At December 31, 2004, the net book
value of the collateral securing the Australian Facility was approximately $29,700. In addition, the stock of Australia is pledged as collateral for borrowings under the Australian Facility. This facility includes a fixed rate component used for the
acquisition, as well as a revolver and LOC facility. This facility restricts the Australian subsidiaries on the payment of dividends, the sale of assets and additional borrowings by the Australian businesses outside of this facility. This facility
also contains financial covenants applying to the Australian subsidiaries including current ratio, interest coverage, debt service coverage and leverage. The fixed portion of the Australian Facility requires minimum quarterly principal reductions
totaling AUD$450 (approximately $350). The revolving facility component requires semi-annual principal reductions based on a portion of excess cash as defined in the agreement. At December 31, 2004, the maximum borrowing allowable under the
Australian Facility was AUD$18,100 (approximately $14,100), of which about AUD$3,600 (approximately $2,800), after outstanding LOCs and other draws, was unused and available.



We have additional international credit facilities that provide availability to these businesses totaling approximately $26,100. Of this
amount, approximately $12,200 (net of $3,935 of borrowings, $4,600 of LOCs and other guarantees and $5,400 of other draws) was available to fund working capital needs and capital expenditures. These credit facilities have various expiration dates
ranging from 2006 through 2008. While these facilities are primarily unsecured, portions of the lines are secured by equipment. At December 31, 2004, the net book value of collateral securing a portion of these facilities was approximately $750. Our
U.S. business guarantees up to $6,700 of the debt of one of our Brazilian subsidiaries, included in these facilities.



As discussed in Note 3 to the Consolidated Financial Statements, on October 6, 2004, we entered into an agreement to acquire Bakelite Aktiengesellschaft
(Bakelite). We intend to finance this acquisition through a combination of new debt securities and cash. We believe we will continue to have adequate cash available from operations and our Amended Credit Facility subsequent to the
completion of this acquisition despite the additional debt to be incurred.



In
the fourth quarter of 2003, we exercised our option to redeem, at par, the remaining $885 of County of Maricopa Industrial Revenue Bonds (IRBs). Also in the fourth quarter of 2003, we converted our remaining IRB issue, the $34,000 Parish
of Ascension IRB, to a fixed interest rate, and, by doing so, we were able to eliminate the requirement to maintain a backup letter of credit for approximately $34,500.



Effective December 1, 2003, we entered into a $34,000 interest rate swap agreement structured for the Parish of Ascension IRBs. Under this
agreement, we received a fixed rate of 10% and paid a variable rate equal to the 6-month LIBOR plus 630 basis points. At December 31, 2003, this equated to a rate of 7.6%. This swap agreement was terminated in the third quarter of 2004 for a fee of
$610.



Previous buybacks of our senior unsecured notes allow us to fulfill our
sinking fund requirements through 2013 for our 8.375% debentures. In the future, we, or our affiliates, including entities controlled by Apollo, may purchase our senior unsecured notes in the open market or by other means, depending on market
conditions.



In June 2003, we announced a realignment plan from which we expect
annualized savings of approximately $20,000 when the program is fully implemented in 2005. We are taking the following measures to achieve these goals: reducing our workforce, streamlining our processes in manufacturing as well as administration,
consolidating manufacturing processes and targeting reductions of general and administrative expenses. We are combining jobs where practical. As a result of consolidating



27



---

##### Table of Contents

manufacturing processes, we closed our North Bay, Ontario plant as of the end of 2003 and shifted the manufacturing to
another facility. We are executing a similar consolidation in Europe. Our facility in France has been converted into a distribution center, and the manufacturing transitioned to the U.K. To further decrease targeted general and administrative
expenses, we have reduced contract work, consolidated and eliminated positions and streamlined the administration of medical benefits and other post-retirement benefits. We anticipate completing this program in 2005. We expect to incur additional
costs in 2005 related to this program. (See Note 4 to the Consolidated Financial Statements for additional information on our realignment programs).



We plan to spend approximately $45,000 in 2005 for capital expenditures, including plans to continue increasing plant production capacity as necessary to meet demand. We
plan to fund capital expenditures through operations and, if necessary, through available lines of credit.



The following table summarizes our contractual cash obligations at December 31, 2004 and the effect we expect these obligations to have on our future cash requirements. Our contractual cash obligations consist of
legal commitments at December 31, 2004, requiring us to make fixed or determinable cash payments, regardless of the contractual requirements of the vendor to provide future goods or services. This table does not include information on our recurring
purchases of materials for use in production, as our raw materials purchase contracts do not meet this definition because they do not require fixed or minimum quantities. Contracts with cancellation clauses are not included, unless such cancellation
would result in major disruption to our business. For example, we have contracts for information technology support that are cancelable, but this support is essential to the operation of our business and administrative functions; therefore, amounts
payable under these contracts are included.



|                                             |  |                      |         |      |   |        |  |      |        |      |   |                 |  |       |         |  |   |           |  |   |          
|-------------------------------------------- |  | -------------------- | ------- | ---- | - | ------ |  | ---- | ------ | ---- | - | --------------- |  | ----- | ------- |  | - | --------- |  | - | ---------
|                                             |  | Payments Due By Year
|Contractual Obligations                      |  | 2005                 |         | 2006 |   | 2007   |  | 2008 |        | 2009 |   | 2010 and beyond |  | Total
|Long-term debt, including current maturities |  | $                    | 11,588  |      | $ | 1,991  |  | $    | 1,489  |      | $ | 3,754           |  | $     | 34,000  |  | $ | 914,582   |  | $ | 967,404  
|Operating leases                             |  |                      | 11,641  |      |   | 8,919  |  |      | 6,370  |      |   | 4,734           |  |       | 2,546   |  |   | 4,307     |  |   | 38,517   
|Unconditional purchase obligations(1)        |  |                      | 11,074  |      |   | 4,667  |  |      | 2,686  |      |   | 300             |  |       |        |  |   |          |  |   | 18,727   
|Interest expense on fixed rate debt(2)       |  |                      | 69,806  |      |   | 69,621 |  |      | 69,491 |      |   | 69,390          |  |       | 68,902  |  |   | 545,785   |  |   | 892,995  
|                                             |  |                      |         |      |   |        |  |      |        |      |   |                 |  |       |         |  |   |           |  |   |          
|Total                                        |  | $                    | 104,109 |      | $ | 85,198 |  | $    | 80,036 |      | $ | 78,178          |  | $     | 105,448 |  | $ | 1,464,674 |  | $ | 1,917,643
|                                             |  |                      |         |      |   |        |  |      |        |      |   |                 |  |       |         |  |   |           |  |   |          

---

|(1) | This table excludes payments relating to income tax, pension and OPEB benefits and environmental obligations due to the fact that, at this time, we cannot determine either the
timing or the amounts of payments for all periods beyond 2004 for certain of these liabilities. See Notes 11, 12, 13 and 17 to the Consolidated Financial Statements and the following discussions on our environmental, pension, OPEB and income tax
liabilities, respectively, for more information on these obligations. Our capital lease obligations are not material.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | This table excludes interest expense for debt instruments with variable interest rates, which includes a portion of the notes. For the year ended December 31, 2004, this expense was
approximately $3,930.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We have updated our projected pension plan
contributions as reported in our Form 10-K dated December 31, 2003. Our current projections for future contributions range from approximately $7,300 in 2005 to approximately $28,600 in 2006, with a total funding requirement for the five years ended
in 2009 of $74,900. The assumptions used by our actuaries in calculating these projections included an 8.0% annual return on assets for the years 2005  2009 and the continuation of current law and plan provisions.



Our projected future plan benefit payments for our postretirement plans range from
approximately $1,500 in 2009 to approximately $3,200 in 2005, with total benefit payments for the five years ended in 2009 of approximately $9,700.



As disclosed in Note 17 to the Consolidated Financial Statements, we wrote-off our net deferred domestic income tax asset in 2004. We do not anticipate this will have a
negative impact on our cash flow in future years. We estimate we will pay cash taxes totaling approximately $20,000 in 2005 for state, local and international liabilities.



We expect other environmental expenditures for 2005  2009 to total approximately $19,500, with approximately $29,700 paid over the
next 25 years beginning in 2010.



Effective September 1, 2003, we amended our
OPEB medical benefit plan to eliminate medical benefits for our retirees and their dependents who are over age 65. We have arranged with a major benefits provider to offer affected retirees and their dependents continued access to medical and
prescription drug coverage, including coverage for pre-existing conditions. We



28



---

##### Table of Contents

subsidized a portion of the cost of coverage for affected retirees and their dependents through December 2004 to assist
our retirees transition to alternative medical coverage and reserved the right to continue, terminate or reduce the subsidy provided to our affected retirees and their dependents for periods after December 2004. We elected to reduce the
subsidy provided effective January 1, 2005 and eliminate the remaining subsidy effective January 1, 2006, except in certain cases where contractual obligations exist. As a result of these actions, our liability related to providing OPEB medical
benefits was reduced by approximately $96,000. Our primary benefit from these amendments was a reduction of future annual cash outlays related to OPEB benefits by approximately $11,600 annually, as compared to the cash outlays we anticipated under
the pre-amended retiree medical benefit plan.



We expect to have adequate
liquidity to fund working capital requirements, contractual obligations and capital expenditures over the remainder of the five year term of our Amended Credit Facility with cash received from operations, amounts available under the Amended Credit
Facility and amounts available under our subsidiaries separate credit facilities.



Off-Balance Sheet Arrangements



We have no off-balance sheet
arrangements.



Covenant Compliance



Adjusted EBITDA is used to determine compliance with the debt incurrence covenant contained
in the indenture governing the Floating and Fixed Rate Notes. Because we are highly leveraged, our compliance with these covenants is important for the investors in the Companys debt. Therefore, Adjusted EBITDA is a key metric for these
investors.



Adjusted EBITDA is defined as Net income adjusted to exclude
depreciation and amortization, interest expense, non-operating income and expenses, unusual items and certain pro forma adjustments permitted in calculating covenant compliance under the indentures governing the notes and our Amended Credit
Facility. We believe that the inclusion of supplemental adjustments to net income applied in presenting Adjusted EBITDA are appropriate to provide additional information to investors to demonstrate compliance with our financing covenants.



As of December 31, 2004, we were in compliance with all material covenants
contained in our indenture governing the notes.



Reconciliation of Adjusted EBITDA to Net (Loss) Income



|                                                |  |      |          |   |      |   |         |  
|----------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|                                                |  | 2004 |          |   | 2003 |  
|Net (loss) income                               |  | $    | (179,668 | ) |      | $ | 22,976  |  
|Depreciation and amortization                   |  |      | 49,724   |   |      |   | 47,319  |  
|Adjustments to Segment EBITDA (see pages 22-23) |  |      | 72,472   |   |      |   | 13,885  |  
|Interest expense                                |  |      | 64,183   |   |      |   | 46,138  |  
|Affiliated interest expense                     |  |      | 138      |   |      |   | 558     |  
|Other non-operating expense                     |  |      | 1,265    |   |      |   | 1,529   |  
|Income tax expense (benefit)                    |  |      | 146,337  |   |      |   | (4,659  | )
|                                                |  |      |          |   |      |   |         |  
|                                                |  |      | 154,451  |   |      |   | 127,746 |  
|                                                |  |     
|Adjusted EBITDA (a) (c):                        |  |      |          |   |      |   |         |  
|Management fees                                 |  |      | 2,608    |   |      |   | 3,350   |  
|Brazil reactor impact (b)                       |  |      | 3,000    |   |      |   |        |  
|Full year impact of acquisitions                |  |      |         |   |      |   | 3,579   |  
|Cost savings                                    |  |      | 4,900    |   |      |   | 11,900  |  
|Benefit plan subsidy amendment                  |  |      | 1,200    |   |      |   | 7,656   |  
|Purchasing power savings                        |  |      | 6,500    |   |      |   | 6,500   |  
|                                                |  |      |          |   |      |   |         |  
|                                                |  | $    | 172,659  |   |      | $ | 160,731 |  
|                                                |  |      |          |   |      |   |         |  

---

|(a) | To arrive at Adjusted EBITDA, we are required to make adjustments to net income for management fees paid to our sponsors, unusual operating impacts and certain pro forma
adjustments. These pro forma adjustments include the full year impact of completed acquisitions and approved amendments to our postretirement plan and cost and purchasing savings we expect to achieve.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Amount represents the estimated impact of the mechanical failure of a Brazilian reactor that occurred in the third quarter of 2004. The Company has filed an insurance claim to
recover substantially all losses related to this item.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | To incur additional debt under the Floating and Fixed Note indenture, a Fixed Charge Coverage Ratio of greater than 2 to 1 must be maintained. The Companys ratio as of
December 31, 2004 after giving effect to the potential acquisition and additional expected debt was 2.3 to 1.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29



---

##### Table of Contents

Risk Management



We use various financial instruments, including some derivatives, to help us hedge our foreign currency exchange risk and interest rate risk. We also use raw material
purchasing contracts and pricing contracts with customers to mitigate commodity price risks. These contracts generally do not contain minimum purchase requirements.



Foreign Exchange Risk



Our international operations accounted for approximately 38% of our sales in 2004 and 37% in 2003. As a result, we have exposure to foreign
exchange risk on transactions potentially denominated in many foreign currencies. These transactions include foreign currency denominated imports and exports of raw materials and finished goods (both intercompany and third party) and loan
repayments. In all cases, the functional currency is the business units local currency.



It is our policy to reduce foreign currency cash flow exposure due to exchange rate fluctuations by hedging firmly committed foreign currency transactions wherever economically feasible. Our use of forward and option
contracts is designed to protect our cash flows against unfavorable movements in exchange rates, to the extent of the amount under contract. We do not attempt to hedge foreign currency exposure in a manner that would entirely eliminate the effect of
changes in foreign currency exchange rates on net income and cash flow. We do not speculate in foreign currency nor do we hedge the foreign currency translation of our international businesses to the U.S. dollar for purposes of consolidating our
financial results or other foreign currency net asset or liability positions. The counter-parties to our forward contracts are financial institutions with investment grade credit ratings.



Our foreign exchange risk is also mitigated because we operate in many foreign countries, reducing the concentration of risk in any one
currency. In addition, our foreign operations have limited imports and exports, reducing the potential impact of foreign currency exchange rate fluctuations. With other factors being equal, such as the performance of individual foreign economies, an
average 10% foreign exchange increase or decrease in any one country would not materially impact our operating results or cash flow. However, an average 10% foreign exchange increase or decrease in all countries may materially impact our operating
results.



As required by current accounting standards, our Consolidated
Statements of Operations includes any gains and losses arising from forward and option contracts.



The following table summarizes forward currency and option contracts outstanding as of December 31, 2004 and 2003. Fair values are determined from quoted market prices at these dates.



|                                  |  |                          |  |                       |      |                  |         |                        |   |        |                          |  |                       |  |                  |  |                        |        |  |   |      |  
|--------------------------------- |  | ------------------------ |  | --------------------- | ---- | ---------------- | ------- | ---------------------- | - | ------ | ------------------------ |  | --------------------- |  | ---------------- |  | ---------------------- | ------ |  | - | ---- | -
|                                  |  | 2004                     |  |                       | 2003 |                 
|                                  |  | Average Days To Maturity |  | Average Contract Rate |      | Forward Position |         | Fair Value Gain (Loss) |   |        | Average Days to Maturity |  | Average Contract Rate |  | Forward Position |  | Fair Value Gain (Loss) |       
|Currency to sell For U.S. Dollars |  |                          |  |                       |      |                  |         |                        |   |        |                          |  |                       |  |                  |  |                        |        |  |   |      |  
|British Pound(1)                  |  |                         |  |                      |      | $                |        |                        | $ |       |                          |  | 7                     |  | 1.7710           |  | $                      | 44,300 |  | $ | (323 | )
|Canadian Dollars(2)               |  | 183                      |  | 1.3200                |      |                  | 36,000  |                        |   | 114    |                          |  | 47                    |  | 1.3600           |  |                        | 12,000 |  |   | 18   |  
|Canadian Dollars(3)               |  | 183                      |  | 1.2300                |      |                  | 36,000  |                        |   | (1,547 | )                        |  | 47                    |  | 1.3068           |  |                        | 12,000 |  |   | (181 | )
|Currency to sell For CDN Dollars  |  |                          |  |                       |      |                  |         |                        |   |        |                          |  |                       |  |                  |  |                        |        |  |   |      |  
|British Pound(1)                  |  | 31                       |  | 2.3255                |      |                  | 41,577  |                        |   | 521    |                          |  |                      |  |                 |  |                        |       |  |   |     |  
|Currency to sellfor Euros         |  |                          |  |                       |      |                  |         |                        |   |        |                          |  |                       |  |                  |  |                        |        |  |   |      |  
|U.S. Dollars(4)                   |  | 90                       |  | 1.3430                |      |                  | 235,025 |                        |   | 2,076  |                          |  |                      |  |                 |  |                        |       |  |   |     |  

---

|(1) | Forward contracts
|--- | -----------------

|(2) | Puts purchased
|--- | --------------

|(3) | Calls sold
|--- | ----------

|(4) | Deal contingent forward contract (Pending Bakelite acquisition)
|--- | ---------------------------------------------------------------



30



---

##### Table of Contents

Interest Rate Risk



We have used interest rate swaps to minimize our interest rate exposures between fixed and floating rates on long-term debt. We do not enter into speculative financial
contracts of any type. The fair values of the swaps are determined using estimated market values. Under interest rate swaps, we agree with other parties to exchange at specified intervals the difference between the fixed rate and floating rate
interest amounts calculated by reference to the agreed notional principal amount.



At December 31, 2003, we had one interest rate swap outstanding with a notional value of $34,000 and a fair value loss of $483. Under this arrangement, we paid 7.6% and received 10.0% in 2003. We cancelled this swap in the third quarter of
2004 for a fee of $610. The swap reduced our interest expense by $456 and $62 in 2004 and 2003, respectively.



The interest rates on most of our debt agreements are fixed. A 10% increase or decrease in the interest rates of the variable debt agreements would be immaterial to our net income. The fair value of our publicly held
debt is based on the price at which the bonds are traded or quoted at December 31, 2004 and 2003. All other debt fair values are determined from quoted market interest rates at December 31, 2004 and 2003.



Following is a summary of our outstanding debt as of December 31, 2004 and 2003 (see Note 9
to the Consolidated Financial Statements for additional information on our debt):



|                |  |      |         |                              |      |   |            |   |         |  |                               |         |  |            |   |  |   |        
|--------------- |  | ---- | ------- | ---------------------------- | ---- | - | ---------- | - | ------- |  | ----------------------------- | ------- |  | ---------- | - |  | - | -------
|                |  | 2004 |         | 2003                        
|Year            |  | Debt |         | WeightedAverage InterestRate |      |   | Fair Value |   | Debt    |  | WeightedAverage Interest Rate |         |  | Fair Value
|2004            |  |      |         |                              |      |   |            |   |         |  | $                             | 8,167   |  | 6.2        | % |  | $ | 8,167  
|2005            |  | $    | 11,588  |                              | 8.6  | % |            | $ | 11,585  |  |                               | 2,219   |  | 9.7        | % |  |   | 2,219  
|2006            |  |      | 1,991   |                              | 8.2  | % |            |   | 1,991   |  |                               | 1,841   |  | 8.6        | % |  |   | 1,841  
|2007            |  |      | 1,489   |                              | 6.8  | % |            |   | 1,489   |  |                               | 1,420   |  | 6.8        | % |  |   | 1,420  
|2008            |  |      | 3,754   |                              | 6.4  | % |            |   | 3,754   |  |                               | 3,609   |  | 6.4        | % |  |   | 3,609  
|2009            |  |      | 34,000  |                              | 10.0 | % |            |   | 36,720  |  |                               | 34,000  |  | 10.0       | % |  |   | 33,517 
|2010 and beyond |  |      | 914,582 |                              | 8.3  | % |            |   | 909,373 |  |                               | 486,877 |  | 8.4        | % |  |   | 452,857
|                |  |      |         |                              |      |   |            |   |         |  |                               |         |  |            |   |  |   |        
|                |  | $    | 967,404 |                              |      |   |            | $ | 964,912 |  | $                             | 538,133 |  |            |   |  | $ | 503,630
|                |  |      |         |                              |      |   |            |   |         |  |                               |         |  |            |   |  |   |        



We do not use derivative financial
instruments in our investment portfolios. We place any cash equivalent investments in instruments that meet the credit quality standards established within our investment policies, which also limit the exposure to any one issue.At December
31, 2004, we had $74,683 invested, at average rates of 1.9%, primarily in a prime money market account, a guaranteed investment certificate and time deposits with maturity periods of 30 days or less. At December 31, 2003, we had no material
investments in cash equivalent instruments. Due to the short maturity of our cash equivalents, the carrying value on these investments approximates fair value and our interest rate risk is not significant. A 10% increase or decrease in interest
returns on invested cash would not have a material effect on our net income and cash flows at December 31, 2004 and 2003.



Commodity Risk



We are exposed to price risks associated with raw material purchases, most significantly with methanol, phenol and urea. For our commodity raw materials, we have purchase contracts, with periodic price adjustment
provisions. In 2004, our suppliers were committed under these contracts to provide 100% of our estimated methanol requirements. Commitments with our phenol and urea suppliers provide up to 100% of our estimated requirements and also provide the
flexibility to purchase a certain percentage of our needs in the spot market, when favorable to us. We expect these arrangements for raw materials to continue throughout 2005. Our commodity risk also is moderated through our use of customer
contracts with selling price provisions that are indexed to publicly available indices for these commodity raw materials. All commodity futures that we enter into are approved by our Board of Directors.



We have a long-term contractual arrangement with a leading global producer to supply a
minimum of 70% of our worldwide requirements of a key raw material polymer. The material we purchase under this agreement is sourced from numerous supplier production sites and the temporary or permanent loss of any individual site would not likely
have a material adverse impact on our ability to satisfy our supply requirements. We have no minimum purchase requirements under this contract.



Natural Gas Futures- Natural gas is essential in our manufacturing processes, and its cost can vary widely and unpredictably. In order to control our costs for
natural gas, we hedge a portion of our natural gas purchases for all of North America by



31



---

##### Table of Contents

entering into futures contracts for natural gas. The contracts are settled for cash each month based on the closing
market price on the last day the contract trades on the New York Mercantile Exchange. We hedged approximately 46% and 69% of our actual natural gas usage in 2004 and 2003, respectively. During 2003, we entered into futures contracts for natural gas
usage through June 2004, and in 2004 we entered into additional futures contracts through December 2005. Our commitments settled under these contracts totaled $3,125 and $4,866 in 2004 and 2003, respectively. We recorded gains relating to these
commitments of $248 in 2004 and losses of $224 in 2003. At December 31, 2004 and 2003, we had future commitments under these contracts of $3,483 and $1,359, respectively.



We were in previous natural gas futures contracts with varying settlement dates during 2002. Commitments settled under these contracts
totaled $1,210 and our related losses were $264 in 2002. These contracts terminated prior to December 31, 2002.



We recognize gains and losses on commodity futures contracts each month as gas is used. Our future commitments are marked to market on a quarterly basis. We recorded
losses of $275 and $20 at December 31, 2004 and 2003, respectively, related to future commitments under our natural gas futures contracts.



Natural Gas Commitments - In 2000, we entered into fixed rate, fixed quantity contracts to secure a portion of future natural gas usage for certain facilities. We entered
into these contracts to partially hedge our risk of natural gas price fluctuations in peak usage months. Our gas purchases under these contracts totaled $402 and $671 in 2003 and 2002, respectively. We recorded a gain of $16 at December 31, 2002 for
the difference between the fair value and the carrying value of our future natural gas commitments. These contracts expired early in 2003, and we had no natural gas purchase commitments at year-end 2003.



Other Matters



Our operations are subject to the usual hazards associated with chemical manufacturing and the related storage and transportation of
feedstocks, products and wastes, including, but not limited to, combustion, inclement weather and natural disasters, mechanical failure, unscheduled downtime, transportation interruptions, remediation, chemical spills, discharges or releases of
toxic or hazardous substances or gases and other environmental risks. These potential hazards could cause personal injury or loss of life, severe damage to or destruction of property and equipment and environmental damage and could result in
suspension of our operations and the imposition of civil or criminal penalties. We have significant operational management systems, preventive procedures and protective safeguards to minimize the risk of an incident and to ensure the safe continuous
operation of our facilities. In addition, we maintain property, business interruption and casualty insurance that we believe is in accordance with customary industry practices, but we are not fully insured against all potential hazards incidental to
our business.



Due to the nature of our business and the current litigious
climate, product liability litigation, including class action lawsuits claiming liability for death, injury or property damage caused by our products, or by other manufacturers products that include our components, is inherent to our business
but historically has been immaterial. However, our current product liability claims and any future lawsuits, could result in damage awards against us, which in turn could encourage additional litigation.



Recently Issued Accounting Standards



In May 2004, the Financial Accounting Standards Board, or FASB, issued Staff Position SFAS
106-2, Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This Position provides guidance on the accounting, disclosure, effective date, and transition
requirements related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. FASB Staff Position SFAS 106-2 is effective for interim or annual periods beginning after June 15, 2004. The adoption of this Position had no material
impact on our financial position or results of operations.



In November 2004,
the FASB issued Statement of Financial Accounting Standard, or SFAS, No. 151, Inventory Costs. The statement amends Accounting Research Bulletin, or ARB, No. 43, Inventory Pricing, to clarify the accounting for abnormal
amounts of idle facility expense, freight, handling costs, and wasted material. ARB No. 43 previously stated that these costs must be so abnormal as to require treatment as current-period charges. SFAS No. 151 requires that those items
be recognized as current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal
capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for fiscal years beginning after the issue date of the statement. We
do not expect our adoption of SFAS No. 151 to have a material impact on our current financial condition or results of operations.



32



---

##### Table of Contents

In December 2004, the FASB revised its SFAS No. 123 (SFAS No. 123R), Accounting for Stock Based
Compensation. The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in
share-based payment transactions. The revised statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be
recognized over the period during which the employee is required to provide service in exchange for the award. Changes in fair value during the requisite service period are to be recognized as compensation cost over that period. In addition, the
revised statement amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash flow rather than as a reduction of taxes paid. The provisions of the revised statement are effective for
our financial statements issued for the first annual reporting period beginning after December 15, 2005, with early adoption encouraged. We are currently evaluating the impact that this statement will have on our financial condition and results of
operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of
Nonmonetary Assets  An Amendment of APB Opinion No. 29. APB Opinion No. 29, Accounting For Nonmonetary Transactions, is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of
the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets whose results are not expected to
significantly change the future cash flows of the entity. This statement is effective for nonmonetary asset exchanges beginning December 4, 2005. We do not expect our adoption of SFAS No. 153 to have any impact on our financial condition or results
of operations.



In December 2004, the FASB issued two FASB Staff Positions, or
FSP, that provide accounting guidance on how companies should account for the effects of the American Jobs Creation Act of 2004 that was signed into law on October 22, 2004. FSP FAS 109-1, Application of FASB Statement No. 109,
Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004, states that the manufacturers deduction provided for under this legislation should be
accounted for as a special deduction instead of a tax rate change. FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, allows a company
additional time to evaluate the effects of the legislation on any plan for reinvestment or repatriation of foreign earnings for purposes of applying SFAS No. 109, Accounting for Income Taxes. These FSPs may affect how a company accounts
for deferred income taxes. These FSPs are effective upon issuance. We do not anticipate a material impact from these FSPs on our financial condition or results of operations.



ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK



Refer to the Risk Management section included in Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operation.





33



---

##### Table of Contents

ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA



|                                                                   |  |   
|------------------------------------------------------------------ |  | --
|Audited Consolidated Financial Statements of Borden Chemical, Inc. |  |   
|                                                                   | 
|Consolidated Statements of Operations:                             |  |   
|For the years ended December 31, 2004, 2003 and 2002               |  | 35
|                                                                   | 
|Consolidated Balance Sheets:                                       |  |   
|As of December 31, 2004 and 2003                                   |  | 36
|                                                                   | 
|Consolidated Statements of Cash Flows:                             |  |   
|For the years ended December 31, 2004, 2003 and 2002               |  | 38
|                                                                   | 
|Consolidated Statements of Shareholders Deficit:                  |  |   
|For the years ended December 31, 2004, 2003 and 2002               |  | 40
|                                                                   | 
|Notes to the Consolidated Financial Statements:                    |  | 42
|For the years ended December 31, 2004, 2003 and 2002               |  |   
|                                                                   | 
|Report of Independent Registered Public Accounting Firm            |  | 88





34



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF OPERATIONS

BORDEN CHEMICAL, INC.



|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|------------------------------------------------------------------------ |  | ----------------------- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|                                                                         |  | Year Ended December 31, |          
|(In thousands, except per share data)                                    |  | 2004                    |           |   | 2003 |   |           | 2002 | 
|Net sales                                                                |  | $                       | 1,686,021 |   |      | $ | 1,434,813 |      |  | $ | 1,247,885 |  
|Cost of goods sold                                                       |  |                         | 1,361,482 |   |      |   | 1,148,519 |      |  |   | 968,657   |  
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Gross margin                                                             |  |                         | 324,539   |   |      |   | 286,294   |      |  |   | 279,228   |  
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Distribution expense                                                     |  |                         | 75,246    |   |      |   | 66,383    |      |  |   | 61,927    |  
|Marketing expense                                                        |  |                         | 46,985    |   |      |   | 42,398    |      |  |   | 42,503    |  
|General & administrative expense (see Note 11)                           |  |                         | 107,967   |   |      |   | 100,021   |      |  |   | 109,237   |  
|Transaction related costs (see Note 1)                                   |  |                         | 55,586    |   |      |   |          |      |  |   |          |  
|Business realignment expense and impairments                             |  |                         | 4,427     |   |      |   | 4,748     |      |  |   | 19,699    |  
|Other operating expense                                                  |  |                         | 2,073     |   |      |   | 6,202     |      |  |   | 12,154    |  
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Operating income                                                         |  |                         | 32,255    |   |      |   | 66,542    |      |  |   | 33,708    |  
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Interest expense                                                         |  |                         | 64,183    |   |      |   | 46,138    |      |  |   | 47,315    |  
|Affiliated interest expense, net                                         |  |                         | 138       |   |      |   | 558       |      |  |   | 1,402     |  
|Other non-operating expense (income)                                     |  |                         | 1,265     |   |      |   | 1,529     |      |  |   | (5,989    | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|(Loss) income before income tax                                          |  |                         | (33,331   | ) |      |   | 18,317    |      |  |   | (9,020    | )
|Income tax expense (benefit)                                             |  |                         | 146,337   |   |      |   | (4,659    | )    |  |   | (2,262    | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|(Loss) income before cumulative effect of change in accounting principle |  |                         | (179,668  | ) |      |   | 22,976    |      |  |   | (6,758    | )
|                                                                         |  |                         |          
|Cumulative effect of change in accounting principle                      |  |                         |          |   |      |   |          |      |  |   | (29,825   | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Net (loss) income                                                        |  | $                       | (179,668  | ) |      | $ | 22,976    |      |  | $ | (36,583   | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Comprehensive (loss) income                                              |  | $                       | (158,968  | ) |      | $ | 60,420    |      |  | $ | (67,784   | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Basic and Diluted Per Share Data                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|(Loss) income before cumulative effect of change in accounting principle |  | $                       | (1.12     | ) |      | $ | 0.11      |      |  | $ | (0.03     | )
|                                                                         |  |                         |          
|Cumulative effect of change in accounting principle                      |  |                         |          |   |      |   |          |      |  |   | (0.15     | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Net (loss) income  basic                                                |  | $                       | (1.12     | ) |      | $ | 0.11      |      |  | $ | (0.18     | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|(Loss) income before cumulative effect of change in accounting principle |  | $                       | (1.12     | ) |      | $ | 0.11      |      |  | $ | (0.03     | )
|                                                                         |  |                         |          
|Cumulative effect of change in accounting principle                      |  |                         |          |   |      |   |          |      |  |   | (0.15     | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Net (loss) income  dilutive                                             |  | $                       | (1.12     | ) |      | $ | 0.11      |      |  | $ | (0.18     | )
|                                                                         |  |                         |           |   |      |   |           |      |  |   |           |  
|Average number of common shares outstanding during the period:           |  |                         |           |   |      |   |           |      |  |   |           |  
|Basic                                                                    |  |                         | 159,923   |   |      |   | 199,310   |      |  |   | 199,319   |  
|Dilutive                                                                 |  |                         | 159,923   |   |      |   | 200,267   |      |  |   | 199,319   |  



See Notes to Consolidated
Financial Statements



35



---

##### Table of Contents

CONSOLIDATED BALANCE SHEETS

BORDEN CHEMICAL, INC.



(In thousands)



|                                                                                                  |  |                  |           |   |                  |   |          |  
|------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | - | ---------------- | - | -------- | -
|                                                                                                  |  | December 31,2004 |           |   | December 31,2003 |  
|ASSETS                                                                                            |  |                  |           |   |                  |   |          |  
|                                                                                                  |  |                 
|Current Assets                                                                                    |  |                  |           |   |                  |   |          |  
|Cash and equivalents                                                                              |  | $                | 122,111   |   |                  | $ | 28,162   |  
|Accounts receivable (less allowance for doubtful accounts of $10,197 in 2004 and $14,459 in 2003) |  |                  | 226,235   |   |                  |   | 196,093  |  
|Inventories:                                                                                      |  |                  |           |   |                  |   |          |  
|Finished and in-process goods                                                                     |  |                  | 55,656    |   |                  |   | 42,292   |  
|Raw materials and supplies                                                                        |  |                  | 54,768    |   |                  |   | 38,819   |  
|Deferred income taxes                                                                             |  |                  | 522       |   |                  |   | 27,085   |  
|Other current assets                                                                              |  |                  | 22,469    |   |                  |   | 13,905   |  
|                                                                                                  |  |                  |           |   |                  |   |          |  
|                                                                                                  |  |                  | 481,761   |   |                  |   | 346,356  |  
|                                                                                                  |  |                  |           |   |                  |   |          |  
|Other Assets                                                                                      |  |                  |           |   |                  |   |          |  
|Deferred income taxes                                                                             |  |                  | 3,582     |   |                  |   | 113,434  |  
|Other assets                                                                                      |  |                  | 49,732    |   |                  |   | 21,725   |  
|                                                                                                  |  |                  |           |   |                  |   |          |  
|                                                                                                  |  |                  | 53,314    |   |                  |   | 135,159  |  
|                                                                                                  |  |                  |           |   |                  |   |          |  
|Property and Equipment                                                                            |  |                  |           |   |                  |   |          |  
|Land                                                                                              |  |                  | 32,945    |   |                  |   | 32,585   |  
|Buildings                                                                                         |  |                  | 103,504   |   |                  |   | 103,774  |  
|Machinery and equipment                                                                           |  |                  | 733,285   |   |                  |   | 691,249  |  
|                                                                                                  |  |                  |           |   |                  |   |          |  
|                                                                                                  |  |                  | 869,734   |   |                  |   | 827,608  |  
|Less accumulated depreciation                                                                     |  |                  | (421,728  | ) |                  |   | (378,724 | )
|                                                                                                  |  |                  |           |   |                  |   |          |  
|                                                                                                  |  |                  | 448,006   |   |                  |   | 448,884  |  
|Goodwill                                                                                          |  |                  | 50,682    |   |                  |   | 57,516   |  
|Other Intangible Assets                                                                           |  |                  | 10,351    |   |                  |   | 5,951    |  
|                                                                                                  |  |                  |           |   |                  |   |          |  
|Total Assets                                                                                      |  | $                | 1,044,114 |   |                  | $ | 993,866  |  
|                                                                                                  |  |                  |           |   |                  |   |          |  



See
Notes to Consolidated Financial Statements



36



---

##### Table of Contents

CONSOLIDATED BALANCE SHEETS

BORDEN CHEMICAL, INC.



(In
thousands, except share data)



|                                                                                                                                                                                                               |  |                  |           |   |                  |   |           |  
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---------------- | --------- | - | ---------------- | - | --------- | -
|                                                                                                                                                                                                               |  | December 31,2004 |           |   | December 31,2003 |  
|LIABILITIES AND SHAREHOLDERS DEFICIT                                                                                                                                                                          |  |                  |           |   |                  |   |           |  
|                                                                                                                                                                                                               |  |                 
|Current Liabilities                                                                                                                                                                                            |  |                  |           |   |                  |   |           |  
|Accounts and drafts payable                                                                                                                                                                                    |  | $                | 222,173   |   |                  | $ | 127,174   |  
|Debt payable within one year                                                                                                                                                                                   |  |                  | 11,588    |   |                  |   | 8,167     |  
|Loans payable to affiliates                                                                                                                                                                                    |  |                  |          |   |                  |   | 18,260    |  
|Income taxes payable                                                                                                                                                                                           |  |                  | 31,556    |   |                  |   | 34,977    |  
|Interest payable                                                                                                                                                                                               |  |                  | 26,022    |   |                  |   | 12,524    |  
|Other current liabilities                                                                                                                                                                                      |  |                  | 74,417    |   |                  |   | 71,546    |  
|                                                                                                                                                                                                               |  |                  |           |   |                  |   |           |  
|                                                                                                                                                                                                               |  |                  | 365,756   |   |                  |   | 272,648   |  
|                                                                                                                                                                                                               |  |                  |           |   |                  |   |           |  
|Other Liabilities                                                                                                                                                                                              |  |                  |           |   |                  |   |           |  
|Long-term debt                                                                                                                                                                                                 |  |                  | 955,816   |   |                  |   | 529,966   |  
|Non-pension postemployment benefit obligations                                                                                                                                                                 |  |                  | 114,502   |   |                  |   | 128,723   |  
|Long-term pension obligations                                                                                                                                                                                  |  |                  | 64,596    |   |                  |   | 66,656    |  
|Other long-term liabilities                                                                                                                                                                                    |  |                  | 92,269    |   |                  |   | 92,066    |  
|                                                                                                                                                                                                               |  |                  |           |   |                  |   |           |  
|                                                                                                                                                                                                               |  |                  | 1,227,183 |   |                  |   | 817,411   |  
|                                                                                                                                                                                                               |  |                  |           |   |                  |   |           |  
|Commitments and Contingencies (See Notes 9 and 11)                                                                                                                                                             |  |                  |           |   |                  |   |           |  
|                                                                                                                                                                                                               |  |                 
|Shareholders Deficit                                                                                                                                                                                          |  |                  |           |   |                  |   |           |  
|Common stock - $0.01 par value: authorized 300,000,000 shares, issued 200,167,297, treasury 103,261,361, outstanding 96,905,936 in 2004;
issued 201,754,598, treasury 858,970, outstanding 200,895,628 in 2003 |  |                  | 969       |   |                  |   | 2,009     |  
|Paid-in capital                                                                                                                                                                                                |  |                  | 1,274,358 |   |                  |   | 1,224,011 |  
|Treasury stock                                                                                                                                                                                                 |  |                  | (295,881  | ) |                  |   |          |  
|Receivable from parent                                                                                                                                                                                         |  |                  | (560,672  | ) |                  |   | (512,094  | )
|Deferred compensation                                                                                                                                                                                          |  |                  |          |   |                  |   | (1,488    | )
|Accumulated other comprehensive loss                                                                                                                                                                           |  |                  | (107,493  | ) |                  |   | (128,193  | )
|Accumulated deficit                                                                                                                                                                                            |  |                  | (860,106  | ) |                  |   | (680,438  | )
|                                                                                                                                                                                                               |  |                  |           |   |                  |   |           |  
|                                                                                                                                                                                                               |  |                  | (548,825  | ) |                  |   | (96,193   | )
|                                                                                                                                                                                                               |  |                  |           |   |                  |   |           |  
|Total Liabilities and Shareholders Deficit                                                                                                                                                                    |  | $                | 1,044,114 |   |                  | $ | 993,866   |  
|                                                                                                                                                                                                               |  |                  |           |   |                  |   |           |  



See Notes to Consolidated Financial
Statements



37



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS

BORDEN CHEMICAL, INC.





|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ------- | ---- |  | - | -------- | -
|                                                                                            |  | Year ended December 31, |         
|(In thousands)                                                                              |  | 2004                    |          |   | 2003 |   |         | 2002 | 
|Cash Flows from (used in) Operating Activities                                              |  |                         |          |   |      |   |         |      |  |   |          |  
|Net (loss) income                                                                           |  | $                       | (179,668 | ) |      | $ | 22,976  |      |  | $ | (36,583  | )
|Adjustments to reconcile net income (loss) to net cash from (used in) operating activities: |  |                         |          |   |      |   |         |      |  |   |          |  
|Gain on sale of venture interest                                                            |  |                         | (1,010   | ) |      |   |        |      |  |   |         |  
|Loss (gain) on the sale of assets                                                           |  |                         | 1,808    |   |      |   | (746    | )    |  |   | 282      |  
|Deferred tax provision                                                                      |  |                         | 139,351  |   |      |   | 6,223   |      |  |   | 16,023   |  
|Depreciation and amortization                                                               |  |                         | 49,724   |   |      |   | 47,319  |      |  |   | 47,947   |  
|Deferred compensation expense                                                               |  |                         | 2,217    |   |      |   | 1,191   |      |  |   | 892      |  
|Business realignment expense and impairments                                                |  |                         | 4,427    |   |      |   | 4,748   |      |  |   | 19,699   |  
|Cumulative effect of change in accounting principle                                         |  |                         |         |   |      |   |        |      |  |   | 29,825   |  
|Other non-cash adjustments                                                                  |  |                         | 433      |   |      |   | 1,070   |      |  |   | (822     | )
|Net change in assets and liabilities:                                                       |  |                         |          |   |      |   |         |      |  |   |          |  
|Accounts receivable                                                                         |  |                         | (17,158  | ) |      |   | (3,217  | )    |  |   | (12,596  | )
|Inventories                                                                                 |  |                         | (26,502  | ) |      |   | 10,731  |      |  |   | 2,552    |  
|Accounts and drafts payable                                                                 |  |                         | 85,570   |   |      |   | 2,492   |      |  |   | (8,303   | )
|Income taxes                                                                                |  |                         | (8,313   | ) |      |   | (30,291 | )    |  |   | (21,780  | )
|Other assets                                                                                |  |                         | 6,594    |   |      |   | 3,581   |      |  |   | (2,571   | )
|Other liabilities                                                                           |  |                         | (32,908  | ) |      |   | (34,137 | )    |  |   | (23,269  | )
|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|                                                                                            |  |                         | 24,565   |   |      |   | 31,940  |      |  |   | 11,296   |  
|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|Cash Flows (used in) from Investing Activities                                              |  |                         |          |   |      |   |         |      |  |   |          |  
|Capital expenditures                                                                        |  |                         | (39,757  | ) |      |   | (41,820 | )    |  |   | (38,773  | )
|Capitalized interest                                                                        |  |                         | (435     | ) |      |   |        |      |  |   |         |  
|Purchase of businesses                                                                      |  |                         |         |   |      |   | (14,691 | )    |  |   |         |  
|Proceeds from sale of venture interest                                                      |  |                         | 2,124    |   |      |   |        |      |  |   |         |  
|Proceeds from the sale of assets                                                            |  |                         | 12,061   |   |      |   | 14,197  |      |  |   | 10,237   |  
|Proceeds from sale of note receivable to an affiliate                                       |  |                         |         |   |      |   |        |      |  |   | 110,000  |  
|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|                                                                                            |  |                         | (26,007  | ) |      |   | (42,314 | )    |  |   | 81,464   |  
|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|Cash Flows from (used in) Financing Activities                                              |  |                         |          |   |      |   |         |      |  |   |          |  
|Net short-term debt borrowings                                                              |  |                         | 3,421    |   |      |   | 5,388   |      |  |   | 1,255    |  
|Borrowings of long-term debt                                                                |  |                         | 475,249  |   |      |   | 7,925   |      |  |   |         |  
|Repayments of long-term debt                                                                |  |                         | (49,399  | ) |      |   | (1,246  | )    |  |   | (10,764  | )
|Affiliated loan (repayments) borrowings                                                     |  |                         | (18,260  | ) |      |   | (66,420 | )    |  |   | 6,130    |  
|Long-term debt and credit facility financing fees                                           |  |                         | (22,965  | ) |      |   |        |      |  |   |         |  
|Purchase of treasury stock                                                                  |  |                         | (294,918 | ) |      |   |        |      |  |   |         |  
|Repurchases, net of sale, of common stock from / to management                              |  |                         | (963     | ) |      |   | (286    | )    |  |   | (591     | )
|Payment of note payable to unconsolidated subsidiary                                        |  |                         |         |   |      |   |        |      |  |   | (31,581  | )
|Decrease (increase) in restricted cash                                                      |  |                         |         |   |      |   | 67,049  |      |  |   | (66,165  | )
|Capital contribution from affiliates                                                        |  |                         |         |   |      |   | 9,300   |      |  |   |         |  
|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|                                                                                            |  |                         | 92,165   |   |      |   | 21,710  |      |  |   | (101,716 | )
|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|Effect of exchange rates on cash                                                            |  |                         | 3,226    |   |      |   | 2,086   |      |  |   | (936     | )
|                                                                                            |  |                         |         
|Increase (decrease) in cash and equivalents                                                 |  |                         | 93,949   |   |      |   | 13,422  |      |  |   | (9,892   | )
|Cash and equivalents at beginning of year                                                   |  |                         | 28,162   |   |      |   | 14,740  |      |  |   | 24,632   |  
|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  
|Cash and equivalents at end of year                                                         |  | $                       | 122,111  |   |      | $ | 28,162  |      |  | $ | 14,740   |  
|                                                                                            |  |                         |          |   |      |   |         |      |  |   |          |  



38



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)

BORDEN CHEMICAL, INC.





|                                                                                         |  |                         |        |      |   |        |  |   |         |  
|---------------------------------------------------------------------------------------- |  | ----------------------- | ------ | ---- | - | ------ |  | - | ------- | -
|                                                                                         |  | Year ended December 31, |       
|(In thousands)                                                                           |  | 2004                    |        | 2003 |   | 2002   | 
|Supplemental Disclosures of Cash Flow Information                                        |  |                         |        |      |   |        |  |   |         |  
|Cash paid (received):                                                                    |  |                         |        |      |   |        |  |   |         |  
|Interest, net                                                                            |  | $                       | 50,112 |      | $ | 45,466 |  | $ | 46,928  |  
|Income taxes, net                                                                        |  |                         | 15,119 |      |   | 19,368 |  |   | 978     |  
|Non-cash activity:                                                                       |  |                         |        |      |   |        |  |   |         |  
|Reclassification of minimum pension liability adjustment from (to) shareholders deficit |  |                         | 1,978  |      |   | 5,830  |  |   | (17,075 | )



See Notes to Consolidated Financial
Statements



39



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT

BORDEN CHEMICAL, INC.



(In thousands)



|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------- |  | ------------ | ----- | - | --------------- | - | --------- | ---------------------- |  | - | --------------------- | - |  | -------------------------------------- | ------ | - | ------------------- | - | -------- | ----- |  | - | -------- | - |  | - | -------- | -
|                                                                      |  | Common Stock |       |   | Paid-in Capital |   |           | Receivable from Parent |  |   | Deferred Compensation |   |  | Accumulated Other Comprehensive Income |        |   | Accumulated Deficit |   |          | Total | 
|Balance, December 31, 2001                                            |  | $            | 1,990 |   |                 | $ | 1,106,789 |                        |  | $ | (404,817              | ) |  | $                                      |       |   |                     | $ | (134,436 | )     |  | $ | (666,831 | ) |  | $ | (97,305  | )
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|Net loss                                                              |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   | (36,583  | ) |  |   | (36,583  | )
|Translation adjustments                                               |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   | (14,856  | )     |  |   |          |   |  |   | (14,856  | )
|Derivative activity (net of $401 tax)                                 |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   | 730      |       |  |   |          |   |  |   | 730      |  
|Minimum pension liability adjustment (net of $9,194 tax)              |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   | (17,075  | )     |  |   |          |   |  |   | (17,075  | )
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|Comprehensive loss                                                    |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   | (67,784  | )
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|Interest accrued on notes from parent                                 |  |              |       |   |                 |   | 58,699    |                        |  |   | (58,699               | ) |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |         |  
|Capital contribution from parent                                      |  |              |       |   |                 |   | 3,895     |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   | 3,895    |  
|Repurchases of common stock from management                           |  |              | (1    | ) |                 |   | (1,341    | )                      |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   | (1,342   | )
|Common stock issued to management                                     |  |              | 4     |   |                 |   | 747       |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   | 751      |  
|Restricted subsidiary stock issued to management                      |  |              | 16    |   |                 |   | 3,555     |                        |  |   |                       |   |  |                                        | (3,571 | ) |                     |   |          |       |  |   |          |   |  |   |         |  
|Compensation expense on restricted stock                              |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        | 892    |   |                     |   |          |       |  |   |          |   |  |   | 892      |  
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|Balance, December 31, 2002                                            |  | $            | 2,009 |   |                 | $ | 1,172,344 |                        |  | $ | (463,516              | ) |  | $                                      | (2,679 | ) |                     |   | (165,637 | )     |  | $ | (703,414 | ) |  | $ | (160,893 | )
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|Net income                                                            |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   | 22,976   |   |  |   | 22,976   |  
|Translation adjustments                                               |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   | 31,614   |       |  |   |          |   |  |   | 31,614   |  
|Minimum pension liability adjustment (net of $3,139 tax)              |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   | 5,830    |       |  |   |          |   |  |   | 5,830    |  
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|Comprehensive income                                                  |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   | 60,420   |  
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|Interest accrued on notes from parent                                 |  |              |       |   |                 |   | 48,578    |                        |  |   | (48,578               | ) |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |         |  
|Capital contribution from parent                                      |  |              |       |   |                 |   | 9,300     |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   | 9,300    |  
|Compensation expense on subsidiary restricted stock                   |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        | 1,191  |   |                     |   |          |       |  |   |          |   |  |   | 1,191    |  
|Income tax on sale to affiliate of Consumer Adhesives note receivable |  |              |       |   |                 |   | (5,925    | )                      |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   | (5,925   | )
|Repurchases of common stock from management                           |  |              |       |   |                 |   | (286      | )                      |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   | (286     | )
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  
|Balance, December 31, 2003                                            |  | $            | 2,009 |   |                 | $ | 1,224,011 |                        |  | $ | (512,094              | ) |  | $                                      | (1,488 | ) |                     | $ | (128,193 | )     |  | $ | (680,438 | ) |  | $ | (96,193  | )
|                                                                      |  |              |       |   |                 |   |           |                        |  |   |                       |   |  |                                        |        |   |                     |   |          |       |  |   |          |   |  |   |          |  



See Notes to Consolidated Financial
Statements



40



---

##### Table of Contents

CONSOLIDATED STATEMENTS OF SHAREHOLDERS DEFICIT

BORDEN CHEMICAL, INC.



(In thousands)



|                                                                      |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   |          |  
|--------------------------------------------------------------------- |  | ----------- | ------ | - | -------------- | - | --------- | ------------- |  | - | -------------------- | - |  | -------------------- | -------- | - | ---------------------------------- | - | ------ | ------------------ |  | - | -------- | - |  | - | -------- | - |  | - | -------- | -
|                                                                      |  | CommonStock |        |   | Paid-inCapital |   |           | TreasuryStock |  |   | ReceivablefromParent |   |  | DeferredCompensation |          |   | Accumulated OtherComprehensiveLoss |   |        | AccumulatedDeficit |  |   | Total    |  
|Balance, December 31, 2003                                            |  | $           | 2,009  |   |                | $ | 1,224,011 |               |  |   |                     |   |  | $                    | (512,094 | ) |                                    | $ | (1,488 | )                  |  | $ | (128,193 | ) |  | $ | (680,438 | ) |  | $ | (96,193  | )
|                                                                      |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   |          |  
|Net loss                                                              |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   | (179,668 | ) |  |   | (179,668 | )
|Translation adjustments                                               |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   | 18,722   |   |  |   |          |   |  |   | 18,722   |  
|Minimum pension liability adjustment (net of $206 tax)                |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   | 1,978    |   |  |   |          |   |  |   | 1,978    |  
|                                                                      |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   |          |  
|Comprehensive loss                                                    |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   | (158,968 | )
|                                                                      |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   |          |  
|Redemption of shares from parent                                      |  |             | (1,021 | ) |                |   | 1,021     |               |  |   | (294,918             | ) |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   | (294,918 | )
|Interest accrued on notes from parent                                 |  |             |        |   |                |   | 48,578    |               |  |   |                      |   |  |                      | (48,578  | ) |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   |         |  
|Repurchases of common stock from management                           |  |             | (3     | ) |                |   | 3         |               |  |   | (963                 | ) |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   | (963     | )
|Compensation expense on restricted stock prior to cancellation        |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   | 694    |                    |  |   |          |   |  |   |          |   |  |   | 694      |  
|Cancellation of restricted stock                                      |  |             | (16    | ) |                |   | (3,555    | )             |  |   |                      |   |  |                      |          |   |                                    |   | 794    |                    |  |   |          |   |  |   |          |   |  |   | (2,777   | )
|Compensation expense under BHI Acquisition deferred compensation plan |  |             |        |   |                |   | 4,300     |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   | 4,300    |  
|                                                                      |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   |          |  
|Balance, December 31, 2004                                            |  | $           | 969    |   |                | $ | 1,274,358 |               |  | $ | (295,881             | ) |  | $                    | (560,672 | ) |                                    |   |       |                    |  | $ | (107,493 | ) |  | $ | (860,106 | ) |  | $ | (548,825 | )
|                                                                      |  |             |        |   |                |   |           |               |  |   |                      |   |  |                      |          |   |                                    |   |        |                    |  |   |          |   |  |   |          |   |  |   |          |  



See Notes to Consolidated Financial
Statements



41



---

##### Table of Contents

Notes to Consolidated Financial Statements

(Dollars in thousands except per share data)



1. Background and Nature of Operations



Borden Chemical, Inc. (the Company) was incorporated on April 24, 1899. The
Company is engaged primarily in manufacturing, processing, purchasing and distributing forest products and industrial resins, formaldehyde, oilfield products and other specialty and industrial chemicals worldwide. The Companys executive and
administrative offices are located in Columbus, Ohio. Production facilities are located throughout the U.S. and in many foreign countries.



Domestic products are sold by the Companys sales force throughout the U.S. to industrial users. To the extent practicable, international distribution techniques
parallel those used in the U.S. and are concentrated in Canada, Western Europe, Latin America, Australia and Malaysia.



At December 31, 2004, 27 of a total 49 production, manufacturing and distribution facilities are located in the U.S., and in 2004, approximately 62% of the Companys
sales were generated in the U.S.



The Company has three reportable segments:
Forest Products, Performance Resins Group and International. See Note 18.



On
July 6, 2004, Apollo Management, L.P. (Apollo) announced that it had signed a definitive agreement to acquire the Company. Previously, on May 7, 2004, the Company filed a registration statement with the U.S. Securities and Exchange
Commission for a proposed initial public offering (IPO) of its common stock. The IPO was suspended and the registration statement withdrawn on August 31, 2004.



On August 12, 2004, BHI Investment, LLC, an affiliate of Apollo acquired all of the outstanding capital stock of Borden Holdings, Inc.
(BHI), the Companys parent at that time, for total consideration of approximately $1.2 billion, including assumption of debt. In conjunction with this transaction, all of the outstanding capital stock of the Company held by
management was redeemed and non-vested restricted stock was cancelled. In addition, the Company redeemed approximately 102 million shares from BHI for cash totaling $294,918.



Immediately following the acquisition of BHI, BHI Investment, LLC reorganized the existing corporate structure of the Company so that the
Company became directly owned by BHI Acquisition Corporation (BHI Acquisition), a subsidiary of BHI Investment, LLC. Following the acquisition of BHI by Apollo, the Company reorganized its foreign subsidiaries.



The acquisition of BHI, and the payment of transaction fees and expenses, was financed with
the net proceeds of a $475 million second-priority senior secured private debt offering (the Second Priority Notes) by two newly formed, wholly owned subsidiaries of the Company and certain equity contributions to BHI Acquisition from
Apollo. With a portion of the proceeds, the Company redeemed its 9.25% debentures on August 12, 2004 for total cash of $49,249. Included in the total cash paid was $47,295 for the principal of the debentures, $1,069 of accrued interest and an early
redemption premium of $885. See Note 9.



Collectively, the transactions
described above are referred to as the Apollo Transaction.



The
Second Priority Notes are guaranteed by the Company and certain of its domestic subsidiaries (the Guarantors). The Second Priority Notes and the related guarantees are senior obligations secured by a second-priority lien (subject to
certain exceptions and permitted liens) on certain of the Guarantors existing and future domestic assets, including the stock of the Companys Canadian subsidiary (BCCI). Because BCCI meets the definition of a significant
subsidiary under Rule 3-16 of Regulation S-X under the Securities Act of 1933, the audited financial statements of BCCI are included in this report.



As a result of the suspended IPO and the subsequent acquisition by Apollo, the Company incurred expenses of $55,586. These amounts included charges for investment
banking, accounting and legal fees, fees paid to Apollo, payments for cancellation of restricted stock, exercises of stock options and management bonuses pertaining to the activity. These amounts are included within Transaction related costs.



Prior to the Apollo Transaction, the Company was controlled by an
affiliate of Kohlberg Kravis Roberts & Co. (KKR) since 1995. The Companys immediate parent, BHI, was a wholly owned subsidiary of BW Holdings, LLC (BWHLLC), an entity controlled by KKR.



42



---

##### Table of Contents

2. Summary of Significant Accounting Policies



Significant accounting policies followed by the Company, as summarized below, are in conformity with generally accepted accounting
principles.



Principles of Consolidation The Consolidated
Financial Statements include the accounts of the Company and its subsidiaries, after elimination of intercompany accounts and transactions. The Companys share of the net earnings of 20% to 50% owned companies is included in income on an equity
basis.



Use of Estimates 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, as well as the reported amounts of revenues and expenses during the reporting period. The most significant estimates reflected in the financial statements include environmental remediation, legal liabilities, deferred
tax assets and liabilities and related valuation allowances, income tax accruals, pension and postretirement assets and liabilities, valuation allowances for accounts receivable and inventories, general insurance liabilities, asset impairments and
related party transactions. Actual results could differ from estimated amounts.



Cash and Equivalents The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. At December 31, 2004, the Company had interest bearing time deposits
and other cash equivalent investments of $71,975 included on the Consolidated Balance Sheet as Cash and equivalents. At December 31, 2003, the Company had no material investments in cash equivalent instruments.



Inventories Inventories are stated at lower of cost or market. Cost is
determined using the first-in, first-out method.



Property and Equipment
Land, buildings and machinery and equipment are carried at cost and include capitalized interest of $435 in 2004. Depreciation is recorded on the straight-line basis by charges to expense at rates based on estimated useful lives of
properties (average rates for buildings 4%; machinery and equipment 7%). Major renewals and betterments are capitalized. Maintenance, repairs and minor renewals are expensed as incurred.



Deferred Expenses - Deferred financing costs are classified as Other assets on the balance sheets and are amortized over the
lives of the related debt or credit facility using the straight-line method since no installment payments are required. Upon retirement of any of the related debt, a proportional share of debt issuance costs is expensed. At December 31, 2004 and
2003, the unamortized balance was $30,302 and $9,946, respectively.



Goodwill and Intangibles The excess of purchase price over net tangible and identifiable intangible assets of businesses acquired is carried as Goodwill on the Consolidated Balance Sheet. As of January 1, 2002, the Company no
longer amortizes goodwill. Certain trademarks, patents and other intangible assets used in the operations of the business are carried as Other Intangible Assets on the Consolidated Balance Sheet. These intangible assets are amortized on a
straight-line basis over the shorter of the legal or useful lives which range from 5 to 10 years. See Note 7.



Impairment As events warrant, but at least annually, the Company evaluates the recoverability of long-lived assets by assessing whether the carrying value can be recovered over their remaining useful
lives through the expected future undiscounted operating cash flows of the underlying business. Any impairment loss required is determined by comparing the carrying value of the assets to operating cash flows on a discounted basis.



The Company performs an annual impairment test for goodwill. See Note 7.



General Insurance The Company is generally self-insured for losses and
liabilities relating to workers compensation, health and welfare claims, physical damage to property, business interruption and comprehensive general, product and vehicle liability. The Company maintains insurance policies for certain items
exceeding deductible limits. Losses are accrued for the estimated aggregate liability for claims using certain actuarial assumptions followed in the insurance industry and the Companys experience.



Legal Costs The Company accrues for legal costs in the period in which a claim
is made or an event becomes known, if the amounts are probable and reasonably estimable. Each claim is assigned a range of potential liability, with the most likely amount being accrued. The amount accrued includes all costs associated with a claim,
including settlements, assessments, judgments, fines and legal fees.



43



---

##### Table of Contents

Revenue Recognition Revenue for product sales, net of allowances, is recognized as risk and title to the
product transfer to the customer, which usually occurs at the time shipment is made. Substantially all of the Companys products are sold FOB (free on board) shipping point. Other terms include sales where risk and title passes upon
delivery (FOB destination point). In situations where our product is delivered by pipeline, risk and title transfers when our product moves across an agreed transfer point, which is typically the customers property line. Product sales
delivered by pipeline are measured based on daily flow meter readings. The Companys standard terms of delivery are included in its contracts of sales and invoices.



Shipping and Handling  The Company records freight billed to customers in net sales. Shipping costs are incurred to move the
Companys products from production and storage facilities to the customers. Handling costs are incurred from the point the product is removed from inventory until it is provided to the shipper and generally include costs to store, move and
prepare the products for shipment. The Company incurred shipping costs of $75,246 in 2004, $66,383 in 2003 and $61,927 in 2002. These costs are classified as Distribution expense in the Consolidated Statements of Operations. Due to the nature of the
Companys business, handling costs incurred prior to shipment are not significant.



Research and Development Costs Funds are committed to research and development for technical improvement of products that are expected to contribute to operating profits in future years. All costs associated with research and
development are charged to expense as incurred. Research and development and technical service expenditures were $19,744, $17,998 and $19,879 for 2004, 2003 and 2002, respectively.



Foreign Currency Translations Assets and liabilities of foreign affiliates are translated at the exchange rates in effect at
the balance sheet date, and income and expenses are translated at average exchange rates prevailing during the year. The effect of translation is accounted for as an adjustment to Shareholders Deficit and is included in Accumulated other
comprehensive loss.



In addition, the Company incurred realized and unrealized
net foreign transaction (losses) gains aggregating $(848) in 2004, $438 in 2003, and $1,307 in 2002.



Income Taxes - The Company files a consolidated U.S. Federal Income Tax return. Income tax expense is based on reported results of operations before income taxes. Deferred income taxes represent the tax
effect of temporary differences between amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for tax purposes. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws,
that will be in effect in the years in which temporary differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. See Note 17.



Derivative Financial
Instruments The Company is party to forward exchange contracts and options and natural gas futures to reduce its cash flow exposure to changes in foreign exchange rates and natural gas prices. The Company does not hold or issue derivative
financial instruments for trading purposes. These instruments are not accounted for using hedge accounting, but are measured at fair value and recorded on the balance sheet as an asset or liability, depending upon the Companys underlying
rights or obligations. See Note 8.



Stock-Based Compensation The
Company accounts for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB No. 25) and has adopted the disclosure-only provisions of Statement of Financial
Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123. During 2004, BHI
Acquisition granted options to purchase BHI Acquisition common stock to key employees of the Company under the BHI Acquisition Corp. 2004 Stock Incentive Plan (the BHI Option Plan). Prior to the Apollo Transaction, the Company had
granted options under its Amended and Restated 1996 Stock Purchase and Option Plan for Key Employees (the BCI Option Plan). Together these plans are referred to as the Option Plans.



44



---

##### Table of Contents

The following table sets forth the required annual reconciliation of reported and proforma net (loss) income and earnings
per share (EPS) under SFAS No. 148:



|                                                                                                                                                                          |  |      |          |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                                                                                                          |  | 2004 |          |   | 2003 |   |         | 2002 | 
|Net (loss) income applicable to common stock                                                                                                                              |  | $    | (179,668 | ) |      | $ | 22,976  |      |  | $ | (36,583 | )
|                                                                                                                                                                          |  |      |          |   |      |   |         |      |  |   |         |  
|Add: Stock-based employee compensation expense included in reported net income, net of related tax benefit                                                                |  |      | 8,521    |   |      |   | 909     |      |  |   | 581     |  
|                                                                                                                                                                          |  |      |         
|Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards granted since January 1, 1996,
net of related tax effects |  |      | (6,198   | ) |      |   | (973    | )    |  |   | (665    | )
|                                                                                                                                                                          |  |      |          |   |      |   |         |      |  |   |         |  
|Pro-forma net (loss) income                                                                                                                                               |  | $    | (177,345 | ) |      | $ | 22,912  |      |  | $ | (36,667 | )
|                                                                                                                                                                          |  |      |          |   |      |   |         |      |  |   |         |  
|Average shares (in thousands) outstanding- basic                                                                                                                          |  |      | 159,923  |   |      |   | 199,310 |      |  |   | 199,319 |  
|Average share (in thousands) outstanding - diluted                                                                                                                        |  |      | 159,923  |   |      |   | 200,267 |      |  |   | 199,319 |  
|Per share as reported  basic                                                                                                                                             |  | $    | (1.12    | ) |      | $ | 0.11    |      |  | $ | (0.18   | )
|Per share as reported  diluted                                                                                                                                           |  | $    | (1.12    | ) |      | $ | 0.11    |      |  | $ | (0.18   | )
|Per share pro forma (basic and diluted)                                                                                                                                   |  | $    | (1.11    | ) |      | $ | 0.11    |      |  | $ | (0.18   | )



To determine proforma compensation
cost for the Option Plans in accordance with SFAS No. 123, the fair value of each option grant was estimated at the date of grant using the minimum value method and the Black-Scholes options pricing model with a risk-free weighted average interest
rate of 3.54%, 2.91% and 5.0% for grants made in 2004, 2003 and 2002, respectively, an expected life of five years and a dividend rate of zero. The weighted average fair values, as determined under these assumptions, of option grants at the dates of
grant were $0.47 for options grants to purchase shares of BHI Acquisition common stock granted at the date of the Apollo Transaction and $0.30 for options granted to purchase shares of the Company, which were granted in the first quarter of 2004.
The weighted average fair values of options granted to purchase the common stock of the Company during 2003 and 2002 were $0.27 and $0.49, respectively. Proforma compensation cost also includes expense related to the deferred compensation plans for
BCI and BHI Acquisition.



Earnings Per Share Basic and diluted
net (loss) income per share is computed by dividing net (loss) income by the weighted average number of common shares outstanding during the period including the effect of dilutive options, when applicable. The Company had no potentially dilutive
instruments outstanding at December 31, 2004. At December 31, 2003, 5,532,360 options to purchase common shares of the Company were outstanding, of which 1,492,000 were considered dilutive. In addition, there were 1,587,301 shares of restricted
stock outstanding, which were dilutive. At December 31, 2002, due to the Companys net loss, the potentially dilutive securities outstanding were anti-dilutive.



The Companys diluted EPS is calculated as follows:



|                                                    |  |      |          |   |      |   |         |  |   |         |  
|--------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- |  | - | ------- | -
|                                                    |  | 2004 |          |   | 2003 |   | 2002    | 
|Net (loss) income applicable to common shareholders |  | $    | (179,668 | ) |      | $ | 22,976  |  | $ | (36,583 | )
|                                                    |  |      |          |   |      |   |         |  |   |         |  
|Average share outstanding (in thousands)  basic    |  |      | 159,923  |   |      |   | 199,310 |  |   | 199,319 |  
|Effect of dilutive options (in thousands)           |  |      |         |   |      |   | 957     |  |   |        |  
|                                                    |  |      |          |   |      |   |         |  |   |         |  
|Average share outstanding (in thousands) - diluted  |  |      | 159,923  |   |      |   | 200,267 |  |   | 199,319 |  
|Diluted EPS                                         |  | $    | (1.12    | ) |      | $ | 0.11    |  | $ | (0.18   | )



Concentrations of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of temporary cash investments and accounts receivable. The Company places its temporary cash investments with high quality
institutions and, by policy, limits the amount of credit exposure to any one institution. At December 31, 2004, investments included $52,400 in a prime money market account and $18,319 in a guaranteed investment certificate. Remaining cash is
primarily held in nine financial institutions. Concentrations of credit risk with respect to accounts receivable are limited, due to the large number of customers comprising the Companys customer base and their dispersion across many different
industries and geographies. The Company generally does not require collateral or other security to support customer receivables.



Reclassification  In 2003, income taxes payable of $15,800, representing probable tax liabilities, was classified as Other long-term liabilities. This amount
was reclassified as Income taxes payable to conform to the current year presentation.



45



---

##### Table of Contents

Recently Issued Accounting Standards



In May 2004, the Financial Accounting Standards Board (FASB) issued Staff Position (FSP) 106-2, Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003. This Position provides guidance on the accounting, disclosure, effective date, and transition requirements related to the Medicare
Prescription Drug, Improvement and Modernization Act of 2003. FSP 106-2 is effective for interim or annual periods beginning after June 15, 2004. The adoption of this FSP had no material impact on the Companys financial position or results of
operations.



In November 2004, the FASB issued Statement of Financial
Accounting Standard (SFAS) No. 151, Inventory Costs. The statement amends Accounting Research Bulletin (ARB) No. 43, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material. ARB No. 43 previously stated that these costs must be so abnormal as to require treatment as current-period charges. SFAS No. 151 requires that those items be recognized as
current-period charges regardless of whether they meet the criterion of so abnormal. In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the
production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for fiscal years beginning after the issue date of the statement. The adoption of
SFAS No. 151 is not expected to have a material impact on the Companys current financial condition or results of operations.



In December 2004, the FASB revised its SFAS No. 123 (SFAS No. 123R), Accounting for Stock Based Compensation. The revision establishes standards
for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires
an entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which the employee is required to
provide service in exchange for the award. Changes in fair value during the requisite service period are to be recognized as compensation cost over that period. In addition, the revised statement amends SFAS No. 95, Statement of Cash
Flows, to require that excess tax benefits be reported as a financing cash flow rather than as a reduction of taxes paid. The provisions of the revised statement are effective for financial statements of the Companies issued for the first
annual reporting period beginning after December 15, 2005, with early adoption encouraged. The Company is evaluating the impact that this statement will have on its financial condition and results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets 
An Amendment of APB Opinion No. 29. APB Opinion No. 29, Accounting For Nonmonetary Transactions, is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS
No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets whose results are not expected to significantly change the
future cash flows of the entity. The statement is effective for nonmonetary asset exchanges beginning December 4, 2005 and is not expected to have any impact on the Companys current financial condition or results of operations.



In December 2004, the FASB issued two FSPs that provide accounting guidance on how companies
should account for the effects of the American Jobs Creation Act of 2004 that was signed into law on October 22, 2004. FSP 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on
Qualified Production Activities Provided by the American Jobs Creation Act of 2004, states that the manufacturers deduction provided for under this legislation should be accounted for as a special deduction instead of a tax rate change.
FSP FAS 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004, allows a company additional time to evaluate the effects of the legislation on any plan for
reinvestment or repatriation of foreign earnings for purposes of applying Statement of Financial Accounting Standards No. 109, Accounting for Income Taxes. The Company does not anticipate a material impact from these FSPs on its
financial condition or results of operations.



3. Business Acquisitions and
Divestitures



Pending Acquisition



On October 6, 2004, the Company entered into a share purchase agreement with RÜTGERS AG
and RÜTGERS Bakelite Projekt GmbH (collectively, the Sellers). Pursuant to the terms of the share purchase agreement, the Company agreed to purchase from the Sellers all outstanding shares of capital stock of Bakelite
Aktiengesellschaft (Bakelite) for a net purchase price ranging from approximately 175 million to 200 million, subject to certain adjustments. Based in Iserlohn-Letmathe, Germany, Bakelite is a leading source of phenolic and
epoxy thermosetting resins and molding compounds with 13 manufacturing facilities and 1,700 employees in Europe and Asia.



46



---

##### Table of Contents

The share purchase agreement contains customary representations, warranties and covenants, including non-compete,
non-solicitation and confidentiality agreements by the Sellers. The Sellers have also agreed, subject to various provisions set forth in the share purchase agreement, to indemnify the Company for breaches of the representations and warranties
contained in the share purchase agreement and in connection with various tax, environmental, certain pension and other matters. Until the closing date, the Sellers have agreed to operate the business of Bakelite in the ordinary course. Completion of
the share purchase is subject to regulatory and other customary closing conditions including European Commission merger clearance. The Company and Bakelite will continue to operate independently until those conditions are satisfied and the closing
occurs. The Company intends to finance this transaction through a combination of available cash and debt financing. There is no material relationship between the Company or its affiliates and any of the Sellers other than in respect of the share
purchase agreement.



Acquisitions



The Company accounts for acquisitions using the purchase method of accounting. Accordingly,
results of operations of the acquired entities have been included from the date of acquisition, and any excess of purchase price over the sum of amounts assigned to identified assets and liabilities has been recorded as goodwill. The proforma
effects of the acquisitions are not material.



During 2003, the Company
acquired Fentak Pty. Ltd. (Fentak), an international manufacturer of specialty chemical products for engineered wood, laminating and paper impregnation markets, and the business and technology assets of Southeastern Adhesives Company
(SEACO), a domestic producer of specialty adhesives, for total cash of $14,691. Fentak was acquired in November 2003 and SEACO was acquired on December 31, 2003. As of December 31, 2004, the Company is required to make additional
deferred payments for these acquisitions of $3,009 and contingent future payments of $1,500.



At the time of the Fentak and SEACO acquisitions in 2003, the Company recorded goodwill totaling $18,455. In 2004, purchase accounting adjustments in the amount of $7,314 were made to allocate amounts originally
recorded as goodwill to other intangible assets. Separately identifiable intangible assets included customer lists, proprietary technology and trade names.



Divestitures



In 2001, the Company merged its North American foundry resins and coatings businesses with similar businesses of Delta-HA, Inc. (Delta) to form HA-International, LLC (HAI), in which the Company
had a 75% interest at that time. The Limited Liability Agreement of HAI provides Delta the right to purchase between 3-5% of additional interest in HAI each year, beginning in 2004. Delta is limited to acquiring a maximum of 25% of additional
interest in HAI under this arrangement. Pursuant to this provision, in the first quarter of 2004, Delta provided the Company with written notice of its intention to exercise its option to purchase an additional 5% interest in 2004, and the purchase
was completed in the third quarter of 2004. Deltas purchase price of the interest is based on the enterprise value of HAI determined by applying a contractually agreed upon multiple to EBITDA, as defined in the agreement. The Company received
cash proceeds of $2,124, as determined by the agreement, and recorded a gain of $1,010 related to the sale, which is included in Other operating expense in the 2004 Consolidated Statement of Operations. In the first quarter of 2005, Delta provided
the Company with written notice of its intention to purchase an additional 5% interest in 2005.



In 2003, the Company sold its idled melamine crystal business (Melamine). The gain from the sale was recorded as business realignment income. See Note 4.



4. Business Realignment and Asset Impairments



In June 2003, the Company initiated a realignment program (the 2003 realignment
program) designed to reduce operating expenses and increase organizational efficiency. The components of this program include reducing headcount, streamlining processes, consolidating manufacturing facilities and reducing general and
administrative expenses. We expect to complete this program in 2005 and will incur additional expenses through its completion. In addition, we have certain additional long-term realignment programs initiated prior to 2003 (the prior
years programs), which primarily relate to the consolidation of plant facilities.



Year ended December 31, 2004



During 2004, the Company recorded Business realignment expense and impairments of $4,427. This amount includes plant closure costs (which include plant employee severance and plant asset impairments) of $3,468, offset by gains of $1,442
from the sale of three former U.S. plant sites. The expense also includes other severance and employee costs of $377 and asset impairment charges of $2,024.



47



---

##### Table of Contents

Plant Closure Costs



Plant closure costs in 2004 of $3,468 primarily represent additional costs pertaining to the conversion of the French manufacturing facility into a distribution center
and the transition of related production to the U.K. ($1,296), environmental remediation for previously closed sites in Brazil ($1,399) and Europe ($812), offset by income related to other plant closure adjustments at various sites ($39).



Other Severance Costs



Business realignment expense includes additional net severance costs incurred during 2004
totaling $377 related to the 2003 realignment program.



Gain on the Sale of
Assets



During 2004, the Company sold two U.S. plants closed under a prior
year realignment program for a gain of $1,214 and a U.S. plant closed under the 2003 realignment program for a gain of $228. These gains are recorded in Business realignment expense.



Asset Impairment



The asset impairment charges of $2,024 primarily relate to production assets that were written-down due to changes in the Companys manufacturing footprint. The
impairment charges represent the excess of the carrying value of the assets over the expected proceeds from their sale.



Provided below is a roll forward of the business realignment reserves for 2004.



|                         |  |                  |        |              |   |             |  |   |                  |   |  |   |      
|------------------------ |  | ---------------- | ------ | ------------ | - | ----------- |  | - | ---------------- | - |  | - | -----
|                         |  | December 31,2003 |        | 2004Expenses |   | 2004Charges |  |   | December 31,2004
|Plant closure costs      |  |                  |        |              |   |             |  |   |                  |   |  |   |      
|2003 realignment program |  | $                | 3,488  |              | $ | 2,241       |  | $ | (5,491           | ) |  | $ | 238  
|Prior years programs    |  |                  | 4,741  |              |   | 1,227       |  |   | (2,312           | ) |  |   | 3,656
|                         |  |                  |        |             
|Other severance costs    |  |                  |        |              |   |             |  |   |                  |   |  |   |      
|2003 realignment program |  |                  | 2,784  |              |   | 377         |  |   | (2,515           | ) |  |   | 646  
|Prior years programs    |  |                  | 1,151  |              |   |            |  |   | (1,151           | ) |  |   |     
|                         |  |                  |        |              |   |             |  |   |                  |   |  |   |      
|                         |  | $                | 12,164 |              | $ | 3,845       |  | $ | (11,469          | ) |  | $ | 4,540



Year Ended December 31, 2003



During 2003, the Company recorded net business realignment expense and
impairments of $4,748, consisting of plant closure costs (which include plant employee severance and plant asset impairments) and other severance and employee costs of $13,825, gains on the sale of assets of $12,260 and other non-cash asset
impairment charges of $3,183.



Plant Closure Costs



Plant closure costs in 2003 include $144 for prior years programs and $6,844 for the
2003 realignment program.



Costs relating to prior years programs include
environmental remediation of approximately $800 for closed plants in Brazil and other plant closure costs of approximately $900. Partially offsetting these costs was a reduction of reserves of approximately $1,600 for Melamine, which was sold in the
second quarter of 2003.



The $6,844 of charges relating to the 2003 realignment
program included costs associated with two plant consolidation programs. As a result of consolidating manufacturing processes, the Companys facility in France has been converted into a distribution center, and the manufacturing has
transitioned to the U.K., resulting in plant closure costs of $5,414, including plant employee severance of approximately $3,600, asset impairment charges of $1,427 and other costs of approximately $400. Additionally, manufacturing was transitioned
from the Companys North Bay, Ontario plant to another facility. The North Bay site was idled as of the end of 2003, resulting in asset impairment charges of $1,430. The impairment charges represent the excess of the carrying value of the
assets over the undiscounted cash flows expected to result from the eventual conversion of the France site and disposition of the North Bay site.



48



---

##### Table of Contents

Other Severance Costs



Other severance costs for 2003 include $3,167 relating to the 2003 realignment program and $3,670 relating to prior years programs. The 2003 severance is related to
the elimination of 200 positions under the 2003 realignment program, as discussed above.



Gain on the Sale of Assets



In 2003,
the Company sold Melamine and land associated with a closed plant in the U.K. for gains of $12,260. The gains related to these sales were recorded as business realignment income because the facilities were closed in conjunction with prior
years programs.



Asset Impairment



The Company recorded other asset impairment charges of $3,183 in 2003. Of the total, $1,421
was for the write-down of assets at various international manufacturing facilities and $1,000 was for a facility held for sale. The impairment charges represent the excess of the carrying value of the assets over the expected proceeds from their
sale. The remaining $762 related to the write-down of goodwill carried by the Companys Malaysian operations. See Note 7.



Provided below is a rollforward of the business realignment reserves for 2003:



|                         |  |                  |        |              |   |                           |  |   |                   |   |  |   |       
|------------------------ |  | ---------------- | ------ | ------------ | - | ------------------------- |  | - | ----------------- | - |  | - | ------
|                         |  | Reserves12/31/02 |        | 2003 Expense |   | 2003Settlements/ Payments |  |   | Reserves 12/31/03
|Plant closure costs      |  |                  |        |              |   |                           |  |   |                   |   |  |   |       
|2003 realignment program |  | $                |       |              | $ | 6,844                     |  | $ | (3,356            | ) |  | $ | 3,488 
|Prior years programs    |  |                  | 9,568  |              |   | 144                       |  |   | (4,971            | ) |  |   | 4,741 
|Other severance costs    |  |                  |        |              |   |                           |  |   |                   |   |  |   |       
|2003 realignment program |  |                  |       |              |   | 3,167                     |  |   | (383              | ) |  |   | 2,784 
|Prior years programs    |  |                  | 3,996  |              |   | 3,670                     |  |   | (6,515            | ) |  |   | 1,151 
|                         |  |                  |        |              |   |                           |  |   |                   |   |  |   |       
|Total reserve activity   |  | $                | 13,564 |              | $ | 13,825                    |  | $ | (15,225           | ) |  | $ | 12,164
|                         |  |                  |        |              |   |                           |  |   |                   |   |  |   |       



Year Ended December 31, 2002



During 2002, the Company recorded net business realignment expense and
impairments of $19,699, consisting of plant closure costs of $12,584, other severance and employee costs of $3,265, a gain on the sale of assets of $2,465 and non-cash impairment charges of $6,315.



Plant Closure and Other Severance Costs



Plant closure costs in 2002 of $12,584 consist of plant employee severance of $2,721,
demolition, environmental and other costs of $8,764 and a $1,099 increase to the reserve related to revised estimates of environmental clean-up and demolition for several locations closed in previous years.



Gain on the Sale of Assets



In 2002, the Company sold land associated with a closed plant in Spain and recorded a gain
of $2,465. The gain related to this sale was recorded as business realignment income because the facility was closed in conjunction with prior years realignment programs.



Asset Impairment



The Company recorded asset impairment charges of $6,315 in 2002. Of the total, $5,275 related to the write-down of fixed assets at various international manufacturing
facilities and $1,040 was for a facility held for sale. The impairment charges represent the excess of the carrying value of the assets over the expected proceeds from their sale.



49



---

##### Table of Contents

Provided below is a roll forward of the business realignment reserve activity for 2002:



|                       |  |                   |        |             |   |                           |  |   |                   |   |  |   |       
|---------------------- |  | ----------------- | ------ | ----------- | - | ------------------------- |  | - | ----------------- | - |  | - | ------
|                       |  | Reserves 12/31/01 |        | 2002Expense |   | 2002Settlements/ Payments |  |   | Reserves 12/31/02
|Plant closure costs    |  | $                 | 14,067 |             | $ | 12,584                    |  | $ | (17,083           | ) |  | $ | 9,568 
|Other severance costs  |  |                   | 8,360  |             |   | 3,265                     |  |   | (7,629            | ) |  |   | 3,996 
|                       |  |                   |        |             |   |                           |  |   |                   |   |  |   |       
|Total reserve activity |  | $                 | 22,427 |             | $ | 15,849                    |  | $ | (24,712           | ) |  | $ | 13,564
|                       |  |                   |        |             |   |                           |  |   |                   |   |  |   |       



5. Investments



In 2004, the Company formed two separate joint venture companies to produce formaldehyde,
resins and UV-curable coatings and adhesives in China. The Company has a 50% ownership interest in each of the joint ventures. The joint ventures are accounted for using the equity method of accounting for investments.



Asia Dekor Borden (Heyuan) Chemical Company Limited (Asia Dekor Borden) was
formed as an alliance between a subsidiary of the Company and a subsidiary of Asia Dekor Holdings Limited. Each party contributed $700 to the joint venture, and each party holds two of the four seats on the Board of Directors. In August 2004, Asia
Dekor Borden opened a new formaldehyde and resin plant in Heyuan, China with the capacity to deliver 60,000 metric tons of advanced resins used in the production of high and medium density fiberboard and particleboard.



The second joint venture, Borden UV Coatings (Shanghai) Company, Limited (Borden
Shanghai), is a collaborative effort between a subsidiary of the Company and UVITech, a Chinese producer of UV-curable coatings. Borden Shanghai manufactures UV-curable coatings and adhesives for fiber optics, digital media and other
applications. Each party contributed $250 and their respective business in the Chinese market to the newly formed entity. The joint venture has a Board of Directors with five seats, of which the Company holds three; however, a super majority (four
of five board members) is needed for adoption of the annual business plan and other key decisions. The Company has the option to purchase an additional 25% interest in the joint venture from UVITech anytime between 2009 and 2019 at a share price to
be calculated on the basis of a multiple of earnings less debt.



The Company
had no investments at December 31, 2003.



6. Related Party Transactions



Financing and Investing Arrangements



The Company had a borrowing arrangement with BWHLLC, evidenced by a demand promissory note
bearing interest at a variable rate, which was terminated upon completion of the Apollo Transaction. Interest expense totaled $138 for the year ended December 31, 2004.



In 2003, the Company and HAI had separate borrowing arrangements with Borden Foods Holdings Corporation (Foods), a former
affiliate, evidenced by demand promissory notes bearing interest at variable rates. The loans were reported as Loans payable to affiliates on the Consolidated Balance Sheet and totaled $18,260 at December 31, 2003. Of the total loans outstanding,
the Company owed $12,260 and HAI owed $6,000 at December 31, 2003. Interest rates on these loans ranged from 1.0% to 4.75%. In early 2004, the Company entered into the arrangement with BWHLLC and canceled its arrangement with Foods. In early 2004,
HAI obtained a $20,000 credit facility with an external bank and terminated its affiliated borrowing arrangement with Foods. Interest expense, related to the Foods loans, totaled $558 and $1,857 for the years ended December 31, 2003 and 2002,
respectively.



The Company holds a $404,817 note receivable ($560,672 including
accrued interest at December 31, 2004) from its parent, which is accounted for as a reduction of equity. The Company accrues interest quarterly on the note receivable in Paid-in capital. Historically, the interest due on the note was funded through
common dividends received from the Company. However, quarterly interest has not been paid, nor an associated dividend declared, since October 15, 2001. See Note 15.



The Company had a note payable to BCP Management, Inc. (BCPM), a former subsidiary, for $34,181 that was settled in the first
quarter of 2002. The Company accrued $151 of interest expense for the years ended December 31, 2002, related to this note. The Company settled in full this note payable by making cash payments of $31,581 and $2,600 of certain set-offs asserted by
the Company against amounts due under this note.



50



---

##### Table of Contents

At December 31, 2001, the Company had a $110,000 preferred stock investment in Consumer Adhesives, a former affiliate.
The preferred stock was redeemed in 2002 for a $110,000 note receivable from Consumer Adhesives which was subsequently sold to BHI for cash proceeds of $110,000 plus accrued interest of $455. In 2003, the Company recognized an income tax charge of
$5,925 related to the sale of the note receivable to BHI. Consistent with the gain on the Consumer Adhesives Sale, this income tax charge was recorded in Paid-in capital due to the affiliated nature of the transaction.



Administrative Service, Management and Consulting Arrangements



In connection with the Apollo Transaction, the Company entered into a transaction fee
agreement with Apollo and its affiliates for the provision of certain structuring and advisory services. The agreement allows Apollo and its affiliates to provide certain advisory services to the Company for a seven-year period, with an automatic
extension of the term for a one-year period beginning on the fourth anniversary of the commencement of the agreement and at the end of each year thereafter, unless notice to the contrary is given by either party. The agreement, as later
supplemented, provides for an annual fee of $2,500 for each annual period after January 1, 2005. Upon closing the Apollo Transaction, the Company paid $10,000 of aggregate transaction and advisory fees, under this agreement, and reimbursed expenses
of $750. In the fourth quarter of 2004, the Company paid $975 of additional fees pursuant to the agreement. Under the agreement, the Company has also agreed to indemnify Apollo and its affiliates and their directors, officers and representatives for
potential losses relating to the services contemplated under this agreement.



Prior to the Apollo Transaction, KKR provided certain management, consulting and board services to the Company for an annual fixed fee. In 2003 and through April 2004, the fixed fee was $3,000 annually. Beginning in May 2004, the fee was
reduced to $1,000 annually. For the year ended December 31, 2004, the Company recorded expense of $1,284 for amounts due to KKR under this arrangement. For the year ended December 31, 2003, the management fee, recorded in Other operating expense,
was $3,000.



During 2002, Borden Capital, Inc., a former affiliate, provided
management, consulting and board services to the Company, and the Company provided certain administrative services to Capital. Capital charged the Company an annual fee of $9,000, payable quarterly in arrears, which represented the net amount of
Capitals services less the Companys fee for providing administrative services to Capital. During 2002, BHI made a decision to cease the operations of Capital by the end of the first quarter of 2003. This decision resulted in the
immediate recognition by Capital of incremental expenses and liabilities related primarily to severance and rent obligations. These incremental expenses were the legal obligation of Capital and have been funded by Capital. The Companys share
of Capitals incremental costs was $5,500 and was recognized by the Company as an additional management fee in 2002. Since the Company was not responsible for settling these liabilities, the offset to the charge was recorded as a capital
contribution of $3,550 (the liability net of tax) to the Company from BHI.



Prior to the Apollo Transaction, the Company provided certain administrative services to BWHLLC and other affiliates under a service agreement. Fees charged under this agreement were based on the projected cost to the Company to provide
these services, primarily based on employee costs. For the years ended December 31, 2004 and 2003, the Company charged these affiliates $294 and $540 for these services, respectively.



Other Transactions and Arrangements



The Company sells finished goods to certain Apollo affiliates. These sales totaled $3,413 from the date of the Apollo Transaction through December 31, 2004. Accounts
receivable from these affiliates totaled $2,345 at December 31, 2004.



In
addition, upon closing the Apollo Transaction, the Company paid transaction-related costs of $8,721 on behalf of BHI Investment LLC, $21,851 on behalf of BWHLLC and shared compensation costs of $14,264. These amounts are included within Transaction
related costs.



Prior to the Apollo transaction, the Company utilized
Willis Group Holdings, Ltd. (Willis), an entity controlled by KKR, as its insurance broker. Through the date of the Apollo Transaction, the Company had paid $598 to Willis for their services. For the years ended December 31, 2003 and
2002, the Company paid Willis $429 and $241, respectively, for their services.



7. Goodwill and Intangible Assets



At December 31, 2004, the
Companys management performed the annual goodwill impairment test. As required by SFAS No. 142, Goodwill and Other Intangible Assets, the Company identified the appropriate reporting units and identified the assets and liabilities
(including goodwill) of the reporting units. The Company determined estimated fair values of the reporting units and assessed whether the estimated fair value of each reporting unit was more or less than the carrying amount of the assets and
liabilities assigned to the units.



51



---

##### Table of Contents

Valuations were performed using a standard methodology based upon a combination of comparable company analysis and the
purchase multiple of the Apollo Transaction. Comparable company analysis ascribes a value to an entity by comparing certain operating metrics of the entity to those of a set of comparable companies in the same industry. Using this method, market
multiples and ratios based on operating, financial and stock market performance are compared across different companies and to the entity being valued. The Company employed a comparable analysis technique commonly used in the investment banking and
private equity industries to estimate the values of its reporting units - the EBITDA (earnings before interest, taxes, depreciation and amortization) multiple technique. Under this technique, estimated values are the result of an EBITDA multiple
derived from this process applied to an appropriate historical EBITDA amount. At December 31, 2004, the fair value of each reporting unit exceeded the carrying amount of assets and liabilities assigned to the units.



At December 31, 2003 and 2002, the Companys management performed the goodwill
impairment test using the same methodology described above. As a result of this test at December 31, 2003, the fair value of each reporting unit exceeded the carrying amount of assets and liabilities, except for the Companys Malaysian
reporting unit. Based on the excess of the carrying value over the estimated fair value of its Malaysian reporting unit, the Company recorded a goodwill impairment charge of $762 due to a decline in operating performance that represented 100% of the
units recorded goodwill balance. This impairment charge is reflected in the 2003 Consolidated Statement of Operations as Business realignment expense and impairments.



At December 31, 2002, no impairment charge was necessary, as the fair values of all reporting units exceeded the carrying amount of the
assets and liabilities assigned to the units.



Upon the adoption of SFAS No.
142, on January 1, 2002, fair values of the Companys reporting units as of December 31, 2001 were determined by employing a methodology similar to that described above. As a result of the initial test, the fair value of each reporting unit
exceeded the carrying amount of assets and liabilities assigned, except for the Companys European reporting unit. Based on the excess of the carrying value over the estimated fair value of its European reporting unit, the Company recorded a
goodwill impairment charge of $29,825 that represented 100% of the December 31, 2001 carrying amount. This impairment charge is reported as Cumulative effect of change in accounting principle in the 2002 Consolidated Statement of Operations.



The changes in the carrying amount of goodwill for the years ended December
31, 2004 and 2003 are as follows:



|                                      |  |                |        |   |                   |   |        |               |  |   |        |   |  |   |        |  
|------------------------------------- |  | -------------- | ------ | - | ----------------- | - | ------ | ------------- |  | - | ------ | - |  | - | ------ | -
|                                      |  | ForestProducts |        |   | PerformanceResins |   |        | International |  |   | Total  |  
|Goodwill balance at December 31, 2002 |  | $              | 20,719 |   |                   | $ | 18,144 |               |  | $ | 777    |   |  | $ | 39,640 |  
|Acquisitions                          |  |                | 4,068  |   |                   |   |       |               |  |   | 14,387 |   |  |   | 18,455 |  
|Impairment                            |  |                |       |   |                   |   |       |               |  |   | (762   | ) |  |   | (762   | )
|Foreign currency translation          |  |                | 167    |   |                   |   |       |               |  |   | 16     |   |  |   | 183    |  
|                                      |  |                |        |   |                   |   |        |               |  |   |        |   |  |   |        |  
|Goodwill balance at December 31, 2003 |  | $              | 24,954 |   |                   | $ | 18,144 |               |  | $ | 14,418 |   |  | $ | 57,516 |  
|Divestitures                          |  |                |       |   |                   |   | (131   | )             |  |   |       |   |  |   | (131   | )
|Purchase accounting adjustments       |  |                | (1,839 | ) |                   |   |       |               |  |   | (5,475 | ) |  |   | (7,314 | )
|Foreign currency translation          |  |                | 66     |   |                   |   |       |               |  |   | 545    |   |  |   | 611    |  
|                                      |  |                |        |   |                   |   |        |               |  |   |        |   |  |   |        |  
|Goodwill balance at December 31, 2004 |  | $              | 23,181 |   |                   | $ | 18,013 |               |  | $ | 9,488  |   |  | $ | 50,682 |  
|                                      |  |                |        |   |                   |   |        |               |  |   |        |   |  |   |        |  



The $131 goodwill divestiture in 2004
pertains to the sale of a 5% ownership interest in HAI (see Note 3). The $7,314 of purchase accounting adjustments in 2004 reflects the allocation of the Fentak and SEACO purchase price to separately identifiable intangible assets (see Note 3).



52



---

##### Table of Contents

Intangible assets consist of the following:



|                                                |  |                      |        |                         |   |                     |  |                         |        |  |   |       
|----------------------------------------------- |  | -------------------- | ------ | ----------------------- | - | ------------------- |  | ----------------------- | ------ |  | - | ------
|                                                |  | At December 31, 2004 |        | At December 31, 2003   
|                                                |  | GrossCarryingAmount  |        | AccumulatedAmortization |   | GrossCarryingAmount |  | AccumulatedAmortization
|Intangible assets:                              |  |                      |        |                         |   |                     |  |                         |        |  |   |       
|Customer list and contracts                     |  | $                    | 11,950 |                         | $ | 6,181               |  | $                       | 7,559  |  | $ | 4,619 
|Formulas and technology                         |  |                      | 8,678  |                         |   | 5,833               |  |                         | 6,524  |  |   | 4,925 
|Unrecognized prior service cost on pension plan |  |                      | 919    |                         |   |                    |  |                         | 1,348  |  |   |      
|Other                                           |  |                      | 1,523  |                         |   | 705                 |  |                         | 744    |  |   | 680   
|                                                |  |                      |        |                         |   |                     |  |                         |        |  |   |       
|                                                |  | $                    | 23,070 |                         | $ | 12,719              |  | $                       | 16,175 |  | $ | 10,224
|                                                |  |                      |        |                         |   |                     |  |                         |        |  |   |       



The impact of foreign currency
translation adjustments is included in accumulated amortization.



Total
intangible amortization expense for the years ended December 31, 2004, 2003 and 2002 was $2,495, $1,508 and $1,555, respectively.



Estimated annual intangible amortization expense for 2005 through 2009 is as follows:



|     |  |   |      
|---- |  | - | -----
|2005 |  | $ | 2,490
|2006 |  |   | 1,370
|2007 |  |   | 1,065
|2008 |  |   | 1,004
|2009 |  |   | 803  



8. Financial Instruments



The following table presents the carrying or notional amounts and fair
values of the Companys financial instruments at December 31, 2004 and 2003. The fair value of a financial instrument is the estimated amount at which the instrument could be exchanged in a current transaction between willing parties, other
than in a forced or liquidation sale. Fair values are determined from quoted market prices where available or based on other similar financial instruments.



The carrying amounts of cash and equivalents, accounts receivable, accounts payable and other accruals are considered reasonable estimates of their fair values. The
carrying value of the loans payable to affiliates approximates fair values, as management believes the loans bear interest at market interest rates.



The following table includes the carrying and fair values of the Companys financial instruments.



|                           |  |                |         |                       |      |         |                |  |                       |         |  |   |         |  
|-------------------------- |  | -------------- | ------- | --------------------- | ---- | ------- | -------------- |  | --------------------- | ------- |  | - | ------- | -
|                           |  | 2004           |         |                       | 2003 |        
|                           |  | CarryingAmount |         | Fair Value            |      |         | CarryingAmount |  | Fair Value            |        
|Nonderivatives             |  |                |         |                       |      |         |                |  |                       |         |  |   |         |  
|Liabilities                |  |                |         |                       |      |         |                |  |                       |         |  |   |         |  
|Debt                       |  | $              | 967,404 |                       | $    | 964,912 |                |  | $                     | 538,133 |  | $ | 503,630 |  
|                           |  |                |         |                       |      |         |                |  |                       |         |  |   |         |  
|                           |  |                |         |                      
|                           |  | NotionalAmount |         | Fair ValueGain (Loss) |      |         | NotionalAmount |  | Fair Value(Loss) Gain |        
|Derivatives relating to:   |  |                |         |                       |      |         |                |  |                       |         |  |   |         |  
|Foreign currency contracts |  | $              | 41,577  |                       | $    | 521     |                |  | $                     | 44,300  |  | $ | (323    | )
|Deal contingent forward    |  |                | 235,025 |                       |      | 2,076   |                |  |                       |        |  |   |        |  
|Interest rate swaps        |  |                |        |                       |      |        |                |  |                       | 34,000  |  |   | (483    | )
|Put options purchased      |  |                | 36,000  |                       |      | 114     |                |  |                       | 12,000  |  |   | 18      |  
|Call options sold          |  |                | 36,000  |                       |      | (1,547  | )              |  |                       | 12,000  |  |   | (181    | )
|Natural gas futures        |  |                | 3,483   |                       |      | (275    | )              |  |                       | 1,359   |  |   | (20     | )



53



---

##### Table of Contents

At December 31, 2004, the Company had derivative losses of $1,822 classified as Other current liabilities and derivative
gains of $2,711 classified as Other assets. At December 31, 2003, the Company had derivative losses of $1,007 classified as Other current liabilities and derivative gains of $18 classified as Other assets.



Foreign Exchange



International operations account for a significant portion of the Companys revenue and operating income. It is the policy of the
Company to reduce foreign currency cash flow exposure due to exchange rate fluctuations by hedging anticipated and firmly committed transactions when economically feasible. The Company enters into forward and option contracts to buy and sell foreign
currencies to reduce foreign exchange exposure and protect the U.S. dollar value of such transactions to the extent of the amount under contract. These contracts are designed to minimize the impact from foreign currency exchange on operating income
and on certain balance sheet exposures.



Gains and losses arising from
contracts are recognized on a quarterly basis through the Consolidated Statement of Operations (see Note 2). The Company does not hold or issue derivative financial instruments for trading purposes.



At December 31, 2004 and 2003, the Company had $41,577 and $44,300, respectively, of notional
value of foreign currency exchange forward contracts outstanding. At December 31, 2004, the Company recorded a gain of $521 related to its foreign currency exchange forward contract outstanding. At December 31, 2003, the Company recorded a loss of
$323 related to its foreign currency exchange forward contract outstanding.



At
December 31, 2004, the Companys forward position of $41,577 was to sell British Pounds for Canadian Dollars at a rate of 2.3255. At December 31, 2003, the Companys forward position of $44,300 was to sell British Pounds for U.S. Dollars
at a rate of 1.7710. The unsecured contracts mature within 31 days and are placed with financial institutions with investment grade credit ratings. The Company is exposed to credit loss in the event of non-performance by the other parties to the
contracts. The Company evaluates the credit worthiness of the counterparties financial condition and does not expect default by the counterparties.



At December 31, 2004 and 2003, the Company had put options totaling $36,000 and $12,000, respectively, to buy U.S. Dollars with Canadian Dollars. The 2004 options have an
average maturity of 183 days and a contract rate of 1.3200. The 2003 options had average maturities of 47 days and a contract rate of 1.3600. At December 31, 2004 and 2003, the Company recorded gains of $114 and $18, respectively, related to these
options. During 2004, the Company also recorded gains of $69 related to put options that were exercised in 2004.



The Company also is a party to call options held by financial institutions totaling $36,000 and $12,000 at December 31, 2004 and 2003, respectively, to sell Canadian
Dollars for U.S. Dollars. The 2004 options have an average maturity of 183 days and a contract rate of 1.2300. The 2003 options had average maturities of 47 days and an average contract rate of 1.3068. At December 31, 2004 and 2003, the Company
recorded a loss of $1,547 and $181, respectively, related to these options.



Deal Contingent Forward



On December 14, 2004, the Company
entered into a foreign currency forward position of $235,025 to purchase Euros with U.S. Dollars at a rate of $1.3430. The contract is contingent upon the close of the Bakelite share purchase agreement (see Note 3) and has a target settlement date
of March 31, 2005 and provides for an extension and adjustments through July 6, 2005. The purpose of the hedge is to mitigate the risk of foreign currency exposure related to the pending transaction. At December 31, 2004, the Company recorded a gain
of $2,076 related to its deal contingent forward contract. This amount is included as Other non-operating income in the 2004 Consolidated Statement of Operations.



Option and Commodity Future Contracts



The Company is exposed to price fluctuations associated with raw materials purchases, most significantly with methanol, phenol and urea. For these commodity raw
materials, the Company has purchase contracts, with periodic price adjustment provisions. The Company also adds to customer contracts selling price provisions that are indexed to publicly available indices for these commodity raw materials. The
Board of Directors approves all commodity futures and commodity commitments.



Natural Gas Futures The Company hedges a portion of natural gas purchases for North America. In March 2003, the Company entered into futures contracts with varying settlement dates through June 2004, and in 2004, the Company entered
into additional contracts with varying settlement dates through December 2005. The Company used futures contracts to hedge 46% and 69%, respectively, of its 2004 and 2003 North American natural gas usage. The contracts are settled for cash each
month based on the closing market price on the last day the contract trades on the New York Mercantile Exchange. Commitments settled under these contracts totaled $3,125 and $4,866 in 2004 and 2003, respectively. The Company recorded gains relating
to these commitments of $248 in 2004 and losses of $224 in 2003. At December 31, 2004 and 2003, the Company had future commitments under these contracts of $3,483 and $1,359, respectively.



54



---

##### Table of Contents

The Company entered into similar futures contracts to hedge portions of its natural gas purchases in June 2001 with
varying settlement dates through November 2002. Commitments settled under these contracts totaled $1,210 in 2002, and related losses were $264 in 2002. There were no remaining obligations under these contracts at December 31, 2002.



Gains and losses on commodity futures contracts are recognized each month as gas is used.
Remaining obligations are marked to market on a quarterly basis. The Company recorded losses of $275 and $20 at December 31, 2004 and 2003, respectively, related to future commitments under its natural gas futures contracts.



Natural Gas Commitments - In 2000, the Company entered into fixed rate, fixed quantity
contracts to secure a portion of anticipated natural gas usage at certain of the Companys facilities. The contracts were entered into to partially hedge the Companys risk associated with natural gas price fluctuations in peak usage
months through March 2003. Gas purchases under these contracts totaled $402 and $671 in 2003 and 2002, respectively. These contracts covered approximately 75% of 2003 and 86% of 2002 natural gas usage during the periods of the contracts at those
facilities. The Company had no natural gas commitments outstanding at December 31, 2004 and 2003. The Company recorded a gain of $16 at December 31, 2002 for the difference between the fair value and carrying value of its remaining natural gas
commitments.



Interest Rate Swaps



The Company periodically uses interest rate swaps to alter interest rate exposures between
fixed and floating rates on certain long-term debt. Under interest rate swaps, the Company agrees with other parties to exchange, at specified intervals, the difference between fixed rate and floating rate interest amounts calculated by reference to
an agreed notional principal amount.



Effective December 1, 2003, the Company
entered into a $34,000 interest rate swap agreement structured for the Parish of Ascension IRBs (see Note 9). Under this agreement, the Company received a fixed rate of 10.0% and paid a variable rate equal to the 6-month LIBOR plus 630 basis points.
The Company cancelled this swap in the third quarter of 2004 for a fee of $610. The Company realized a gain in 2002 of $1,722 related to a swap that matured on December 1, 2002.



The net impact of interest rate swaps was a decrease in the Companys interest expense of $456 and $62 in 2004 and 2003, respectively,
and an increase in interest expense of $2,566 in 2002. The 2003 year-end fair value loss on the $34,000 interest rate swap was $483.



The following table summarizes the weighted average interest rates for the swaps used by the Company. The Company had no swaps outstanding at December 31, 2004.



|                      |  |      |   |  |      |   |  |      |  
|--------------------- |  | ---- | - |  | ---- | - |  | ---- | -
|                      |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Average rate paid     |  | 7.9  | % |  | 7.6  | % |  | 13.7 | %
|Average rate received |  | 10.0 | % |  | 10.0 | % |  | 1.9  | %



55



---

##### Table of Contents

9. Debt and Lease Obligations



Debt outstanding at December 31, 2004 and 2003 is as follows:



|                                                                                                   |  |                   |         |                    |   |           |  |                    |         |  |   |      
|-------------------------------------------------------------------------------------------------- |  | ----------------- | ------- | ------------------ | - | --------- |  | ------------------ | ------- |  | - | -----
|                                                                                                   |  | December 31, 2004 |         | December 31, 2003 
|                                                                                                   |  | Long-Term         |         | Due WithinOne Year |   | Long-Term |  | Due WithinOne Year
|9.2% debentures due 2021                                                                           |  | $                 | 114,800 |                    |   |          |  | $                  | 114,800 |  |   |     
|7.875% debentures 2023                                                                             |  |                   | 246,782 |                    |   |          |  |                    | 246,782 |  |   |     
|Sinking fund debentures:                                                                           |  |                   |         |                    |   |           |  |                    |         |  |   |      
|8.375% due 2016                                                                                    |  |                   | 78,000  |                    |   |          |  |                    | 78,000  |  |   |     
|9.25% due 2019                                                                                     |  |                   |        |                    |   |          |  |                    | 47,295  |  |   |     
|9% second-priority senior secured notes due 2014                                                   |  |                   | 325,000 |                    |   |          |  |                    |        |  |   |     
|Floating rate second-priority senior secured notes due 2010 (at an average rate of 6.6% in 2004)   |  |                   | 150,000 |                    |   |          |  |                    |        |  |   |     
|Industrial Revenue Bonds (at an average rate of 10.0% in 2004 and 3.1% in 2003)                    |  |                   | 34,000  |                    |   |          |  |                    | 34,000  |  |   |     
|Other (at an average rate of 9.3% in 2004 and 8.1% in 2003)                                        |  |                   | 7,234   |                    | $ | 2,383     |  |                    | 9,089   |  | $ | 2,221
|                                                                                                   |  |                   |         |                    |   |           |  |                    |         |  |   |      
|Total current maturities of long-term debt                                                         |  |                   |         |                    |   | 2,383     |  |                    |         |  |   | 2,221
|                                                                                                   |  |                   |         |                   
|Short-term debt (primarily foreign bank loans at an average rate of 8.4% in 2004 and 4.8% in 2003) |  |                   |        |                    |   | 9,205     |  |                    |        |  |   | 5,946
|                                                                                                   |  |                   |         |                    |   |           |  |                    |         |  |   |      
|Total debt                                                                                         |  | $                 | 955,816 |                    | $ | 11,588    |  | $                  | 529,966 |  | $ | 8,167
|                                                                                                   |  |                   |         |                    |   |           |  |                    |         |  |   |      



The Company entered into a three-year
asset based revolving credit facility in the third quarter of 2002 (the Credit Facility), which provides for a maximum borrowing of $175,000, including letters of credit (LOC). The Company amended this Credit Facility (the
Amended Credit Facility) on August 12, 2004 as part of the Apollo Transaction. The Amended Credit Facility is a five-year asset based revolving credit facility with the same borrowing capacity as the Credit Facility. The Amended Credit
Facility is secured with inventory and accounts receivable in the U.S., Canada and the U.K., a portion of property and equipment in Canada and the U.K. and the stock of certain subsidiaries. At December 31, 2004, the net book value of the collateral
securing the Amended Credit Facility, excluding the stock of subsidiaries, was approximately $266,000. Maximum borrowing allowable under the Amended Credit Facility is calculated monthly (quarterly, if availability is greater than $100,000) and is
based upon specific percentages of eligible accounts receivable, inventory and fixed assets. The Amended Credit Facility contains restrictions on dividends, capital expenditures ($37,500 from August 12, 2004 to December 31, 2004; $75,000 in 2005)
and payment of management fees ($3,000 per year or 2% of Segment EBITDA). It also includes a minimum trailing twelve-month fixed charge coverage ratio of 1.1 to 1.0 if aggregate availability is less than $50,000. The trailing twelve-month fixed
charge coverage ratio requirement does not apply when aggregate availability exceeds $50,000. At December 31, 2004, the maximum borrowing allowable under the Amended Credit Facility was approximately $174,700, of which approximately $127,800, after
outstanding LOCs and other draws, was unused and available. As a result, the Company has no fixed charge coverage ratio requirements at the end of 2004.



Under the terms of the Amended Credit Facility, the Company has the ability to borrow funds at either the prime rate plus an applicable margin (the prime rate
option) or at LIBOR plus an applicable margin. The Company must designate which option it chooses at the time of the borrowing. Currently, the applicable margin for any prime rate borrowing is 50 basis points and for any LIBOR borrowing is 200
basis points. For LOCs issued under the Amended Credit Facility, the Company pays a per annum fee equal to the LIBOR applicable margin, or 2.00%, plus a fronting fee of .125%. In addition, the Company pays a .375% per annum fee on the amount of the
revolving loan commitment less any borrowings or outstanding LOCs. The Company incurred commitment fees of $650, $557 and $363 in 2004, 2003 and 2002, respectively, related to the Amended Credit Facility.



As discussed in Note 1, in conjunction with the Apollo Transaction, the Company formed two
wholly owned finance subsidiaries that borrowed a total of $475 million through a private debt offering. Of the debt, $325 million is second-priority senior secured notes due 2014 (the Fixed Rate Notes), which bear an interest rate of
9%. The remaining $150 million of debt is second-priority senior secured floating rate notes due 2010 (the Floating Rate Notes).



56



---

##### Table of Contents

Interest on the Floating Rate Notes will be paid each January 15, April 15, July 15 and October 15. Interest on the
Floating Rate Notes accrues at an annual rate, reset quarterly, equal to LIBOR plus 475 basis points. At December 31, 2004, the interest rate on the Floating Rate Notes was 6.82%. The notes mature July 15, 2010. These notes may be redeemed at any
time on or after July 15, 2006 at the applicable redemption price set forth in the indenture for the notes. In addition, up to 35% of these notes may be redeemed prior to July 15, 2006 with cash proceeds from certain equity offerings at the
applicable redemption price set forth in the indenture for the notes. Prior to July 15, 2009, the Floating Rate Notes may be redeemed at a price equal to 100% of the principal amount plus accrued interest plus the make-whole premium as
defined in the indenture for the notes. The Floating Rate Notes may also be redeemed upon certain changes in tax laws or upon a change in control. There is no sinking fund for the Floating Rate Notes.



Interest on the Fixed Rate Notes will be paid each January 15 and July 15. The notes mature
July 15, 2014. These notes may be redeemed at any time on or after July 15, 2009 at the applicable redemption price set forth in the indenture for the notes. In addition, up to 35% of these notes may be redeemed prior to July 15, 2007 with cash
proceeds from certain equity offerings at the applicable redemption price set forth in the indenture for the notes. Prior to July 15, 2009, the Fixed Rate Notes may be redeemed at a price equal to 100% of the principal amount plus accrued interest
plus the make-whole premium as defined in the indenture for the notes. The Fixed Rate Notes may also be redeemed upon certain changes in tax laws or upon a change in control. There is no sinking fund for the Fixed Rate Notes.



The Companys Australian subsidiary entered into a five-year secured credit facility
in the fourth quarter of 2003 (the Australian Facility), which provides for a maximum borrowing of AUD$19,900, or approximately $15,500. At December 31, 2004, outstanding debt under this facility was $11,295, of which $6,557 is
classified as long-term. In addition, there was approximately $3,334 of short term debt under the facility. The Australian Facility provided the funding for the Fentak acquisition made in the fourth quarter of 2003 (see Note 3)and is secured
by liens against substantially all of the assets of the Australian business including the stock of Australian subsidiaries. At December 31, 2004, the net book value of the collateral securing the Australian Facility was approximately $29,700. In
addition, the Company pledged the stock of its Australian subsidiary as collateral for borrowing under the Australian Facility. This facility includes a fixed rate facility used for the acquisition, as well as a revolver. At December 31, 2004,
$7,961 was outstanding under the fixed rate facility at an interest rate of 6.4%. The Australian Facility contains restrictions relative to the Australian businesses on dividends, the sale of assets and additional borrowings. The Australian Facility
also contains financial covenants applying to the Australian subsidiaries including current ratio, interest coverage, debt service coverage and leverage. The fixed portion of the Australian Facility requires minimum quarterly principal reductions
totaling AUD$450 (approximately $350). The Australian Facility requires semi-annual principal reductions based on a portion of excess cash as defined in the agreement. At December 31, 2004, the maximum borrowing allowable under the Australian
Facility was AUD$18,100 (approximately $14,100), of which about AUD$3,600 (approximately $2,800), after outstanding LOCs and other draws, was unused and available. The Company incurred commitment fees of $173 in 2004 related to the Australian
Facility.



Additional international credit facilities provide availability
totaling approximately $26,100. Of this amount, approximately $12,200 (net of approximately $3,900 of borrowings, LOCs and other guarantees of approximately $4,600 and $5,400 of other draws) was available to fund working capital needs and capital
expenditures at December 31, 2004. These credit facilities have various expiration dates ranging from 2006 through 2008. Of the total $3,935 of outstanding debt, $677 was classified as long-term. While these facilities are primarily unsecured,
portions of the lines are secured by equipment. At December 31, 2004, the net book value of collateral securing a portion of these facilities was approximately $750. The Company guarantees up to $6,700 of the debt of one of its Brazilian
subsidiaries, included in these facilities.



The Company and HAI had affiliated
borrowing arrangements with Foods and BWHLLC during 2003 and 2004. See Note 6.



HAI entered into a three-year asset based revolving credit facility on January 28, 2004, which provides for a maximum borrowing of $15,000, as amended on October 29, 2004 (the HAI Facility). The HAI Facility replaced the
affiliated loan agreement with Foods. Maximum borrowing allowable under the HAI Facility is based upon specific percentages of eligible accounts receivable and inventory and is secured with inventory, accounts receivable and property and equipment
of HAI. At December 31, 2004, the net book value of collateral securing the HAI Facility was approximately $33,600. The HAI Facility provides up to $2,000 for LOCs. The HAI Facility contains restrictions relative to HAI on dividends, affiliate
transactions, minimum availability ($2,000), additional debt and capital expenditures ($2,000 in 2005). In addition, HAI is required to maintain a minimum trailing twelve-month debt coverage ratio of 1.5 to 1.0 and a monthly debt to tangible capital
ratio of less than 2.5 to 1.0. At December 31, 2004, borrowing allowable under the HAI Facility was approximately $13,800, of which approximately $11,800 was unused and available, after the minimum availability requirement. Commitment fees of $66
were incurred in 2004 related to the HAI Facility.



57



---

##### Table of Contents

At December 31, 2004, the Company was in compliance with the material covenants and restrictions in all of the
Companys credit facilities.



In addition, the Company finances certain
insurance premiums. Short-term borrowings under this arrangement include $3,588 and $2,548 at December 31, 2004 and 2003, respectively.



On October 1, 2003, the Company exercised its option to redeem, at par, the remaining $885 of County of Maricopa Industrial Revenue Bonds (IRBs).



In October 2003, the Company converted the $34,000 Parish of Ascension (IRBs) to a fixed
interest rate and, by doing so, eliminated the requirement to maintain a backup letter of credit of approximately $34,500. The $34,000 IRBs are related to the acquisition, construction and installation of air and water pollution control facilities
that are no longer owned by the Company. The tax-exempt status of the IRBs is based upon there being no change in the use of the facilities, as defined by the Internal Revenue Code. The Company continues to monitor the use of the facilities by the
current owner. If a change in use were to occur, the Company could be required to take remedial action, including redeeming all of the bonds.



In addition, the Company redeemed its 9.25% debentures on August 12, 2004 for total cash of $49,249. Included in the total cash paid was $47,295 for the principal of the
debentures, $1,069 of accrued interest and an early redemption premium of $885. The redemption was funded with cash received from the $475 million private debt offering discussed above.



During the fourth quarter of 2002, the Company repurchased $7,368 of the outstanding publicly held bonds for $4,510 plus fees. A $2,741 gain
on the extinguishment of the bonds was recognized in 2002 and is included in Other non-operating income.



Aggregate maturities of total debt and minimum annual rentals under operating leases at December 31, 2004, for the Company are as follows:



|                |  |      |         |                                      |   |       
|--------------- |  | ---- | ------- | ------------------------------------ | - | ------
|Year            |  | Debt |         | Minimum RentalsUnder OperatingLeases
|2005            |  | $    | 11,588  |                                      | $ | 11,641
|2006            |  |      | 1,991   |                                      |   | 8,919 
|2007            |  |      | 1,489   |                                      |   | 6,370 
|2008            |  |      | 3,754   |                                      |   | 4,734 
|2009            |  |      | 34,000  |                                      |   | 2,546 
|2010 and beyond |  |      | 914,582 |                                      |   | 4,307 
|                |  |      |         |                                      |   |       
|                |  | $    | 967,404 |                                      | $ | 38,517
|                |  |      |         |                                      |   |       



Rental expense amounted to $13,451,
$15,362 and $15,152 in 2004, 2003 and 2002, respectively.



10. Guarantees,
Indemnifications and Warranties



Standard Guarantees /
Indemnifications



In the ordinary course of business, the Company enters
into numerous agreements that contain standard guarantees and indemnities whereby the Company indemnifies another party for, among other things, breaches of representations and warranties. Such guarantees or indemnifications are granted under
various agreements, including those governing (i) purchases and sales of assets or businesses, (ii) leases of real property, (iii) licenses of intellectual property and (iv) long-term supply agreements. The guarantees or indemnifications issued are
for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords or lessors in lease contracts, (iii) licensors or licensees in license agreements and (iv) vendors or customers in long-term supply agreements.



These parties may also be indemnified against any third party claim resulting
from the transaction that is contemplated in the underlying agreement. Additionally, in connection with the sale of assets and the divestiture of businesses, the Company may agree to indemnify the buyer with respect to liabilities related to the
pre-closing operations of the assets or businesses sold. Indemnities related to pre-closing operations generally include tax liabilities, environmental liabilities and employee benefit liabilities not assumed by the buyer in the transaction.



Indemnities related to the pre-closing operations of sold assets normally do
not represent additional liabilities to the Company, but simply serve to protect the buyer from potential liability associated with the Companys existing obligations at the time of sale. As with any liability, the Company has accrued for those
pre-closing obligations that are considered probable and reasonably estimable. Amounts recorded are not significant at December 31, 2004.



58



---

##### Table of Contents

While some of these guarantees extend only for the duration of the underlying agreement, many survive the expiration of
the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). There are no specific limitations on the maximum potential amount of future payments that the Company could be required to make under its
guarantees nor is the Company able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees as the triggering events are not predictable. With respect to certain of the aforementioned guarantees,
the Company maintains limited insurance coverage that mitigates potential payments to be made. The Company had limited reimbursement agreements from affiliates that were terminated as a result of the Apollo Transaction, and as a result, the Company
accrued $620 for environmental obligations previously covered by an affiliate reimbursement agreement.



In connection with the Apollo Transaction, the Company entered into a transaction fee agreement with Apollo and its affiliates for the provision of certain structuring and advisory services. The Company has agreed to
indemnify Apollo and its affiliates and their directors, officers and representatives for potential losses relating to the services contemplated under this agreement.



In addition, the Company had previously agreed to indemnify KKR for any claims resulting from its services to the Company and its
affiliates. The indemnification was terminated as a result of the Apollo Transaction.



The Company has not entered into any significant agreement subsequent to January 1, 2003 that would require it, as a guarantor, to recognize a liability for the fair value of obligations it has undertaken in issuing the guarantee.



Subsidiary Guarantees



The Company and certain of its subsidiaries guarantee the debt of its two finance
subsidiaries totaling $475 million. See Note 19.



The Company guarantees the
bank debt of one of its Brazilian subsidiaries up to a maximum U.S. equivalent of $6,700.



In connection with the conversion in 2003 of the $34,000 Parish of Ascension IRBs to a fixed rate, the Companys Canadian and U.K. subsidiaries have guaranteed its IRBs.



Warranties



The Company does not make express warranties on its products, other than that they comply with the Companys specifications; therefore,
the Company does not record a warranty liability. Adjustments for product quality claims are not material and are charged against sales revenues.



11. Commitments and Contingencies



Environmental Matters



Because the Companys operations involve the use, handling, processing, storage, transportation and disposal of hazardous materials, the Company is subject to
extensive environmental regulation at the Federal and state level and is exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on
operating activities, substantial fines, penalties, damages or other costs, any of which could have a material adverse effect on the Companys business, financial condition, results of operations or cash flows.



Accruals for environmental matters are recorded following the guidelines of Statement of
Position 96-1, Environmental Remediation Liabilities, when it is probable that a liability has been incurred and the amount of the liability can be estimated. Environmental accruals are reviewed on an interim basis and as events and
developments warrant. Based on managements estimates, which are determined through historical experience and consultation with outside experts, the Company has recorded liabilities, relating to 55 locations, of approximately $38,200 and
$38,600 at December 31, 2004 and 2003, respectively, for all probable environmental remediation, indemnification and restoration liabilities. These amounts include estimates of unasserted claims the Company believes are probable of loss and
reasonably estimable. Based on the factors discussed below and currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such sites may fall within a range of $25,000 to $77,000, in
the aggregate, at December 31, 2004. This estimate of the range of reasonably possible costs is less certain than the estimates upon which the liabilities are based, and in order to establish the upper end of such range, assumptions less favorable
to the Company among the range of reasonably possible outcomes were used. As with any estimate, if facts or circumstances change, the final outcome could differ



59



---

##### Table of Contents

materially from these estimates. The Company has not taken into consideration insurance coverage or any anticipated
recoveries from other third parties in determining the liability or range of possible outcomes. The Companys current insurance coverage provides very limited, if any, coverage for environmental matters.



Following is a more detailed discussion of the Companys environmental liabilities and
related assumptions:



BCP Geismar Site 
The Company formerly owned a basic chemicals and polyvinyl chloride business which was taken public as Borden Chemicals and Plastics Operating Limited Partnership (BCPOLP) in 1987. The Company retained a 1% interest and the general
partner interest, which were held by its subsidiary, BCPM. The Company also retained the liability for certain environmental matters after BCPOLPs formation. Under a Settlement Agreement approved by the United States Bankruptcy Court for the
District of Delaware among the Company, BCPOLP, BCPM, the United States Environmental Protection Agency (EPA) and the Louisiana Department of Environmental Quality, the Company agreed to perform certain of BCPOLPs obligations with
respect to environmental conditions at BCPOLPs Geismar, Louisiana site. These obligations are related to soil and groundwater contamination at the Geismar site. The Company bears the sole responsibility for these obligations, as there are no
other potentially responsible parties (PRPs) or third parties from which the Company can seek reimbursement, and no additional insurance recoveries are expected.



A groundwater pump and treat system for the removal of contaminants is operational, and preliminary natural attenuation
studies are proceeding. The Company has performed extensive soil and groundwater testing. Regulatory agencies are reviewing the current findings and remediation efforts. If closure procedures and remediation systems prove inadequate, or if
additional contamination is discovered, this could result in the costs approaching the higher end of the range of possible outcomes discussed below.



The Company has recorded a liability of approximately $21,100 and $21,600 at December 31, 2004 and 2003, respectively, related to the BCP Geismar site.
Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with this site may fall within a range of $13,900 to $32,100, depending upon the factors discussed above. Due to the
long-term nature of the project, the reliability of timing and the ability to estimate remediation payments, this liability was recorded at its net present value, assuming a 3% discount rate and a time period of thirty years and the range of
possible outcomes is discounted similarly. The undiscounted liability is approximately $32,100 over thirty years.



Following are expected payments for each of the next five years, and a reconciliation of the expected aggregate payments to the liability reflected at
December 31, 2004:



|                                         |  |   |         |  
|---------------------------------------- |  | - | ------- | -
|2005                                     |  | $ | 2,600   |  
|2006                                     |  |   | 1,600   |  
|2007                                     |  |   | 1,600   |  
|2008                                     |  |   | 1,500   |  
|2009                                     |  |   | 700     |  
|Remaining aggregate payments             |  |   | 24,100  |  
|                                         |  |   |         |  
|Total undiscounted liability             |  |   | 32,100  |  
|Less: discount to net present value      |  |   | (11,000 | )
|                                         |  |   |         |  
|Liability per Consolidated Balance Sheet |  | $ | 21,100  |  
|                                         |  |   |         |  



Superfund Sites /
Offsite Landfills - The Company is currently involved in environmental remediation activities at 26 sites in which it has been notified that it is, or may be, a PRP under the United States Comprehensive Environmental Response, Compensation and
Liability Act (CERCLA) or similar state superfund laws. The Company has recorded liabilities of approximately $7,900 and $7,600 at December 31, 2004 and 2003, respectively, related to these sites. The Company anticipates
approximately 60% of this liability will be paid within the next five years, with the remaining payments occurring over the next twenty-five years. The Company generally does not bear a significant level of responsibility for these sites, and
therefore, has little control over the costs and timing of cash flows. At 16 of the 26 sites, the Companys share is less than 1%. At the remaining 10 sites, the Company has a share of up to 8.8% of the total liability which accounts for $6,700
and $6,400 of the total amount reserved for superfund / offsite landfill sites at December 31, 2004 and 2003, respectively. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs
associated with all superfund sites may be as low as $5,200 or as high as $17,300, in the aggregate. In estimating both its current reserves for environmental remediation at these sites and the possible range of additional costs, the Company has not
assumed that it will bear the



60



---

##### Table of Contents

entire cost of remediation of every site to the exclusion of other known PRPs who may be jointly and
severally liable. The Company has limited information to assess the viability of other PRPs and their probable contribution on a per site basis. The range of possible outcomes also takes into account the maturity of each project, which results in a
more narrow range as the project progresses. The Companys ultimate liability will depend on many factors including its volumetric share of waste, the financial viability of other PRPs, the remediation methods and technology used, the amount of
time necessary to accomplish remediation, and the availability of insurance coverage. The Companys insurance provides very limited, if any, coverage for these environmental matters.



Sites Under Current Ownership - The Company is conducting
environmental remediation at 7 locations currently owned by the Company, of which 4 sites are no longer operating. There are no other parties responsible for remediation at these sites. Much of the remediation is being performed by the Company on a
voluntary basis; therefore, the Company has greater control over the costs to be incurred and the timing of cash flows. The Company has accrued approximately $5,400 and $5,200 at December 31, 2004 and 2003, respectively, for remediation and
restoration liabilities at these locations. The Company anticipates approximately $3,700 of these liabilities will be paid within the next three years, with the remaining amounts being paid over the next ten years. Approximately $3,700 of these
reserves is included in the Companys business realignment reserve, as the environmental clean up is being handled in conjunction with planned closure of the location (see Note 4). Based on currently available information and analysis, the
Company believes that it is reasonably possible that costs associated with such sites may fall within a range of $3,200 to $14,100, in the aggregate. The factors influencing the ultimate outcome include the methods of remediation to be elected, the
conclusions and assessment of site studies remaining to be completed and the time period required to complete the work.



Other Sites - The Company is conducting environmental remediation at 9 locations (10 locations as of December 31, 2003) formerly owned by the
Company. The Company has accrued approximately $2,500 and $2,400 at December 31, 2004 and 2003, respectively, for remediation and restoration liabilities at these locations. The Company anticipates cash outflows of approximately $2,000 within the
next three years, with the remainder occurring over the next ten years. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such sites may fall within a range of
$1,900 to $11,300, in the aggregate. The primary drivers in determining the final costs to the Company on these matters are the method of remediation selected and the level of participation of third parties.



In addition, the Company is responsible for 11 sites that require monitoring
where no additional remediation is expected and has also established accruals for other related costs, such as fines and penalties. The Company has accrued approximately $1,300 and $1,800 at December 31, 2004 and 2003, respectively, related to these
sites. Payment of these liabilities is anticipated to occur over the next ten years. Based on currently available information and analysis, the Company believes that it is reasonably possible that costs associated with such sites may fall within a
range of $800 and $2,200, in the aggregate. The ultimate cost to the Company will be influenced by any variations in projected monitoring periods or by findings that are better or worse than anticipated findings.



The Company formerly operated the Smith Douglass fertilizer business which
included a phosphate processing operation in Manatee County, Florida and an animal food processing operation in Hillsborough County, Florida. Both operations were sold in 1980. The EPA has sent the Company and another former owner of the Manatee
County facility a request for $112 relating to oversight costs incurred when the site was abandoned by its current owner. The Company is disputing the charge. The Company is aware that state and Federal environmental agencies have taken measures to
prevent the off-site release of water from rainfall that accumulated in the drainage ditches and lagoons surrounding the gypsum piles located on this site. The Company is aware that the current owner of the Hillsborough County site ceased operations
in March of 2004 and is working with governmental agencies to effect closure of that site. At this time, the Company has received an information request from the EPA, but has not received any demands from any governmental agencies or others
regarding the closure and environmental cleanup at this site, which the Company believes is the responsibility of the current owner. While it is reasonably possible some costs could be incurred related to these sites, the Company has inadequate
information to enable it to estimate a potential range of liability, if any. As of December 31, 2004, the Company had a reserve of $63 relating to these matters.



61



---

##### Table of Contents

Non-Environmental Legal Matters



Following is a discussion of non-environmental legal proceedings that are not in the ordinary course of business:



Imperial Home Décor Group- In 1998, pursuant to a merger and
recapitalization transaction sponsored by The Blackstone Group (Blackstone) and financing arranged by The Chase Manhattan Bank (Chase), Borden Decorative Products Holdings, Inc. (BDPH), a wholly owned subsidiary
of the Company, was acquired by Blackstone and subsequently merged with Imperial Wallcoverings to create Imperial Home Décor Group (IHDG). Blackstone provided $84,500 in equity, a syndicate of banks funded $198,000 of senior
secured financing and $125,000 of senior subordinated notes were privately placed. The Company received approximately $309,000 in cash and 11% of IHDG common stock for its interest in BDPH at the closing of the merger. On January 5, 2000, IHDG filed
for reorganization under Chapter 11 of the U. S. Bankruptcy Code. The IHDG Litigation Trust (the Trust) was created pursuant to the plan of reorganization in the IHDG bankruptcy to pursue preference and other avoidance claims on behalf
of the unsecured creditors of IHDG. In November 2001, the Trust filed a lawsuit against the Company and certain of its affiliates in U.S. Bankruptcy Court in Delaware seeking to have the IHDG recapitalization transaction voided as a fraudulent
conveyance and asking for a judgment to be entered against the Company for $314,400 plus interest, costs and attorney fees. An effort to resolve this matter through non-binding mediation was unsuccessful in resolving the case and the parties are
preparing for trial.



The Company has an accrual of $3,600 for
legal defense costs related to this matter. The Company has not recorded a liability for any potential losses because a loss is not considered probable based on current information. The Company believes it has strong defenses to the Trusts
allegations and intends to defend the case vigorously. While it is reasonably possible the resolution of this matter may result in a loss due to the many variables involved, the Company is not able to estimate the range of possible outcomes at this
time.



Brazil Tax Claim- In 1992, the State of Sao
Paulo Administrative Tax Bureau issued an assessment against the Companys primary Brazilian subsidiary claiming that excise taxes were owed on certain intercompany loans made for centralized cash management purposes, characterized by the Tax
Bureau as intercompany sales. Since that time, management and the Tax Bureau have held discussions, and the subsidiary has filed an administrative appeal seeking cancellation of the assessment. The Administrative Court upheld the assessment in
December 2001. In 2002, the subsidiary filed a second appeal with the highest-level Administrative Court, again seeking cancellation of the assessment. Argument was made to the court in September 2004 and the Company is awaiting its ruling.



At December 31, 2004, the amount of the assessment, including
tax, penalties, monetary correction and interest, is 60.8 million Brazilian Reais, or approximately $22,900. The Company believes it has a strong defense against the assessment and will pursue the appeal vigorously, including appealing to the
judicial level; however, there is no assurance that the assessment will not be upheld. At this time the Company does not believe a loss is probable; therefore, only related legal fees have been accrued. Reasonably possible losses to the Company
resulting from the resolution of this matter range from zero to $22,900.



HAI Grand Jury InvestigationHAI received a grand jury subpoena dated November 5, 2003 from the U.S. Department of Justice Antitrust Division relating to a foundry resins Grand Jury investigation. HAI has
provided documentation in response to the subpoena. As is frequently the case when such investigations are in progress, various antitrust lawsuits have been brought against the Company alleging that the Company and HAI, along with various other
entities, engaged in a price fixing conspiracy. At this time the Company does not believe a loss is probable; therefore, only related legal fees have been accrued. The Company does not have sufficient information to determine a range of possible
outcomes for this matter at this time.



CTA Acoustics
 From the third quarter 2003 to the first quarter 2004, six lawsuits were filed against the Company in the 27th Judicial District, Laurel County Circuit Court, in Kentucky, arising from an explosion at a customers plant where seven plant
workers were killed and over 40 other workers were injured. The lawsuits primarily seek recovery for wrongful death, emotional and personal injury, loss of consortium, property damage and indemnity. The Company expects that a number of these suits
will be consolidated. The litigation also includes claims by its customer against its insurer and the Company. The Company is pursuing a claim for indemnity against its customer, based on language in its contract with the customer, and a claim
against a third party that performed services for the Company in connection with sales to the customer. The Company previously accrued $5,000, the amount of its insurance deductible, relating to these actions and has insurance coverage to address
any payments and legal fees in excess of this amount.



Other Legal Matters - The Company has been served in two lawsuits filed in Hillsborough County, Florida Circuit Court which name the Company and several other parties, relating to an animal feed supplement processing site formerly
operated by the Company and sold in 1980. The lawsuits are filed on behalf of multiple residents of Hillsborough County living near the site and allege various injuries related to exposure to toxic chemicals. At this time, the Company has inadequate
information from which to estimate a potential range of liability, if any.



62



---

##### Table of Contents

The Company is involved in various product liability, commercial and employment litigation, personal
injury, property damage and other legal proceedings which are considered to be in the ordinary course of business. There has been increased publicity about asbestos liabilities faced by manufacturing companies. In large part, as a result of the
bankruptcies of many asbestos producers, plaintiffs attorneys are increasing their focus on peripheral defendants, including the Company, and asserting that even products that contained a small amount of asbestos caused injury. Plaintiffs are
also focusing on alleged harm caused by other products we have made or used, including those containing silica and vinyl chloride monomer. The Company does not believe that it has a material exposure relating to these claims and believes it has
adequate reserves and insurance to cover currently pending and foreseeable future claims.



The Company has reserved approximately $19,800 and $24,000 at December 31, 2004 and 2003, respectively, relating to all non-environmental legal matters for legal defense and settlement costs that it believes are
probable and estimable at this time. For the years ended December 31, 2004 and 2003, the Company recorded, in General and Administrative expense, legal fees of approximately $17,000 and $17,300, respectively, related to the non-environmental legal
matters described above.



Other Commitments and Contingencies



The Limited Liability Agreement of HAI provides Delta, the Companys
partner in HAI, the right to purchase between 3-5% of additional interest in HAI each year, beginning in 2004. Delta is limited to acquiring a maximum of 25% of additional interest in HAI under this arrangement. Pursuant to this provision, in the
first quarter of 2004, Delta provided the Company with written notice of its intention to exercise its option to purchase an additional 5% interest in 2004, and the purchase was completed in the third quarter of 2004 (see Note 3). Deltas
purchase price of the interest is based on the enterprise value of HAI determined by applying a contractually agreed upon multiple to EBITDA, as defined in the agreement. In the first quarter of 2005, Delta provided the Company with written notice
of its intention to purchase an additional 5% interest in 2005.



The
Fentak Pty. Ltd. acquisition agreement includes a contingent purchase consideration provision based on achievement of certain targeted earnings before interest and taxes. No payment was required in 2004. Maximum annual payments are AU$600 for the
period 2005-2006.



12. Pension and Retirement Savings Plans



Most U.S. employees of the Company are covered under a non-contributory defined benefit
plan (the U.S. Plan). The U.S. Plan provides benefits for salaried and certain hourly employees based on eligible compensation and years of credited service and for hourly employees who are covered under a collective bargaining agreement
based on years of credited service. Certain employees in other countries are covered under other contributory and non-contributory defined benefit foreign plans that, in the aggregate, are insignificant and are included in the data presented herein.



63



---

##### Table of Contents

Following is a rollforward of the assets and benefit obligations of the Companys defined benefit plans. The Company
uses a September 30 measurement date for its plans.



|                                               |  |      |         |   |      |   |         |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                               |  | 2004 |         |   | 2003 |  
|Change in Benefit Obligation                   |  |      |         |   |      |   |         |  
|                                               |  |     
|Benefit obligation at beginning of year        |  | $    | 259,079 |   |      | $ | 263,364 |  
|Service cost                                   |  |      | 2,949   |   |      |   | 2,316   |  
|Interest cost                                  |  |      | 13,983  |   |      |   | 15,228  |  
|Actuarial losses                               |  |      | 9,198   |   |      |   | 12,038  |  
|Foreign currency exchange rate changes         |  |      | 526     |   |      |   | 1,165   |  
|Benefits paid                                  |  |      | (31,543 | ) |      |   | (34,403 | )
|Acquisitions / divestitures                    |  |      |        |   |      |   | (325    | )
|Settlements / curtailments                     |  |      |        |   |      |   | (304    | )
|                                               |  |      |         |   |      |   |         |  
|                                               |  |      | 254,192 |   |      |   | 259,079 |  
|                                               |  |      |         |   |      |   |         |  
|Change in Plan Assets                          |  |      |         |   |      |   |         |  
|                                               |  |     
|Fair value of plan assets at beginning of year |  |      | 189,686 |   |      |   | 190,831 |  
|Actual return on plan assets                   |  |      | 20,537  |   |      |   | 30,683  |  
|Foreign currency exchange rate changes         |  |      | 345     |   |      |   | 805     |  
|Employer contribution                          |  |      | 973     |   |      |   | 1,770   |  
|Benefits paid                                  |  |      | (31,543 | ) |      |   | (34,403 | )
|                                               |  |      |         |   |      |   |         |  
|Fair value of plan assets at end of year       |  |      | 179,998 |   |      |   | 189,686 |  
|                                               |  |      |         |   |      |   |         |  
|Plan assets less than benefit obligation       |  |      | (74,194 | ) |      |   | (69,393 | )
|Unrecognized net actuarial loss                |  |      | 120,897 |   |      |   | 122,261 |  
|Unrecognized initial transition loss           |  |      | 12      |   |      |   | 21      |  
|Unrecognized prior service cost                |  |      | 919     |   |      |   | 1,348   |  
|                                               |  |      |         |   |      |   |         |  
|Net amount recognized                          |  | $    | 47,634  |   |      | $ | 54,237  |  
|                                               |  |      |         |   |      |   |         |  



Amounts recognized in the balance
sheets, after reclassification of the prepaid pension asset to reflect a minimum pension liability adjustment, consist of:



|                                       |  |      |         |   |      |   |         |  
|-------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                       |  | 2004 |         |   | 2003 |  
|Accrued benefit liability              |  | $    | (71,928 | ) |      | $ | (67,526 | )
|Intangible asset                       |  |      | 919     |   |      |   | 1,348   |  
|Accumulated other comprehensive income |  |      | 118,643 |   |      |   | 120,415 |  
|                                       |  |      |         |   |      |   |         |  
|Net amount recognized                  |  | $    | 47,634  |   |      | $ | 54,237  |  
|                                       |  |      |         |   |      |   |         |  



The weighted average rates used to
determine benefit obligations for the Company were as follows:



|                                               |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ---- | -
|                                               |  | 2004 |   |  | 2003 |  
|Discount rate                                  |  | 5.5  | % |  | 5.8  | %
|Rate of increase in future compensation levels |  | 4.0  | % |  | 4.0  | %



The following summarizes the
Companys benefit obligations and plan assets:



|                               |  |      |         |      |   |        
|------------------------------ |  | ---- | ------- | ---- | - | -------
|                               |  | 2004 |         | 2003
|Projected benefit obligation   |  | $    | 254,192 |      | $ | 259,079
|Accumulated benefit obligation |  |      | 251,429 |      |   | 256,972
|Fair value of plan assets      |  |      | 179,998 |      |   | 189,686



While the Company reports the entire
liability for the U.S. Plan, which is sponsored by the Company, its participants also include certain Foods former associates and certain Consumer Adhesives former associates. Therefore, the tables summarizing the pension activities for
the Companys defined benefit pension plans include the liabilities and assets relating to these businesses. However, prior to 2004, Foods and Consumer Adhesives reimbursed the Company for the expense



64



---

##### Table of Contents

associated with their respective participants in the U.S. Plan. Consequently, the expense table excluded the expense
relating to Foods and Consumer Adhesives. The Company reached a final settlement relating to these expenses in 2003. Expense reimbursements received by the Company from Foods and Consumer Adhesives totaled $1,061 and $1,012 in 2003 and 2002,
respectively. Because of the settlement reached in 2003, the Company did not receive any expense reimbursements in 2004, and does not anticipate any future reimbursements from either Foods or Consumer Adhesives.



Following are the components of net pension expense recognized by the Company for the years
ended December 31:



|                                              |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                              |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Service cost                                  |  | $    | 2,949   |   |      | $ | 2,101   |      |  | $ | 3,602   |  
|Interest cost on projected benefit obligation |  |      | 13,983  |   |      |   | 14,803  |      |  |   | 16,727  |  
|Expected return on assets                     |  |      | (16,634 | ) |      |   | (15,481 | )    |  |   | (19,386 | )
|Amortization of prior service cost            |  |      | 429     |   |      |   | 386     |      |  |   | 395     |  
|Amortization of initial transition asset      |  |      | 9       |   |      |   | 10      |      |  |   | 12      |  
|Recognized actuarial loss                     |  |      | 6,509   |   |      |   | 7,116   |      |  |   | 4,102   |  
|Settlement / curtailment loss                 |  |      |        |   |      |   | 411     |      |  |   | 13,600  |  
|                                              |  |      |         |   |      |   |         |      |  |   |         |  
|Net pension expense                           |  | $    | 7,245   |   |      | $ | 9,346   |      |  | $ | 19,052  |  
|                                              |  |      |         |   |      |   |         |      |  |   |         |  



The weighted average rates used to
determine net pension expense for the Company were as follows:



|                                                 |  |      |   |  |      |   |  |      |  
|------------------------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                                                 |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate                                    |  | 5.8  | % |  | 6.5  | % |  | 7.2  | %
|Rate of increase in future compensation levels   |  | 4.0  | % |  | 4.2  | % |  | 4.5  | %
|Expected long-term rate of return on plan assets |  | 8.2  | % |  | 8.2  | % |  | 8.3  | %



The 2003 curtailment loss includes a
$710 charge for the U.S. Plan, partially offset by a curtailment gain of $299 on an international plan. During 2002, the Company recognized a settlement charge of $13,600 related to lump sum payments made by the U.S. Plan.



In determining the expected overall long-term rate of return on assets, the Company takes
into account the rates on long-term debt investments held within the portfolio, as well as expected trends in the equity markets. Peer data and historical returns are reviewed, and the Company consults with actuarial experts to confirm that the
Companys assumptions are reasonable.



The Companys investment
strategy for defined benefit pension plan assets is to maximize the long-term return on plan assets using a mix of equities and fixed income investments and accepting a prudent level of risk. Risk tolerance is established through careful
consideration of plan liabilities, plan funded status and expected timing of future cash flow requirements. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity investments are diversified
across U.S. and non-U.S. stocks, as well as growth, value and small and large capital investments. Investment risk and performance is measured and monitored on an ongoing basis through quarterly investment portfolio reviews, annual liability
measurements and periodic asset / liability studies.



Following is a summary of
actual 2004 and 2003, at the measurement date, and target 2005 allocations of plan assets by investment type:



|                                |  |        |   |  |        |   |  |      |  
|------------------------------- |  | ------ | - |  | ------ | - |  | ---- | -
|                                |  | Actual |   |  | Target |  
|                                |  | 2004   |   |  | 2003   |   |  | 2005 |  
|Fixed income securities         |  | 35     | % |  | 49     | % |  | 40   | %
|Equity securities               |  | 61     | % |  | 31     | % |  | 60   | %
|Cash and short-term investments |  | 4      | % |  | 20     | % |  |     |  
|                                |  |        |   |  |        |   |  |      |  
|                                |  | 100    | % |  | 100    | % |  | 100  | %
|                                |  |        |   |  |        |   |  |      |  



In 2003, the Company reviewed its
target allocation of plan assets based on projections and expected timing of future benefit payments. Based on this review, the Company set a new allocation target of 60% equities and 40% debt. The Companys pension portfolio does not include
any significant holdings in real estate.



65



---

##### Table of Contents

Estimated future benefit payments under the Companys defined benefit plans as of December 31, 2004 are as follows:



|            |  |   |       
|----------- |  | - | ------
|2005        |  | $ | 26,605
|2006        |  |   | 26,166
|2007        |  |   | 24,411
|2008        |  |   | 23,241
|2009        |  |   | 22,170
|2010  2014 |  |   | 98,598



The Company expects to make
contributions totaling approximately $7,300 to its defined benefit plans in 2005.



In 2003, the Company was informed by the IRS that cash balance plans may be required to be amended because of recent ERISA rulings that found some cash balance plans to be discriminatory. The IRS indicated that the U.S. Plan should continue
to operate as currently designed until new guidance is available. There is insufficient information to assess any potential impact to the Company of the ERISA ruling at this time.



Most employees not covered by the Companys U.S. and foreign defined benefit pension plans are covered by collective bargaining
agreements, which are generally effective for five years. Under Federal pension law, there would be continuing liability to these pension trusts if the Company ceased all or most participation in any such trust, and under certain other specified
conditions. The Consolidated Statements of Operations include charges of $556, $472 and $504 in 2004, 2003 and 2002, respectively, for payments to pension trusts on behalf of employees not covered by the Companys plans.



The Company also provides a defined contribution plan to its U.S. employees. Eligible
salaried and hourly employees may contribute up to 5% of their pay (7% for certain longer service salaried employees), as basic contributions to the plan. The Company contributes monthly to the plan an amount equal to at least 50%, and up to 100%,
of basic contributions. The Company has the option to make additional contributions based upon financial performance. Additionally, the Company provides benefits under various defined contribution plans to employees in certain international
locations. Total charges to operations for matching contributions under these plans in 2004, 2003 and 2002 were $6,177, $6,560 and $5,647, respectively.



The Company also provides executives with a nonqualified plan that provides an opportunity for executives to elect deferral of compensation and also provides retirement
benefits in cases where executives cannot fully participate in the defined benefit or defined contribution plan because of plan and Internal Revenue Service limitations. This plan will be amended in 2005 to comply with the deferred compensation
provisions of the American Jobs Creation Act of 2004.



13. Non-Pension
Postretirement Benefits



The Company provides certain health and life
insurance benefits for eligible domestic and Canadian retirees and their dependents. The cost of postretirement benefits is accrued during employees working careers. Domestic participants who are not eligible for Medicare are generally
provided with the same medical benefits as active employees. Until September 2003, participants who were eligible for Medicare were provided with supplemental benefits. In September 2003, the plan was amended, as discussed below. Canadian
participants are provided with supplemental benefits to the respective provencial healthcare plan in Canada. The domestic postretirement medical benefits are contributory; the Canadian medical benefits are non-contributory. The domestic and Canadian
postretirement life insurance benefits are non-contributory. Benefits are funded on a pay-as-you-go basis.



In 2003, the Company amended its medical benefit plan such that, effective September 1, 2003, medical benefits are no longer provided to the Companys retirees and their dependents who are over age 65. The
Company has made an arrangement with a major benefits provider to offer affected retirees and their dependents continued access to medical and prescription drug coverage, including coverage for pre-existing conditions. The Company subsidized a
portion of the cost of coverage for affected retirees and dependents through December 2004 to assist retirees transition to alternative medical coverage. As a result of these actions, in 2003 the Companys liability related to providing
post-retirement medical benefits was reduced by approximately $88,000. The Companys unrecognized prior service cost was adjusted for the impact of the amendment, and the adjustment is being amortized over the estimated remaining years of
service of approximately nine years (2003  2012).



In 2004, the Company
again amended its retiree medical benefit plan to reduce subsidies to retirees effective January 1, 2005, and eliminate remaining subsidies effective January 1, 2006, except in certain cases where contractual obligations exist. As a result of this
amendment, the Companys liability related to providing postretirement medical benefits was further reduced by $7,900 in 2004. The Companys unrecognized prior service cost has been adjusted to reflect this amendment. The prior service
cost will be amortized over nine years (2004  2013), which is the estimated remaining years of service. The amount of amortization of prior service cost recorded in 2004 that related to the new plan amendment was $300.



66



---

##### Table of Contents

On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was
signed into law. The Act introduces a prescription drug benefit under Medicare (Medicare Part D) that provides several options for Medicare eligible participants and employers, including a federal subsidy to companies that elect to
provide a retiree prescription drug benefit which is at least actuarially equivalent to Medicare Part D. The Act provides for a two-year transition period to allow for, among other items, the possibility that companies may amend existing plans.
There are significant uncertainties regarding the eventual regulations required to implement the Act, as well as the Acts overall effect on plan participants coverage choices and the related impact on their health care costs. As such,
the effects of the Act are not reflected in the accumulated postretirement benefit obligation as of December 31, 2004 or in the 2004 net periodic postretirement benefit cost. Because the Company does not provide prescription drug coverage to
domestic retirees and dependents who are over age 65, the Company does not believe that the provisions of the Act will have a material impact on its postretirement medical plans.



Following is a rollforward of the changes in the non-pension postretirement benefit obligations of the Company for the years ended December
31. The Company uses a measurement date of September 30.



|                                                 |  |      |         |   |      |   |         |  
|------------------------------------------------ |  | ---- | ------- | - | ---- | - | ------- | -
|                                                 |  | 2004 |         |   | 2003 |  
|Change in Benefit Obligation                     |  |      |         |   |      |   |         |  
|                                                 |  |     
|Benefit obligation at beginning of year          |  | $    | 32,205  |   |      | $ | 131,609 |  
|Service cost                                     |  |      | 138     |   |      |   | 72      |  
|Interest cost                                    |  |      | 1,627   |   |      |   | 3,938   |  
|Contributions by plan participants               |  |      | 459     |   |      |   | 2,176   |  
|Actuarial gains                                  |  |      | (2,129  | ) |      |   | (4,683  | )
|Plan amendments                                  |  |      | (7,900  | ) |      |   | (88,168 | )
|Benefits paid                                    |  |      | (5,225  | ) |      |   | (12,889 | )
|Foreign currency exchange rate changes           |  |      | 99      |   |      |   | 150     |  
|                                                 |  |      |         |   |      |   |         |  
|                                                 |  |     
|Benefit obligation at end of year                |  |      | 19,274  |   |      |   | 32,205  |  
|Unrecognized net actuarial gain                  |  |      | 5,944   |   |      |   | 3,809   |  
|Unrecognized prior service benefit               |  |      | 84,056  |   |      |   | 86,830  |  
|                                                 |  |      |         |   |      |   |         |  
|Accrued postretirement obligation at end of year |  | $    | 109,274 |   |      | $ | 122,844 |  
|                                                 |  |      |         |   |      |   |         |  



The weighted average rates used to
determine benefit obligations for the Company were as follows:



|              |  |      |   |  |      |  
|------------- |  | ---- | - |  | ---- | -
|              |  | 2004 |   |  | 2003 |  
|Discount rate |  | 5.7  | % |  | 5.8  | %



The net postretirement (benefit)
expense table excludes the expense related to Foods for 2002; Foods reimbursed the Company $509 for the expense related to Foods participants in that year.



Following are the components of net postretirement (benefit) expense recognized by the Company for 2004, 2003 and 2002:



|                                              |  |      |         |   |      |   |        |      |  |   |        |  
|--------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | ---- |  | - | ------ | -
|                                              |  | 2004 |         |   | 2003 |   |        | 2002 | 
|Service cost                                  |  | $    | 138     |   |      | $ | 72     |      |  | $ | 64     |  
|Interest cost on projected benefit obligation |  |      | 1,627   |   |      |   | 3,938  |      |  |   | 8,249  |  
|Amortization of prior service benefit         |  |      | (10,566 | ) |      |   | (8,552 | )    |  |   | (3,294 | )
|Recognized actuarial gain                     |  |      | (107    | ) |      |   | (122   | )    |  |   | (1     | )
|                                              |  |      |         |   |      |   |        |      |  |   |        |  
|Net postretirement (benefit) expense          |  | $    | (8,908  | ) |      | $ | (4,664 | )    |  | $ | 5,018  |  
|                                              |  |      |         |   |      |   |        |      |  |   |        |  



67



---

##### Table of Contents

The weighted average rates used to determine net postretirement (benefit) expense for the Company were as follows:



|              |  |      |   |  |      |   |  |      |  
|------------- |  | ---- | - |  | ---- | - |  | ---- | -
|              |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate |  | 5.8  | % |  | 6.5  | % |  | 7.3  | %



Following are the assumed health care
cost trend rates at December 31, 2004 and 2003:



|                                                                                                  |  |      |   |  |      |  
|------------------------------------------------------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                                                                  |  | 2004 |   |  | 2003 |  
|Health care cost trend rate assumed for next year and ultimate trend rate  U.S. plan             |  | 5.25 | % |  | 5.25 | %
|Health care cost trend rate assumed for next year  Canadian Plan                                 |  | 7.5  | % |  | 7.8  | %
|Rate to which the cost trend rate is assumed to decline (the ultimate trend rate)  Canadian Plan |  | 4.4  | % |  | 4.4  | %
|Year that the rate reaches the ultimate trend rate  Canadian Plan                                |  | 2015 |   |  | 2015 |  



A one-percentage-point change in the
assumed health care cost trend rates would have the following impact on the Company:



|                                                          |  |             |     |             |   |      |  
|--------------------------------------------------------- |  | ----------- | --- | ----------- | - | ---- | -
|                                                          |  | 1% increase |     | 1% decrease |  
|Effect on total service cost and interest cost components |  | $           | 91  |             | $ | (75  | )
|Effect on postretirement benefit obligation               |  |             | 766 |             |   | (646 | )



Estimated future plan benefit payments
as of December 31, 2004 are as follows:



|            |  |   |      
|----------- |  | - | -----
|2005        |  | $ | 3,202
|2006        |  |   | 1,813
|2007        |  |   | 1,672
|2008        |  |   | 1,539
|2009        |  |   | 1,472
|2010  2014 |  |   | 6,526



Also included in the Consolidated
Balance Sheets at December 31, 2004 and 2003 are other postemployment benefit obligations of $5,228 and $5,879, respectively.



14. Accumulated Other Comprehensive Loss



The components of Accumulated other comprehensive loss as of December 31, 2004 and 2003 are as follows:



|                                                    |  |      |          |   |      |   |          |  
|--------------------------------------------------- |  | ---- | -------- | - | ---- | - | -------- | -
|                                                    |  | 2004 |          |   | 2003 |  
|Cumulative foreign currency translation adjustments |  | $    | (31,201  | ) |      | $ | (49,923  | )
|Minimum pension liability, net of tax               |  |      | (76,292  | ) |      |   | (78,270  | )
|                                                    |  |      |          |   |      |   |          |  
|                                                    |  | $    | (107,493 | ) |      | $ | (128,193 | )
|                                                    |  |      |          |   |      |   |          |  



68



---

##### Table of Contents

15. Shareholders Deficit



Common Stock



Following is a rollforward of the Companys common stock activity:



|                                  |  |                          |   |  |               
|--------------------------------- |  | ------------------------ | - |  | --------------
|                                  |  | Common SharesOutstanding |   |  | Treasury Stock
|Balance December 31, 2001         |  | 199,121,749              |   |  | 858,970       
|                                  |  |                         
|Issuance of restricted stock      |  | 1,587,301                |   |  |              
|Common shares sold to management  |  | 333,333                  |   |  |              
|Repurchase of management shares   |  | (118,755                 | ) |  |              
|                                  |  |                          |   |  |               
|Balance December 31, 2002         |  | 200,923,628              |   |  | 858,970       
|Repurchase of management shares   |  | (28,000                  | ) |  |              
|                                  |  |                          |   |  |               
|Balance December 31, 2003         |  | 200,895,628              |   |  | 858,970       
|                                  |  |                         
|Cancellation of restricted shares |  | (1,587,301               | ) |  |              
|Redemption of shares from parent  |  | (102,069,058             | ) |  | 102,069,058   
|Repurchase of management shares   |  | (333,333                 | ) |  | 333,333       
|                                  |  |                          |   |  |               
|Balance December 31, 2004         |  | 96,905,936               |   |  | 103,261,361   



Receivable from Parent



At December 31, 2004, the Company held $404,817 of notes receivable from BHI
Acquisition, which accrue interest at 12% per year, payable quarterly, and mature on September 29, 2005. The notes were previously due from BHI, the Companys parent prior to the Apollo Transaction. This receivable, reflected as a reduction in
the Consolidated Statements of Shareholders Deficit, includes accrued interest of $155,855, $107,277 and $58,699 at December 31, 2004, 2003 and 2002, respectively. Paid-in capital includes the related interest income of $48,578, $48,578 and
$58,699 for the years ended December 31, 2004, 2003 and 2002. In the Companys 2001 Annual Report on Form 10-K, the Company expressed its intention to cancel this note receivable; therefore, a valuation allowance of $10,120 was placed on the
accrued interest at that date. During 2002, the Company decided to defer canceling the note, reversed this valuation allowance and resumed accruing the related interest. Historically, BHI funded the payment of the interest on the note through common
dividends received from the Company. The Company has not received a payment on the accrued interest, nor has the Company paid an associated dividend, since October 15, 2001.



16. Stock Based Compensation



Stock Options



The Company accounts for stock-based compensation under APB No. 25 and has adopted the disclosure-only provisions of SFAS No. 123 Accounting for Stock-Based Compensation. During 2004, BHI Acquisition
granted options to purchase BHI Acquisition common stock to key employees of the Company under the BHI Option Plan. Prior to the Apollo Transaction, the Company had granted options under the BCI Option Plan.



Following is a summary of option activity under the BCI Option Plan for the three years ended
December 31, 2004:



|                                      |  |            |   |      |                              |      |        |            |   |                              |   |        |  |            |                              |  |   |     
|------------------------------------- |  | ---------- | - | ---- | ---------------------------- | ---- | ------ | ---------- | - | ---------------------------- | - | ------ |  | ---------- | ---------------------------- |  | - | ----
|                                      |  | 2004       |   | 2003 |                              | 2002
|                                      |  | Shares     |   |      | WeightedAverageExercisePrice |      | Shares |            |   | WeightedAverageExercisePrice |   | Shares |  |            | WeightedAverageExercisePrice
|Options outstanding beginning of year |  | 5,532,360  |   |      | $                            | 2.42 |        | 3,426,040  |   |                              | $ | 3.59   |  | 6,871,380  |                              |  | $ | 4.38
|Options exercised                     |  | (4,968,250 | ) |      |                              | 2.08 |        |           |   |                              |   |       |  |           |                              |  |   |    
|Options granted                       |  | 330,000    |   |      |                              | 2.00 |        | 3,457,500  |   |                              |   | 2.00   |  | 1,492,000  |                              |  |   | 2.25
|Options forfeited                     |  | (894,110   | ) |      |                              | 4.18 |        | (1,351,180 | ) |                              |   | 4.30   |  | (4,937,340 | )                            |  |   | 4.28
|                                      |  |            |   |      |                              |      |        |            |   |                              |   |        |  |            |                              |  |   |     
|Options outstanding end of year       |  |           |   |      | $                            |     |        | 5,532,360  |   |                              | $ | 2.42   |  | 3,426,040  |                              |  | $ | 3.59



69



---

##### Table of Contents

During the first quarter of 2004, the Company granted 330,000 options to key employees to purchase the stock of BCI. The
options ratably vested over five years, had an exercise price of $2.00 and were granted at their estimated fair value.



As a result of the Apollo Transaction, all 4,968,250 of the Companys in-the-money options were exercised, resulting in the recognition of $3,716 of option expense,
which is included in Transaction related costs. The remaining options under the BCI Option Plan were terminated without payment.



During 2004, BHI Acquisition granted options to purchase 5,423,284 shares of BHI Acquisition stock, half of which vest ratably over a five-year period (the
five-year options), while the remaining vest after the eighth anniversary of the grant date (the eight-year options). The eight-year options provide for accelerated vesting upon the sale of the Company and the achievement of
certain financial targets. The five-year options and eight-year options were granted at fair value, but are treated as variable because the BHI Option Plan is a book value plan with the value of the options determined by a formula. The Company has
not recorded any expense under APB No. 25 related to these options, as their formula value is less than the exercise price.



At December 31, 2004, there were no exercisable options outstanding under the BHI Option Plan to purchase BHI Acquisition stock. At December 31, 2003, there were 583,488
exercisable options outstanding to purchase the Companys stock under the BCI Option Plan, with a weighted average exercise price of $4.70.



Total expense recognized by the Company relating to the option plans was $3,716, $230 and $14 for the years ended December 31, 2004, 2003 and 2002, respectively.



Stock-Based Deferred Compensation Plans



Certain key employees of the Company have been granted 2,169,314 deferred common stock units
under the BHI Acquisition Corp. 2004 Deferred Compensation Plan (the Deferred Compensation Plan), which is an unfunded plan. Each unit gives the grantee the right to one share of common stock of BHI Acquisition, following the completion
of a forfeiture period, upon the earlier of termination of employment or upon certain other events triggered by a registration of BHI Acquisition common stock for sale to the public. The forfeiture period for 1,477,272 of the deferred units expired
on December 10, 2004. The remaining 692,042 deferred units are subject to forfeiture until December 31, 2005. The Company recorded $4,300 of expense related to the Deferred Compensation Plan during 2004, and the related credit is in Paid-in capital.



In addition, the Company granted 1,587,301 shares of restricted stock of BCI
during 2002, which was cancelled as a result of the Apollo Transaction. A payment of $2,587 was made to the holders of the restricted stock related to the cancellation. The Company recognized expense related to the restricted stock of $504, $1,191
and $892 for the years ended December 31, 2004, 2003 and 2002.



Unit
Appreciation Rights



Certain current and former employees of the Company
held unit appreciation rights (UARs) in BWHLLC granted by the Company during the years 1996 - 2000. As a result of the Apollo Transaction, which triggered a liquidation of the UAR plan, all 1,157,732 UARs outstanding were terminated
without payment.



70



---

##### Table of Contents

17. Income Taxes



Comparative analysis of the Companys income tax expense (benefit) related to continuing operations follows:



|                             |  |      |         |   |      |   |         |      |  |   |         |  
|---------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                             |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Current                      |  |      |         |   |      |   |         |      |  |   |         |  
|Federal                      |  | $    | (5,578  | ) |      | $ | (9,899  | )    |  | $ | (29,479 | )
|State & Local                |  |      | 5,797   |   |      |   | (737    | )    |  |   | (380    | )
|Foreign                      |  |      | 6,767   |   |      |   | (246    | )    |  |   | 11,574  |  
|                             |  |      |         |   |      |   |         |      |  |   |         |  
|Total                        |  | $    | 6,986   |   |      | $ | (10,882 | )    |  | $ | (18,285 | )
|                             |  |      |         |   |      |   |         |      |  |   |         |  
|Deferred                     |  |      |         |   |      |   |         |      |  |   |         |  
|Federal                      |  | $    | 136,318 |   |      | $ | 4,662   |      |  | $ | 12,040  |  
|State & Local                |  |      | 150     |   |      |   | 566     |      |  |   | 187     |  
|Foreign                      |  |      | 2,883   |   |      |   | 995     |      |  |   | 3,796   |  
|                             |  |      |         |   |      |   |         |      |  |   |         |  
|Total                        |  | $    | 139,351 |   |      | $ | 6,223   |      |  | $ | 16,023  |  
|                             |  |      |         |   |      |   |         |      |  |   |         |  
|Income tax expense (benefit) |  | $    | 146,337 |   |      | $ | (4,659  | )    |  | $ | (2,262  | )
|                             |  |      |         |   |      |   |         |      |  |   |         |  



A reconciliation of the Companys
difference between income taxes related to continuing operations computed at Federal statutory tax rates and provisions for income taxes is as follows:



|                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|--------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                    |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Income taxes computed at Federal statutory tax rate |  | $    | (11,666 | ) |      | $ | 6,411   |      |  | $ | (3,157  | )
|State tax provision, net of Federal benefits        |  |      | (265    | ) |      |   | (111    | )    |  |   | (193    | )
|Foreign tax differentials                           |  |      | 680     |   |      |   | (813    | )    |  |   | 3,502   |  
|Foreign source income also subject to U.S. taxation |  |      | 5,463   |   |      |   | 9,324   |      |  |   | 1,777   |  
|Expenses not deductible for tax                     |  |      | 14,018  |   |      |   | 373     |      |  |   | (863    | )
|Valuation allowance                                 |  |      | 86,541  |   |      |   | 5,401   |      |  |   | 16,672  |  
|Elimination of deferred tax liabilities of BCPM     |  |      |        |   |      |   | (1,624  | )    |  |   |        |  
|Capital loss on sale of Melamine                    |  |      |        |   |      |   | (19,936 | )    |  |   |        |  
|Additional tax on foreign unrepatriated earnings    |  |      | 62,514  |   |      |   |        |      |  |   |        |  
|Adjustment of prior estimates and other             |  |      | (10,948 | ) |      |   | (3,684  | )    |  |   | (20,000 | )
|                                                    |  |      |         |   |      |   |         |      |  |   |         |  
|Income tax expense (benefit)                        |  | $    | 146,337 |   |      | $ | (4,659  | )    |  | $ | (2,262  | )
|                                                    |  |      |         |   |      |   |         |      |  |   |         |  



Due to changes in circumstances in
connection with the Apollo Transaction, the 2004 consolidated tax rate reflects a valuation allowance in the amount of $86,541 recorded against the Companys deferred tax assets when management determined that it is more likely than not that
these deferred tax assets will not be fully utilized in the future. Following the Apollo Transaction, Apollo made a determination that the unrepatriated earnings of the Companys foreign subsidiaries are no longer considered permanently
reinvested. As such, the 2004 consolidated tax rate reflects an additional provision of $62,514 for taxes associated with the unrepatriated earnings of the Companys foreign subsidiaries. In addition, the 2004 consolidated tax rate reflects
income tax expense of $14,018, which primarily pertains to Apollo Transaction costs (see Note 1), which are not deductible for income tax purposes. These amounts are partially offset by a net tax benefit of $10,948 relating to certain state and
Internal Revenue Service (IRS) settlements, as well as changes in prior estimates.



The 2003 consolidated rate reflects a benefit of $19,936 from the sale of the stock of Melamine in 2003. The tax basis of the stock exceeded the tax basis of the assets and this additional basis was not recognized
until the stock sale was completed in 2003. This benefit is a capital loss carryforward that can only be used against capital gains; therefore, a valuation reserve was established for the full amount of this benefit. The 2003 consolidated rate also
reflects a reduction of the valuation reserve in the amount of $14,534 related to benefits which the Company believed were more likely than not to be realized. The 2003 tax rate also reflects the elimination of $1,624 of deferred tax liabilities
associated with the BCPM bankruptcy. In addition, reserves for prior years Canadian and U.S. tax audits were reduced by $3,997 as a result of preliminary settlements of certain matters in the fourth quarter of 2003. The effective rate also
reflects additional income tax expense of $9,324 on foreign dividend income and on deemed dividend income related to loans and guarantees from foreign subsidiaries.



The 2002 consolidated tax rate reflects a valuation allowance in the amount of $16,672 recorded against the benefit of certain deferred
interest expense deductions, which are subject to usage limitations by the IRS, that the



71



---

##### Table of Contents

Company believed were no longer more likely than not to be used. This expense is offset by the reduction of a $20,000 reserve for U.S. Federal income tax
audits reflecting preliminary settlement of certain matters for the years 1998 and 1999 that were resolved in 2002.



The domestic and foreign components of the Companys (Loss) income from continuing operations before income taxes are as follows:



|         |  |      |         |   |      |   |         |      |  |   |         |  
|-------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|         |  | 2004 |         |   | 2003 |   |         | 2002 | 
|Domestic |  | $    | (58,960 | ) |      | $ | (30,706 | )    |  | $ | (42,929 | )
|Foreign  |  |      | 25,629  |   |      |   | 49,023  |      |  |   | 33,909  |  
|         |  |      |         |   |      |   |         |      |  |   |         |  
|         |  | $    | (33,331 | ) |      | $ | 18,317  |      |  | $ | (9,020  | )
|         |  |      |         |   |      |   |         |      |  |   |         |  



The tax effects of the Companys
significant temporary differences, and net operating loss and credit carryforwards, which comprise the deferred tax assets and liabilities at December 31, 2004 and 2003, are as follows:



|                                               |  |      |          |   |      |   |         |  
|---------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | -
|                                               |  | 2004 |          |   | 2003 |  
|Assets                                         |  |      |          |   |      |   |         |  
|Non-pension postemployment benefit obligations |  | $    | 42,237   |   |      | $ | 46,261  |  
|Accrued and other expenses                     |  |      | 62,087   |   |      |   | 75,493  |  
|Loss and credit carryforwards                  |  |      | 144,797  |   |      |   | 162,308 |  
|Pension liability                              |  |      | 22,577   |   |      |   | 23,448  |  
|                                               |  |      |          |   |      |   |         |  
|Gross deferred tax assets                      |  |      | 271,698  |   |      |   | 307,510 |  
|Valuation allowance                            |  |      | (189,248 | ) |      |   | (81,992 | )
|                                               |  |      |          |   |      |   |         |  
|                                               |  |      | 82,450   |   |      |   | 225,518 |  
|                                               |  |     
|Liabilities                                    |  |      |          |   |      |   |         |  
|Property, plant, equipment and intangibles     |  |      | 36,830   |   |      |   | 77,558  |  
|Unrepatriated earnings of foreign subsidiaries |  |      | 66,271   |   |      |   | 30,374  |  
|Foreign property, plant, equipment and other   |  |      | 12,580   |   |      |   | 9,060   |  
|Prepaid expenses                               |  |      |         |   |      |   | 2,406   |  
|                                               |  |      |          |   |      |   |         |  
|Gross deferred tax liabilities                 |  |      | 115,681  |   |      |   | 119,398 |  
|                                               |  |      |          |   |      |   |         |  
|Net deferred tax (liability) asset             |  | $    | (33,231  | ) |      | $ | 106,120 |  
|                                               |  |      |          |   |      |   |         |  



The following table summarizes the
Companys presentation of its net deferred tax (liability) asset on the Consolidated Balance Sheets at December 31, 2004 and 2003:



|                                                              |  |      |         |   |      |   |        
|------------------------------------------------------------- |  | ---- | ------- | - | ---- | - | -------
|                                                              |  | 2004 |         |   | 2003
|Assets                                                        |  |      |         |   |      |   |        
|Current deferred income taxes                                 |  | $    | 522     |   |      | $ | 27,085 
|Long-term deferred income taxes                               |  |      | 3,582   |   |      |   | 113,434
|                                                              |  |      |         |   |      |   |        
|                                                              |  |      | 4,104   |   |      |   | 140,519
|                                                              |  |     
|Liabilities                                                   |  |      |         |   |      |   |        
|Current deferred income taxes (Other current liabilities)     |  |      | 478     |   |      |   | 4,025  
|Long-term deferred income taxes (Other long-term liabilities) |  |      | 36,857  |   |      |   | 30,374 
|                                                              |  |      |         |   |      |   |        
|                                                              |  |      | 37,335  |   |      |   | 34,399 
|                                                              |  |      |         |   |      |   |        
|Net deferred tax (liability) asset                            |  | $    | (33,231 | ) |      | $ | 106,120
|                                                              |  |      |         |   |      |   |        



The Companys net deferred tax
liability at December 31, 2004 was $33,231, and primarily represents the Companys liability for withholding taxes related to unrepatriated earnings from its foreign subsidiaries. As a result of Apollos decision to repatriate foreign
earnings, the Company recorded a deferred tax asset of approximately $19,000 related to the tax effect of accumulated foreign currency translation adjustments, for which a full valuation allowance was recorded. Utilization of the Companys
deferred tax assets on a go-forward basis are significantly limited by statute; as such, at December 31, 2004, the Company has a valuation allowance of $189,248 on its deferred tax assets. The deferred tax assets are reduced by a valuation allowance
when it is determined that it is more likely than not that these assets will not be fully utilized in the future. The Companys remaining unreserved deferred tax assets are expected to offset deferred tax liabilities in future taxable periods.



72



---

##### Table of Contents

To conform with the current year presentation, the Company reclassed its 2003 liability of $30,374 pertaining to
unrepatriated earnings from Other long-term liabilities to Long-term deferred income taxes.



The Company and some of its affiliates have historically operated in over forty states across the U.S. Since 1995, the Company has divested a significant number of its businesses and generated significant taxable
gains from these sales and divestitures. The Company has also utilized certain affiliated legal entities for the purposes of licensing its intellectual properties to related and unrelated parties and for providing loans and other financing for
operations. Reserves have been established to provide for probable additional tax liabilities related to these transactions. At December 31, 2004, the Company has $25,047 accrued for probable tax liabilities and $6,875 accrued for expected payments
to states as a result of settled IRS issues. As the various taxing authorities continue with their audit / examination programs, the Company will adjust its reserves to reflect these settlements.



The IRS has substantially completed audits of all years through 1999, and unresolved issues
for the years 1994 - 1999 are currently under discussion with the Appeals Office of the IRS and the Competent Authority group of the U.S. Treasury Department. For tax years 1996 through 1999, agreement has been reached between the U.S. and Canadian
Competent Authority that reduces previously disallowed allocations and royalties. Remaining unresolved issues generally include the appropriateness of expense allocations and royalty charges between U.S. and foreign jurisdictions, compensation
excise tax assessments, certain carryback claims filed by the Company and the treatment of various business sale transactions undertaken by the Company during the period. Management believes the resolution of the above-described issues will not have
a material impact on the Companys financial results. The IRS has substantially completed the audit of tax years 2000 - 2001, and the results have been discussed and agreed upon by the Company. The years 2002, 2003 and 2004 remain open for
examination.



The Canada Revenue Agency is currently auditing the
Companys Canadian subsidiary for the period 1991 - 1995. The years 1996 - 2004 remain open for inspection and examination by various Canadian taxing authorities. Since 1995, the Company has divested its Foods, Consumer Adhesives and wall
coverings businesses, all of which had operations in Canada. Deposits have been made to offset the accrued probable additional taxes related to the divestiture of these businesses.



18. Segment and Geographic Data



The Company consists of three reportable segments: Forest Products, Performance Resins and International. Consolidated results also include Corporate and Other and
Divested Business, which are reported separately. The product lines included in the Forest Products segment are formaldehyde and forest product resins. The key business drivers in the Forest Products segment are housing starts, furniture demand,
panel production capacity and chemical sector operating conditions. The Performance Resins segment includes oilfield, foundry and specialty resins. In the Performance Resins segment, the key business drivers are housing starts, auto builds, active
gas drilling rigs and the general industrial sector. The International segment consists of operations in Europe, Latin America and Asia Pacific. Principal countries of operation are the U.K., Brazil, Australia and Malaysia. Product lines include
formaldehyde, forest product and performance resins and consumer products. In the International segment, the key business drivers are export levels, panel production capacity, housing starts, furniture demand and the local political environment.
Corporate and Other represents general and administrative expenses and income and expenses related to liabilities retained from businesses sold in previous years. Divested Business includes Melamine, which was impaired in 2001, closed in early 2002
and subsequently sold in 2003. Operating results subsequent to the closure date represent revenue from the sale of inventory.



Operating Segments:



Following is a comparison of net sales and Segment EBITDA. Segment EBITDA is equal to net income (loss) before depreciation and amortization, interest expense, other
non-operating expenses or income, income taxes and other adjustments (which include costs included in operating income associated with the Apollo Transaction, business realignment activities, certain costs primarily related to legacy businesses,
dispositions and pension settlement charges, if any). Segment EBITDA is presented by reportable segment and for Corporate and Other and Divested Business of the Company for the years ended December 31, 2004, 2003 and 2002. Segment EBITDA information
is presented with the Companys segment disclosures because it is the measure used by the Companys management in the evaluation of operating results and in determining allocations of capital resources among the business segments. It is
also the metric used by the Company to set management and executive incentive compensation.



73



---

##### Table of Contents

|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|-------------------------------------- |  | ---- | --------- | - | ---- | - | --------- | ---- |  | - | --------- | -
|Sales to Unaffiliated Customers:       |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|                                       |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Forest Products                        |  | $    | 896,089   |   |      | $ | 755,767   |      |  | $ | 634,619   |  
|Performance Resins                     |  |      | 426,546   |   |      |   | 364,347   |      |  |   | 340,791   |  
|International                          |  |      | 363,386   |   |      |   | 314,693   |      |  |   | 264,541   |  
|Divested Business                      |  |      |          |   |      |   | 6         |      |  |   | 7,934     |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                  |  | $    | 1,686,021 |   |      | $ | 1,434,813 |      |  | $ | 1,247,885 |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|Sales by Product Line:                 |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|                                       |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Forest products resins                 |  | $    | 842,810   |   |      | $ | 704,930   |      |  | $ | 598,835   |  
|Formaldehyde                           |  |      | 267,842   |   |      |   | 242,774   |      |  |   | 185,102   |  
|Specialty resins                       |  |      | 252,998   |   |      |   | 226,161   |      |  |   | 211,233   |  
|Foundry resins                         |  |      | 171,655   |   |      |   | 137,481   |      |  |   | 143,419   |  
|Oilfield products                      |  |      | 108,451   |   |      |   | 86,487    |      |  |   | 60,598    |  
|International consumer products        |  |      | 37,696    |   |      |   | 31,050    |      |  |   | 34,957    |  
|Melamine                               |  |      |          |   |      |   | 6         |      |  |   | 7,934     |  
|Other                                  |  |      | 4,569     |   |      |   | 5,924     |      |  |   | 5,807     |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                  |  | $    | 1,686,021 |   |      | $ | 1,434,813 |      |  | $ | 1,247,885 |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|Depreciation and Amortization Expense: |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|                                       |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Forest Products                        |  | $    | 21,142    |   |      | $ | 19,953    |      |  | $ | 19,259    |  
|Performance Resins                     |  |      | 10,568    |   |      |   | 10,209    |      |  |   | 9,929     |  
|International                          |  |      | 12,679    |   |      |   | 11,089    |      |  |   | 10,305    |  
|Corporate and Other                    |  |      | 5,335     |   |      |   | 6,068     |      |  |   | 8,454     |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                  |  | $    | 49,724    |   |      | $ | 47,319    |      |  | $ | 47,947    |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|Segment EBITDA:                        |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|                                       |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Forest Products                        |  | $    | 111,359   |   |      | $ | 92,548    |      |  | $ | 92,918    |  
|Performance Resins                     |  |      | 49,505    |   |      |   | 46,661    |      |  |   | 45,127    |  
|International                          |  |      | 31,083    |   |      |   | 32,250    |      |  |   | 28,630    |  
|Corporate and Other                    |  |      | (37,496   | ) |      |   | (43,713   | )    |  |   | (44,949   | )
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                  |  | $    | 154,451   |   |      | $ | 127,746   |      |  | $ | 121,726   |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|Total Assets at Year End:              |  |      |           |   |      |   |           |      |  |   |           |  
|                                       |  |      |          
|                                       |  | 2004 |           |   | 2003 |   |           | 2002 | 
|Forest Products                        |  | $    | 402,474   |   |      | $ | 400,950   |      |  | $ | 329,574   |  
|Performance Resins                     |  |      | 213,135   |   |      |   | 202,482   |      |  |   | 205,385   |  
|International                          |  |      | 291,154   |   |      |   | 252,303   |      |  |   | 204,777   |  
|Corporate and Other                    |  |      | 137,351   |   |      |   | 138,131   |      |  |   | 271,811   |  
|Divested Business                      |  |      |          |   |      |   |          |      |  |   | 233       |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  
|Total                                  |  | $    | 1,044,114 |   |      | $ | 993,866   |      |  | $ | 1,011,780 |  
|                                       |  |      |           |   |      |   |           |      |  |   |           |  



74



---

##### Table of Contents

|                      |  |      |        |      |   |        |  |   |       
|--------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|Capital Expenditures: |  |      |        |      |   |        |  |   |       
|                      |  |      |       
|                      |  | 2004 |        | 2003 |   | 2002  
|Forest Products       |  | $    | 22,031 |      | $ | 21,726 |  | $ | 17,322
|Performance Resins    |  |      | 6,062  |      |   | 9,830  |  |   | 13,744
|International         |  |      | 8,421  |      |   | 8,708  |  |   | 5,691 
|Corporate and Other   |  |      | 3,243  |      |   | 1,556  |  |   | 2,016 
|                      |  |      |        |      |   |        |  |   |       
|Total                 |  | $    | 39,757 |      | $ | 41,820 |  | $ | 38,773
|                      |  |      |        |      |   |        |  |   |       



The Company reports and manages its
business through three operating segments, which do cross geographic boundaries. The following tables reflect sales and long-lived assets by major geographic area:



|                                    |  |      |           |      |   |           |  |   |          
|----------------------------------- |  | ---- | --------- | ---- | - | --------- |  | - | ---------
|Sales to Unaffiliated Customers:(1) |  |      |           |      |   |           |  |   |          
|                                    |  |      |          
|                                    |  | 2004 |           | 2003 |   | 2002     
|United States                       |  | $    | 1,048,531 |      | $ | 901,018   |  | $ | 812,667  
|Canada                              |  |      | 274,104   |      |   | 219,102   |  |   | 170,677  
|United Kingdom                      |  |      | 138,966   |      |   | 121,893   |  |   | 105,595  
|Other International                 |  |      | 224,420   |      |   | 192,800   |  |   | 158,946  
|                                    |  |      |           |      |   |           |  |   |          
|Total                               |  | $    | 1,686,021 |      | $ | 1,434,813 |  | $ | 1,247,885
|                                    |  |      |           |      |   |           |  |   |          

---

|(1) | For purposes of geographic disclosures, sales are attributed to the country in which individual business locations reside.
|--- | --------------------------------------------------------------------------------------------------------------------------



|                      |  |      |         |      |   |         |  |   |        
|--------------------- |  | ---- | ------- | ---- | - | ------- |  | - | -------
|Long-Lived Assets:(2) |  |      |         |      |   |         |  |   |        
|                      |  |      |        
|                      |  | 2004 |         | 2003 |   | 2002   
|United States         |  | $    | 251,218 |      | $ | 265,963 |  | $ | 277,349
|Canada                |  |      | 73,518  |      |   | 63,109  |  |   | 51,042 
|United Kingdom        |  |      | 76,483  |      |   | 77,769  |  |   | 76,377 
|Other International   |  |      | 46,787  |      |   | 42,043  |  |   | 34,970 
|                      |  |      |         |      |   |         |  |   |        
|Total                 |  | $    | 448,006 |      | $ | 448,884 |  | $ | 439,738
|                      |  |      |         |      |   |         |  |   |        

---

|(2) | Long-lived assets include property, plant and equipment, net of accumulated depreciation.
|--- | -----------------------------------------------------------------------------------------



75



---

##### Table of Contents

The table below reconciles Segment EBITDA to net (loss) income, which management believes to be the most directly
comparable GAAP financial measure.



Reconciliation of Segment EBITDA to Net
(Loss) Income:



|                                                     |  |      |          |   |      |   |         |      |  |   |         |  
|---------------------------------------------------- |  | ---- | -------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                     |  | 2004 |          |   | 2003 |   |         | 2002 | 
|Segment EBITDA:                                      |  |      |          |   |      |   |         |      |  |   |         |  
|Forest Products                                      |  | $    | 111,359  |   |      | $ | 92,548  |      |  | $ | 92,918  |  
|Performance Resins                                   |  |      | 49,505   |   |      |   | 46,661  |      |  |   | 45,127  |  
|International                                        |  |      | 31,083   |   |      |   | 32,250  |      |  |   | 28,630  |  
|Corporate and Other                                  |  |      | (37,496  | ) |      |   | (43,713 | )    |  |   | (44,949 | )
|                                                     |  |      |         
|Reconciliation:                                      |  |      |          |   |      |   |         |      |  |   |         |  
|Depreciation and amortization                        |  |      | (49,724  | ) |      |   | (47,319 | )    |  |   | (47,947 | )
|Adjustments to Segment EBITDA (described below)      |  |      | (72,472  | ) |      |   | (13,885 | )    |  |   | (40,071 | )
|Interest expense                                     |  |      | (64,183  | ) |      |   | (46,138 | )    |  |   | (47,315 | )
|Affiliated interest expense, net                     |  |      | (138     | ) |      |   | (558    | )    |  |   | (1,402  | )
|Other non-operating (expense) income                 |  |      | (1,265   | ) |      |   | (1,529  | )    |  |   | 5,989   |  
|Income tax (expense) benefit                         |  |      | (146,337 | ) |      |   | 4,659   |      |  |   | 2,262   |  
|Cumulative effect of change in accounting. Principle |  |      |         |   |      |   |        |      |  |   | (29,825 | )
|                                                     |  |      |          |   |      |   |         |      |  |   |         |  
|Net (loss) income                                    |  | $    | (179,668 | ) |      | $ | 22,976  |      |  | $ | (36,583 | )
|                                                     |  |      |          |   |      |   |         |      |  |   |         |  



Adjustments to Segment
EBITDA



The following items are not included in Segment EBITDA:



|                             |  |                   |        |   |           |   |      |                |  |   |           |   |  |       |         |   |  |   |         |  
|---------------------------- |  | ----------------- | ------ | - | --------- | - | ---- | -------------- |  | - | --------- | - |  | ----- | ------- | - |  | - | ------- | -
|Year Ended December 31, 2004 |  | (1) Plant Closure |        |   | Severance |   |      | (2) Impairment |  |   | (3) Other |   |  | Total |        
|Forest Products              |  | $                 | 139    |   |           | $ | (334 | )              |  | $ | (75       | ) |  | $     | (803    | ) |  | $ | (1,073  | )
|Performance Resins           |  |                   | (251   | ) |           |   | (80  | )              |  |   | (1,552    | ) |  |       | 1,007   |   |  |   | (876    | )
|International                |  |                   | (3,369 | ) |           |   | (119 | )              |  |   | (397      | ) |  |       | (25     | ) |  |   | (3,910  | )
|Corporate and Other          |  |                   | 13     |   |           |   | 156  |                |  |   |          |   |  |       | (66,782 | ) |  |   | (66,613 | )
|                             |  |                   |        |   |           |   |      |                |  |   |           |   |  |       |         |   |  |   |         |  
|Total                        |  | $                 | (3,468 | ) |           | $ | (377 | )              |  | $ | (2,024    | ) |  | $     | (66,603 | ) |  | $ | (72,472 | )
|                             |  |                   |        |   |           |   |      |                |  |   |           |   |  |       |         |   |  |   |         |  

---

|(1) | Plant closure costs include fixed asset write-offs, plant employee severance and demolition, environmental and other related costs (see Note 4).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents write-down of production assets due to changes in our manufacturing footprint.
|--- | -----------------------------------------------------------------------------------------

|(3) | Primarily represents costs of $55,586 related to the Apollo Transaction, and included in Transaction related costs, and legal costs of approximately $10,300 primarily related to
legacy businesses, which are included in General & administrative expense.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



76



---

##### Table of Contents

|                             |  |                   |        |   |           |   |        |            |  |   |        |      |  |       |        |      |  |   |         |  
|---------------------------- |  | ----------------- | ------ | - | --------- | - | ------ | ---------- |  | - | ------ | ---- |  | ----- | ------ | ---- |  | - | ------- | -
|Year Ended December 31, 2003 |  | (1) Plant Closure |        |   | Severance |   |        | Impairment |  |   | Other  |      |  | Total |       
|Forest Products              |  | $                 | (932   | ) |           | $ | (1,125 | )          |  | $ |       |      |  | $     | (90    | )(2) |  | $ | (2,147  | )
|Performance Resins           |  |                   | 94     |   |           |   | (397   | )          |  |   | (1,000 | )(3) |  |       |       |      |  |   | (1,303  | )
|International                |  |                   | (7,720 | ) |           |   | (643   | )          |  |   | (2,183 | )(4) |  |       | 11,692 | (5)  |  |   | 1,146   |  
|Corporate and Other          |  |                   | (146   | ) |           |   | (4,672 | )          |  |   |       |      |  |       | (8,732 | )(2) |  |   | (13,550 | )
|Divested Business(6)         |  |                   | 1,716  |   |           |   |       |            |  |   |       |      |  |       | 253    |      |  |   | 1,969   |  
|                             |  |                   |        |   |           |   |        |            |  |   |        |      |  |       |        |      |  |   |         |  
|Total                        |  | $                 | (6,988 | ) |           | $ | (6,837 | )          |  | $ | (3,183 | )    |  | $     | 3,123  |      |  | $ | (13,885 | )
|                             |  |                   |        |   |           |   |        |            |  |   |        |      |  |       |        |      |  |   |         |  

---

|(1) | Plant closure costs include fixed asset write-offs, plant employee severance and demolition, environmental and other related costs (see Note 4).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Primarily represents a charge of $5,929 related to legal settlements with BCPM Liquidating LLC and BCP Liquidating LLC and severance expense included in general and administrative
expense, incurred by the Company for positions to be replaced.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | Represents a reduction in estimated net realizable value of a facility held for sale.
|--- | -------------------------------------------------------------------------------------

|(4) | Represents fixed asset and goodwill impairments related to various international locations.
|--- | -------------------------------------------------------------------------------------------

|(5) | Represents a gain on the sale of land associated with a closed plant in the U.K.
|--- | --------------------------------------------------------------------------------

|(6) | Represents gains recognized related to the closure and subsequent sale of Melamine.
|--- | -----------------------------------------------------------------------------------



|                             |  |                   |         |   |           |   |        |            |  |   |        |      |  |       |         |      |  |   |         |  
|---------------------------- |  | ----------------- | ------- | - | --------- | - | ------ | ---------- |  | - | ------ | ---- |  | ----- | ------- | ---- |  | - | ------- | -
|Year Ended December 31, 2002 |  | (1) Plant Closure |         |   | Severance |   |        | Impairment |  |   | Other  |      |  | Total |        
|Forest Products              |  | $                 | (1,107  | ) |           | $ | (250   | )          |  | $ |       |      |  | $     |        |      |  | $ | (1,357  | )
|Performance Resins           |  |                   | (1,950  | ) |           |   | (102   | )          |  |   | (1,040 | )(2) |  |       |        |      |  |   | (3,092  | )
|International                |  |                   | (2,844  | ) |           |   | (795   | )          |  |   | (5,275 | )(3) |  |       | 2,465   | (4)  |  |   | (6,449  | )
|Corporate and Other          |  |                   |        |   |           |   | (2,118 | )          |  |   |       |      |  |       | (19,850 | )(5) |  |   | (21,968 | )
|Divested Business(6)         |  |                   | (6,683  | ) |           |   |       |            |  |   |       |      |  |       | (522    | )    |  |   | (7,205  | )
|                             |  |                   |         |   |           |   |        |            |  |   |        |      |  |       |         |      |  |   |         |  
|Total                        |  | $                 | (12,584 | ) |           | $ | (3,265 | )          |  | $ | (6,315 | )    |  | $     | (17,907 | )    |  | $ | (40,071 | )
|                             |  |                   |         |   |           |   |        |            |  |   |        |      |  |       |         |      |  |   |         |  

---

|(1) | Plant closure costs include fixed asset write-offs, plant employee severance and demolition, environmental and other related costs (see Note 4).
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Represents a reduction in estimated net realizable value of a facility held for sale.
|--- | -------------------------------------------------------------------------------------

|(3) | Represents fixed asset impairments at various international manufacturing facilities.
|--- | -------------------------------------------------------------------------------------

|(4) | Represents a gain on the sale of land associated with a closed plant in Spain.
|--- | ------------------------------------------------------------------------------

|(5) | Primarily represents a pension settlement charge of $13,600, included in general and administrative expense, and an additional management fee of $5,500 related to the wind down of
Capital, included in other operating expense.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | Represents expenses incurred related to the closure of Melamine.
|--- | ----------------------------------------------------------------



77



---

##### Table of Contents

19. Guarantor/Non-Guarantor Subsidiary Financial Information



In conjunction with the Apollo Transaction, the Company formed two wholly owned finance
subsidiaries to borrow $475 million through a private debt offering. The Company and certain of its subsidiaries guarantee this debt. The following information contains the condensed consolidating financial information for the parent, Borden
Chemical, Inc., the subsidiary issuers (Borden U.S. Finance Corporation and Borden Nova Scotia, ULC), the subsidiary guarantors (BDS Two, Inc., Borden Chemical Investments, Inc., Borden Chemical Foundry, Inc. and Borden Services Company) and the
combined non-guarantor subsidiaries, which includes all of the Companys foreign subsidiaries and HAI. All of the subsidiary issuers and subsidiary guarantors are owned 100% by the Company. All guarantees are full and unconditional and are
joint and several. There are no significant restrictions on the ability of the Company to obtain funds from its domestic subsidiaries by dividend or loan. While the Companys Australian subsidiary and HAI are restricted in the payment of
dividends and intercompany loans due to the terms of their credit facilities, there are no material restrictions on the Companys ability to obtain cash from the remaining non-guarantor subsidiaries.



This information includes allocations of Corporate overhead to the combined non-guarantor
subsidiaries based on Net sales. Income tax expense has been provided on the combined non-guarantor subsidiaries based on actual effective tax rates. All other tax expense is reflected in the parent.



78



---

##### Table of Contents

BORDEN CHEMICAL, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



YEAR ENDED DECEMBER 31, 2004

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS



|                                                 |  |                     |          |   |                   |   |         |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|------------------------------------------------ |  | ------------------- | -------- | - | ----------------- | - | ------- | ---------------------------- |  | - | --------------------------------- | - |  | ------------ | ------- | - | ------------ | - | -------- | - |  | - | --------- | -
|                                                 |  | BordenChemical,Inc. |          |   | SubsidiaryIssuers |   |         | CombinedSubsidiaryGuarantors |  |   | CombinedNon-GuarantorSubsidiaries |   |  | Eliminations |         |   | Consolidated |  
|Net sales                                        |  | $                   | 918,006  |   |                   | $ |        |                              |  | $ |                                  |   |  | $            | 799,041 |   |              | $ | (31,026  | ) |  | $ | 1,686,021 |  
|Cost of goods sold                               |  |                     | 736,840  |   |                   |   |        |                              |  |   |                                  |   |  |              | 655,668 |   |              |   | (31,026  | ) |  |   | 1,361,482 |  
|                                                 |  |                     |          |   |                   |   |         |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Gross margin                                     |  |                     | 181,166  |   |                   |   |        |                              |  |   |                                  |   |  |              | 143,373 |   |              |   |         |   |  |   | 324,539   |  
|                                                 |  |                     |          |   |                   |   |         |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Distribution expense                             |  |                     | 45,045   |   |                   |   |        |                              |  |   |                                  |   |  |              | 30,201  |   |              |   |         |   |  |   | 75,246    |  
|Marketing expense                                |  |                     | 23,649   |   |                   |   |        |                              |  |   |                                  |   |  |              | 23,336  |   |              |   |         |   |  |   | 46,985    |  
|General & administrative expense                 |  |                     | 55,302   |   |                   |   |        |                              |  |   | (11                               | ) |  |              | 52,676  |   |              |   |         |   |  |   | 107,967   |  
|Transaction related costs                        |  |                     | 29,913   |   |                   |   |        |                              |  |   |                                  |   |  |              | 25,673  |   |              |   |         |   |  |   | 55,586    |  
|Business realignment expense and impairments     |  |                     | 874      |   |                   |   |        |                              |  |   |                                  |   |  |              | 3,553   |   |              |   |         |   |  |   | 4,427     |  
|Other operating expense (income)                 |  |                     | 4,892    |   |                   |   |        |                              |  |   | (1,281                            | ) |  |              | (1,538  | ) |              |   |         |   |  |   | 2,073     |  
|                                                 |  |                     |          |   |                   |   |         |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Operating income                                 |  |                     | 21,491   |   |                   |   |        |                              |  |   | 1,292                             |   |  |              | 9,472   |   |              |   |         |   |  |   | 32,255    |  
|                                                 |  |                     |          |   |                   |   |         |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Interest expense                                 |  |                     | 45,955   |   |                   |   | 16,145  |                              |  |   |                                  |   |  |              | 2,083   |   |              |   |         |   |  |   | 64,183    |  
|Affiliated interest expense, net                 |  |                     | 120      |   |                   |   |         |                              |  |   |                                  |   |  |              | 18      |   |              |   |         |   |  |   | 138       |  
|Intercompany interest expense (income)           |  |                     | 136,610  |   |                   |   | (17,116 | )                            |  |   | (130,336                          | ) |  |              | 10,842  |   |              |   |         |   |  |   |          |  
|Intercompany royalty expense (income)            |  |                     | 21,315   |   |                   |   |        |                              |  |   | (21,315                           | ) |  |              |        |   |              |   |         |   |  |   |          |  
|Equity in (earnings) losses of subsidiaries, net |  |                     | (136,719 | ) |                   |   |        |                              |  |   | (2,540                            | ) |  |              |        |   |              |   | 139,259  |   |  |   |          |  
|Other non-operating expense (income)             |  |                     | 402      |   |                   |   | (286    | )                            |  |   | (2                                | ) |  |              | 1,151   |   |              |   |         |   |  |   | 1,265     |  
|                                                 |  |                     |          |   |                   |   |         |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|(Loss) income before income tax                  |  |                     | (46,192  | ) |                   |   | 1,257   |                              |  |   | 155,485                           |   |  |              | (4,622  | ) |              |   | (139,259 | ) |  |   | (33,331   | )
|Income tax expense                               |  |                     | 133,476  |   |                   |   |        |                              |  |   |                                  |   |  |              | 12,861  |   |              |   |         |   |  |   | 146,337   |  
|                                                 |  |                     |          |   |                   |   |         |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Net (loss) income                                |  | $                   | (179,668 | ) |                   | $ | 1,257   |                              |  | $ | 155,485                           |   |  | $            | (17,483 | ) |              | $ | (139,259 | ) |  | $ | (179,668  | )
|                                                 |  |                     |          |   |                   |   |         |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  



79



---

##### Table of Contents

BORDEN CHEMICAL, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



YEAR ENDED DECEMBER 31, 2003

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS



|                                                      |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|----------------------------------------------------- |  | ------------------- | -------- | - | ----------------- | - | ---------------------------- |  | - | --------------------------------- | - |  | ------------ | ------- | - | ------------ | - | -------- | - |  | - | --------- | -
|                                                      |  | BordenChemical,Inc. |          |   | SubsidiaryIssuers |   | CombinedSubsidiaryGuarantors |  |   | CombinedNon-GuarantorSubsidiaries |   |  | Eliminations |         |   | Consolidated |  
|Net sales                                             |  | $                   | 796,981  |   |                   | $ |                             |  | $ |                                  |   |  | $            | 666,754 |   |              | $ | (28,922  | ) |  | $ | 1,434,813 |  
|Cost of goods sold                                    |  |                     | 633,648  |   |                   |   |                             |  |   |                                  |   |  |              | 543,793 |   |              |   | (28,922  | ) |  |   | 1,148,519 |  
|                                                      |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Gross margin                                          |  |                     | 163,333  |   |                   |   |                             |  |   |                                  |   |  |              | 122,961 |   |              |   |         |   |  |   | 286,294   |  
|                                                      |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Distribution expense                                  |  |                     | 40,903   |   |                   |   |                             |  |   |                                  |   |  |              | 25,480  |   |              |   |         |   |  |   | 66,383    |  
|Marketing expense                                     |  |                     | 20,845   |   |                   |   |                             |  |   |                                  |   |  |              | 21,553  |   |              |   |         |   |  |   | 42,398    |  
|General & administrative expense                      |  |                     | 54,262   |   |                   |   |                             |  |   | 273                               |   |  |              | 45,486  |   |              |   |         |   |  |   | 100,021   |  
|Business realignment expense (income) and impairments |  |                     | 5,644    |   |                   |   |                             |  |   |                                  |   |  |              | (896    | ) |              |   |         |   |  |   | 4,748     |  
|Other operating expense (income)                      |  |                     | 8,328    |   |                   |   |                             |  |   | (20                               | ) |  |              | (2,106  | ) |              |   |         |   |  |   | 6,202     |  
|                                                      |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Operating income (loss)                               |  |                     | 33,351   |   |                   |   |                             |  |   | (253                              | ) |  |              | 33,444  |   |              |   |         |   |  |   | 66,542    |  
|                                                      |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Interest expense                                      |  |                     | 44,825   |   |                   |   |                             |  |   |                                  |   |  |              | 1,313   |   |              |   |         |   |  |   | 46,138    |  
|Affiliated interest expense, net                      |  |                     | 394      |   |                   |   |                             |  |   |                                  |   |  |              | 164     |   |              |   |         |   |  |   | 558       |  
|Intercompany interest expense (income)                |  |                     | 107,452  |   |                   |   |                             |  |   | (108,273                          | ) |  |              | 821     |   |              |   |         |   |  |   |          |  
|Intercompany royalty expense (income)                 |  |                     | 19,193   |   |                   |   |                             |  |   | (19,193                           | ) |  |              |        |   |              |   |         |   |  |   |          |  
|Equity in (earnings) losses of subsidiaries, net      |  |                     | (164,062 | ) |                   |   |                             |  |   | (2,453                            | ) |  |              |        |   |              |   | 166,515  |   |  |   |          |  
|Other non-operating expense (income)                  |  |                     | 8,038    |   |                   |   |                             |  |   | 105                               |   |  |              | (6,614  | ) |              |   |         |   |  |   | 1,529     |  
|                                                      |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Income before income tax                              |  |                     | 17,511   |   |                   |   |                             |  |   | 129,561                           |   |  |              | 37,760  |   |              |   | (166,515 | ) |  |   | 18,317    |  
|Income tax (benefit) expense                          |  |                     | (5,465   | ) |                   |   |                             |  |   |                                  |   |  |              | 806     |   |              |   |         |   |  |   | (4,659    | )
|                                                      |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Net income                                            |  | $                   | 22,976   |   |                   | $ |                             |  | $ | 129,561                           |   |  | $            | 36,954  |   |              | $ | (166,515 | ) |  | $ | 22,976    |  
|                                                      |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  



80



---

##### Table of Contents

BORDEN CHEMICAL, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



YEAR ENDED DECEMBER 31, 2002

CONDENSED CONSOLIDATING STATEMENT OF OPERATIONS



|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|------------------------------------------------------------------------ |  | ------------------- | -------- | - | ----------------- | - | ---------------------------- |  | - | --------------------------------- | - |  | ------------ | ------- | - | ------------ | - | -------- | - |  | - | --------- | -
|                                                                         |  | BordenChemical,Inc. |          |   | SubsidiaryIssuers |   | CombinedSubsidiaryGuarantors |  |   | CombinedNon-GuarantorSubsidiaries |   |  | Eliminations |         |   | Consolidated |  
|Net sales                                                                |  | $                   | 692,814  |   |                   | $ |                             |  | $ |                                  |   |  | $            | 584,704 |   |              | $ | (29,633  | ) |  | $ | 1,247,885 |  
|Cost of goods sold                                                       |  |                     | 531,018  |   |                   |   |                             |  |   |                                  |   |  |              | 467,272 |   |              |   | (29,633  | ) |  |   | 968,657   |  
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Gross margin                                                             |  |                     | 161,796  |   |                   |   |                             |  |   |                                  |   |  |              | 117,432 |   |              |   |         |   |  |   | 279,228   |  
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Distribution expense                                                     |  |                     | 38,223   |   |                   |   |                             |  |   |                                  |   |  |              | 23,704  |   |              |   |         |   |  |   | 61,927    |  
|Marketing expense                                                        |  |                     | 21,535   |   |                   |   |                             |  |   |                                  |   |  |              | 20,968  |   |              |   |         |   |  |   | 42,503    |  
|General & administrative expense                                         |  |                     | 60,500   |   |                   |   |                             |  |   | 233                               |   |  |              | 48,504  |   |              |   |         |   |  |   | 109,237   |  
|Business realignment expense and impairments                             |  |                     | 5,316    |   |                   |   |                             |  |   |                                  |   |  |              | 14,383  |   |              |   |         |   |  |   | 19,699    |  
|Other operating expense (income)                                         |  |                     | 15,983   |   |                   |   |                             |  |   | (6                                | ) |  |              | (3,823  | ) |              |   |         |   |  |   | 12,154    |  
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Operating income (loss)                                                  |  |                     | 20,239   |   |                   |   |                             |  |   | (227                              | ) |  |              | 13,696  |   |              |   |         |   |  |   | 33,708    |  
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Interest expense                                                         |  |                     | 46,220   |   |                   |   |                             |  |   |                                  |   |  |              | 1,095   |   |              |   |         |   |  |   | 47,315    |  
|Affiliated interest expense, net                                         |  |                     | 1,402    |   |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | 1,402     |  
|Intercompany interest expense (income)                                   |  |                     | 143,639  |   |                   |   |                             |  |   | (144,977                          | ) |  |              | 1,338   |   |              |   |         |   |  |   |          |  
|Intercompany royalty expense (income)                                    |  |                     | 16,976   |   |                   |   |                             |  |   | (16,976                           | ) |  |              |        |   |              |   |         |   |  |   |          |  
|Equity in (earnings) losses of subsidiaries, net                         |  |                     | (102,441 | ) |                   |   |                             |  |   | (1,396                            | ) |  |              |        |   |              |   | 103,837  |   |  |   |          |  
|Other non-operating expense (income)                                     |  |                     | (9,871   | ) |                   |   |                             |  |   | 23                                |   |  |              | 3,859   |   |              |   |         |   |  |   | (5,989    | )
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|(Loss) income before income tax                                          |  |                     | (75,686  | ) |                   |   |                             |  |   | 163,099                           |   |  |              | 7,404   |   |              |   | (103,837 | ) |  |   | (9,020    | )
|Income tax (benefit) expense                                             |  |                     | (39,103  | ) |                   |   |                             |  |   |                                  |   |  |              | 36,841  |   |              |   |         |   |  |   | (2,262    | )
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|(Loss) income before cumulative effect of change in accounting principle |  |                     | (36,583  | ) |                   |   |                             |  |   | 163,099                           |   |  |              | (29,437 | ) |              |   | (103,837 | ) |  |   | (6,758    | )
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Cumulative effect of change in accounting principle                      |  |                     |         |   |                   |   |                             |  |   |                                  |   |  |              | (29,825 | ) |              |   |         |   |  |   | (29,825   | )
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  
|Net (loss) income                                                        |  | $                   | (36,583  | ) |                   | $ |                             |  | $ | 163,099                           |   |  | $            | (59,262 | ) |              | $ | (103,837 | ) |  | $ | (36,583   | )
|                                                                         |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |           |  





81



---

##### Table of Contents

BORDEN CHEMICAL, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



DECEMBER 31, 2004

CONDENSED CONSOLIDATING BALANCE SHEET



|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|-------------------------------------------------- |  | ------------------- | --------- | - | ----------------- | - | ---------------------------- |  | - | ---------------------------------- | - |  | ------------ | -------- | - | ------------ | - | ----------- | - |  | - | --------- | -
|                                                   |  | BordenChemical,Inc. |           |   | SubsidiaryIssuers |   | CombinedSubsidiaryGuarantors |  |   | Combined Non-GuarantorSubsidiaries |   |  | Eliminations |          |   | Consolidated |  
|ASSETS                                             |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Current Assets                                     |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Cash and equivalents                               |  | $                   | 55,199    |   |                   | $ | 2                            |  | $ | 600                                |   |  | $            | 66,310   |   |              | $ |            |   |  | $ | 122,111   |  
|Accounts receivable                                |  |                     | 98,694    |   |                   |   |                             |  |   | 209                                |   |  |              | 127,332  |   |              |   |            |   |  |   | 226,235   |  
|Accounts receivable from affiliates                |  |                     | 24,927    |   |                   |   | 15,494                       |  |   | 7,684                              |   |  |              | 6,734    |   |              |   | (54,839     | ) |  |   |          |  
|Inventories:                                       |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |            |   |  |   |           |  
|Finished & in-process goods                        |  |                     | 33,027    |   |                   |   |                             |  |   |                                   |   |  |              | 22,629   |   |              |   |            |   |  |   | 55,656    |  
|Raw materials and supplies                         |  |                     | 29,826    |   |                   |   |                             |  |   |                                   |   |  |              | 24,942   |   |              |   |            |   |  |   | 54,768    |  
|Deferred income taxes                              |  |                     | 100       |   |                   |   |                             |  |   |                                   |   |  |              | 422      |   |              |   |            |   |  |   | 522       |  
|Other current assets                               |  |                     | 18,514    |   |                   |   |                             |  |   | 17                                 |   |  |              | 3,938    |   |              |   |            |   |  |   | 22,469    |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|                                                   |  |                     | 260,287   |   |                   |   | 15,496                       |  |   | 8,510                              |   |  |              | 252,307  |   |              |   | (54,839     | ) |  |   | 481,761   |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Other Assets                                       |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Investment in subsidiaries                         |  |                     | 6,242,903 |   |                   |   |                             |  |   | 15,638                             |   |  |              |         |   |              |   | (6,258,541  | ) |  |   |          |  
|Loans receivable from affiliates                   |  |                     |          |   |                   |   | 482,382                      |  |   | 6,152,367                          |   |  |              | 40,144   |   |              |   | (6,674,893  | ) |  |   |          |  
|Deferred income taxes                              |  |                     | (2,378    | ) |                   |   |                             |  |   |                                   |   |  |              | 5,960    |   |              |   |            |   |  |   | 3,582     |  
|Other assets                                       |  |                     | 17,063    |   |                   |   | 18,505                       |  |   |                                   |   |  |              | 14,164   |   |              |   |            |   |  |   | 49,732    |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|                                                   |  |                     | 6,257,588 |   |                   |   | 500,887                      |  |   | 6,168,005                          |   |  |              | 60,268   |   |              |   | (12,933,434 | ) |  |   | 53,314    |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Property and Equipment                             |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Land                                               |  |                     | 24,074    |   |                   |   |                             |  |   |                                   |   |  |              | 8,871    |   |              |   |            |   |  |   | 32,945    |  
|Buildings                                          |  |                     | 65,654    |   |                   |   |                             |  |   |                                   |   |  |              | 37,850   |   |              |   |            |   |  |   | 103,504   |  
|Machinery and equipment                            |  |                     | 417,776   |   |                   |   |                             |  |   | 531                                |   |  |              | 314,978  |   |              |   |            |   |  |   | 733,285   |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|                                                   |  |                     | 507,504   |   |                   |   |                             |  |   | 531                                |   |  |              | 361,699  |   |              |   |            |   |  |   | 869,734   |  
|Less accumulated depreciation                      |  |                     | (266,500  | ) |                   |   |                             |  |   | (481                               | ) |  |              | (154,747 | ) |              |   |            |   |  |   | (421,728  | )
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|                                                   |  |                     | 241,004   |   |                   |   |                             |  |   | 50                                 |   |  |              | 206,952  |   |              |   |            |   |  |   | 448,006   |  
|                                                   |  |                     |           |   |                   |  
|Goodwill                                           |  |                     | 34,623    |   |                   |   |                             |  |   |                                   |   |  |              | 16,059   |   |              |   |            |   |  |   | 50,682    |  
|                                                   |  |                     |           |   |                   |  
|Other intangible assets                            |  |                     | 4,829     |   |                   |   |                             |  |   |                                   |   |  |              | 5,522    |   |              |   |            |   |  |   | 10,351    |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Total Assets                                       |  | $                   | 6,798,331 |   |                   | $ | 516,383                      |  | $ | 6,176,565                          |   |  | $            | 541,108  |   |              | $ | (12,988,273 | ) |  | $ | 1,044,114 |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|LIABILITIES AND SHAREHOLDERS DEFICIT              |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Current Liabilities                                |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Accounts and drafts payable                        |  | $                   | 117,978   |   |                   | $ |                             |  | $ | 23                                 |   |  | $            | 104,172  |   |              | $ |            |   |  | $ | 222,173   |  
|Accounts payable to affiliates                     |  |                     |          |   |                   |   | 1,727                        |  |   | 103                                |   |  |              | 23,097   |   |              |   | (24,927     | ) |  |   |          |  
|Debt payable within one year                       |  |                     | 3,588     |   |                   |   |                             |  |   |                                   |   |  |              | 8,000    |   |              |   |            |   |  |   | 11,588    |  
|Income taxes payable                               |  |                     | 32,398    |   |                   |   |                             |  |   |                                   |   |  |              | (842     | ) |              |   |            |   |  |   | 31,556    |  
|Interest payable                                   |  |                     | 12,475    |   |                   |   | 13,510                       |  |   |                                   |   |  |              | 37       |   |              |   |            |   |  |   | 26,022    |  
|Other affiliated payables                          |  |                     | 10,274    |   |                   |   |                             |  |   |                                   |   |  |              | 19,638   |   |              |   | (29,912     | ) |  |   |          |  
|Other current liabilities                          |  |                     | 53,688    |   |                   |   |                             |  |   | 7                                  |   |  |              | 20,722   |   |              |   |            |   |  |   | 74,417    |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|                                                   |  |                     | 230,401   |   |                   |   | 15,237                       |  |   | 133                                |   |  |              | 174,824  |   |              |   | (54,839     | ) |  |   | 365,756   |  
|Other Liabilities                                  |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Long-term debt                                     |  |                     | 473,582   |   |                   |   | 475,000                      |  |   |                                   |   |  |              | 7,234    |   |              |   |            |   |  |   | 955,816   |  
|Long-term loans payable to affiliates              |  |                     | 6,389,725 |   |                   |   |                             |  |   |                                   |   |  |              | 285,168  |   |              |   | (6,674,893  | ) |  |   |          |  
|Non-pension postemployment benefit obligations     |  |                     | 113,026   |   |                   |   |                             |  |   |                                   |   |  |              | 1,476    |   |              |   |            |   |  |   | 114,502   |  
|Long-term pension obligations                      |  |                     | 63,133    |   |                   |   |                             |  |   |                                   |   |  |              | 1,463    |   |              |   |            |   |  |   | 64,596    |  
|Other long-term liabilities                        |  |                     | 77,289    |   |                   |   |                             |  |   |                                   |   |  |              | 14,980   |   |              |   |            |   |  |   | 92,269    |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|                                                   |  |                     | 7,116,755 |   |                   |   | 475,000                      |  |   |                                   |   |  |              | 310,321  |   |              |   | (6,674,893  | ) |  |   | 1,227,183 |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Shareholders (Deficit) Equity                     |  |                     | (548,825  | ) |                   |   | 26,146                       |  |   | 6,176,432                          |   |  |              | 55,963   |   |              |   | (6,258,541  | ) |  |   | (548,825  | )
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  
|Total Liabilities & Shareholders (Deficit) Equity |  | $                   | 6,798,331 |   |                   | $ | 516,383                      |  | $ | 6,176,565                          |   |  | $            | 541,108  |   |              | $ | (12,988,273 | ) |  | $ | 1,044,114 |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |           |  



82



---

##### Table of Contents

BORDEN CHEMICAL, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



DECEMBER 31, 2003

CONDENSED CONSOLIDATING BALANCE SHEET



|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|-------------------------------------------------- |  | ------------------- | --------- | - | ----------------- | - | ---------------------------- |  | - | ---------------------------------- | - |  | ------------ | -------- | - | ------------ | - | ----------- | - |  | - | -------- | -
|                                                   |  | BordenChemical,Inc. |           |   | SubsidiaryIssuers |   | CombinedSubsidiaryGuarantors |  |   | Combined Non-GuarantorSubsidiaries |   |  | Eliminations |          |   | Consolidated |  
|ASSETS                                             |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Current Assets                                     |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Cash and equivalents                               |  | $                   | 1,370     |   |                   | $ |                             |  | $ | 151                                |   |  | $            | 26,641   |   |              | $ |            |   |  | $ | 28,162   |  
|Accounts receivable                                |  |                     | 85,524    |   |                   |   |                             |  |   | 67                                 |   |  |              | 110,502  |   |              |   |            |   |  |   | 196,093  |  
|Inventories:                                       |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Finished & in-process goods                        |  |                     | 25,173    |   |                   |   |                             |  |   |                                   |   |  |              | 17,119   |   |              |   |            |   |  |   | 42,292   |  
|Raw materials and supplies                         |  |                     | 22,395    |   |                   |   |                             |  |   |                                   |   |  |              | 16,424   |   |              |   |            |   |  |   | 38,819   |  
|Deferred income taxes                              |  |                     | 26,744    |   |                   |   |                             |  |   |                                   |   |  |              | 341      |   |              |   |            |   |  |   | 27,085   |  
|Other current assets                               |  |                     | 10,102    |   |                   |   |                             |  |   | 73                                 |   |  |              | 3,730    |   |              |   |            |   |  |   | 13,905   |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|                                                   |  |                     | 171,308   |   |                   |   |                             |  |   | 291                                |   |  |              | 174,757  |   |              |   |            |   |  |   | 346,356  |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Other Assets                                       |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Investment in subsidiaries                         |  |                     | 6,315,510 |   |                   |   |                             |  |   | 16,610                             |   |  |              |         |   |              |   | (6,332,120  | ) |  |   |         |  
|Loans receivable from affiliates                   |  |                     |          |   |                   |   |                             |  |   | 6,037,074                          |   |  |              |         |   |              |   | (6,037,074  | ) |  |   |         |  
|Deferred income taxes                              |  |                     | 105,682   |   |                   |   |                             |  |   |                                   |   |  |              | 7,752    |   |              |   |            |   |  |   | 113,434  |  
|Other assets                                       |  |                     | 14,410    |   |                   |   |                             |  |   |                                   |   |  |              | 7,315    |   |              |   |            |   |  |   | 21,725   |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|                                                   |  |                     | 6,435,602 |   |                   |   |                             |  |   | 6,053,684                          |   |  |              | 15,067   |   |              |   | (12,369,194 | ) |  |   | 135,159  |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Property and Equipment                             |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Land                                               |  |                     | 24,389    |   |                   |   |                             |  |   |                                   |   |  |              | 8,196    |   |              |   |            |   |  |   | 32,585   |  
|Buildings                                          |  |                     | 67,365    |   |                   |   |                             |  |   |                                   |   |  |              | 36,409   |   |              |   |            |   |  |   | 103,774  |  
|Machinery and equipment                            |  |                     | 407,587   |   |                   |   |                             |  |   | 480                                |   |  |              | 283,182  |   |              |   |            |   |  |   | 691,249  |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|                                                   |  |                     | 499,341   |   |                   |   |                             |  |   | 480                                |   |  |              | 327,787  |   |              |   |            |   |  |   | 827,608  |  
|Less accumulated depreciation                      |  |                     | (244,120  | ) |                   |   |                             |  |   | (355                               | ) |  |              | (134,249 | ) |              |   |            |   |  |   | (378,724 | )
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|                                                   |  |                     | 255,221   |   |                   |   |                             |  |   | 125                                |   |  |              | 193,538  |   |              |   |            |   |  |   | 448,884  |  
|                                                   |  |                     |           |   |                   |  
|Goodwill                                           |  |                     | 36,593    |   |                   |   |                             |  |   |                                   |   |  |              | 20,923   |   |              |   |            |   |  |   | 57,516   |  
|                                                   |  |                     |           |   |                   |  
|Other intangible assets                            |  |                     | 4,822     |   |                   |   |                             |  |   |                                   |   |  |              | 1,129    |   |              |   |            |   |  |   | 5,951    |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Total Assets                                       |  | $                   | 6,903,546 |   |                   | $ |                             |  | $ | 6,054,100                          |   |  | $            | 405,414  |   |              | $ | (12,369,194 | ) |  | $ | 993,866  |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|LIABILITIES AND SHAREHOLDERS DEFICIT              |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Current Liabilities                                |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Accounts and drafts payable                        |  | $                   | 63,707    |   |                   | $ |                             |  | $ | 12                                 |   |  | $            | 63,455   |   |              | $ |            |   |  | $ | 127,174  |  
|Accounts payable to affiliate                      |  |                     | (8,582    | ) |                   |   |                             |  |   | (6,877                             | ) |  |              | 15,459   |   |              |   |            |   |  |   |         |  
|Debt payable within one year                       |  |                     | 2,548     |   |                   |   |                             |  |   |                                   |   |  |              | 5,619    |   |              |   |            |   |  |   | 8,167    |  
|Loans payable to affiliates                        |  |                     | 12,260    |   |                   |   |                             |  |   |                                   |   |  |              | 6,000    |   |              |   |            |   |  |   | 18,260   |  
|Income taxes payable                               |  |                     | 32,533    |   |                   |   |                             |  |   |                                   |   |  |              | 2,444    |   |              |   |            |   |  |   | 34,977   |  
|Interest payable                                   |  |                     | 12,339    |   |                   |   |                             |  |   |                                   |   |  |              | 185      |   |              |   |            |   |  |   | 12,524   |  
|Other current liabilities                          |  |                     | 55,514    |   |                   |   |                             |  |   | 349                                |   |  |              | 15,683   |   |              |   |            |   |  |   | 71,546   |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|                                                   |  |                     | 170,319   |   |                   |   |                             |  |   | (6,516                             | ) |  |              | 108,845  |   |              |   |            |   |  |   | 272,648  |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Other Liabilities                                  |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Long-term debt                                     |  |                     | 520,877   |   |                   |   |                             |  |   |                                   |   |  |              | 9,089    |   |              |   |            |   |  |   | 529,966  |  
|Long-term loans payable to affiliates              |  |                     | 6,032,348 |   |                   |   |                             |  |   |                                   |   |  |              | 4,726    |   |              |   | (6,037,074  | ) |  |   |         |  
|Non-pension postemployment benefit obligations     |  |                     | 127,768   |   |                   |   |                             |  |   |                                   |   |  |              | 955      |   |              |   |            |   |  |   | 128,723  |  
|Long-term pension obligations                      |  |                     | 65,647    |   |                   |   |                             |  |   |                                   |   |  |              | 1,009    |   |              |   |            |   |  |   | 66,656   |  
|Other long-term liabilities                        |  |                     | 82,780    |   |                   |   |                             |  |   |                                   |   |  |              | 9,286    |   |              |   |            |   |  |   | 92,066   |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|                                                   |  |                     | 6,829,420 |   |                   |   |                             |  |   |                                   |   |  |              | 25,065   |   |              |   | (6,037,074  | ) |  |   | 817,411  |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Shareholders (Deficit) Equity                     |  |                     | (96,193   | ) |                   |   |                             |  |   | 6,060,616                          |   |  |              | 271,504  |   |              |   | (6,332,120  | ) |  |   | (96,193  | )
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  
|Total Liabilities & Shareholders (Deficit) Equity |  | $                   | 6,903,546 |   |                   | $ |                             |  | $ | 6,054,100                          |   |  | $            | 405,414  |   |              | $ | (12,369,194 | ) |  | $ | 993,866  |  
|                                                   |  |                     |           |   |                   |   |                              |  |   |                                    |   |  |              |          |   |              |   |             |   |  |   |          |  



83



---

##### Table of Contents

BORDEN CHEMICAL, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



YEAR ENDED DECEMBER 31, 2004

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS



|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------------- | -------- | - | ----------------- | - | -------- | ---------------------------- |  | - | ----------------------------------- | - |  | ------------ | -------- | - | ------------ | - | -------- | - |  | - | -------- | -
|                                                                                            |  | BordenChemical,Inc. |          |   | SubsidiaryIssuers |   |          | CombinedSubsidiaryGuarantors |  |   | Combined Non- GuarantorSubsidiaries |   |  | Eliminations |          |   | Consolidated |  
|Cash Flows from (used in) Operating Activities                                              |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net (loss) income                                                                           |  | $                   | (179,668 | ) |                   | $ | 1,257    |                              |  | $ | 155,485                             |   |  | $            | (17,483  | ) |              | $ | (139,259 | ) |  | $ | (179,668 | )
|Adjustments to reconcile net (loss) income to net cash from (used in) operating activities: |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|Non-cash affiliated interest (1)                                                            |  |                     | 129,543  |   |                   |   |         |                              |  |   | (129,543                            | ) |  |              |         |   |              |   |         |   |  |   |         |  
|Non-cash allocation of corporate expenses                                                   |  |                     | (43,461  | ) |                   |   |         |                              |  |   |                                    |   |  |              | 43,461   |   |              |   |         |   |  |   |         |  
|Equity in earnings of subsidiaries                                                          |  |                     | (136,719 | ) |                   |   |         |                              |  |   | (2,540                              | ) |  |              |         |   |              |   | 139,259  |   |  |   |         |  
|Depreciation and amortization                                                               |  |                     | 30,019   |   |                   |   |         |                              |  |   | 126                                 |   |  |              | 19,579   |   |              |   |         |   |  |   | 49,724   |  
|Deferred tax provision (benefit)                                                            |  |                     | 123,605  |   |                   |   |         |                              |  |   |                                    |   |  |              | 15,746   |   |              |   |         |   |  |   | 139,351  |  
|Deferred compensation expense                                                               |  |                     | 2,217    |   |                   |   |         |                              |  |   |                                    |   |  |              |         |   |              |   |         |   |  |   | 2,217    |  
|Business realignment expense (income) and impairments                                       |  |                     | 874      |   |                   |   |         |                              |  |   |                                    |   |  |              | 3,553    |   |              |   |         |   |  |   | 4,427    |  
|Loss on sale of assets                                                                      |  |                     | 1,245    |   |                   |   |         |                              |  |   |                                    |   |  |              | 563      |   |              |   |         |   |  |   | 1,808    |  
|Gain on sale of venture interest                                                            |  |                     |         |   |                   |   |         |                              |  |   | (1,010                              | ) |  |              |         |   |              |   |         |   |  |   | (1,010   | )
|Other non-cash adjustments                                                                  |  |                     | (986     | ) |                   |   |         |                              |  |   |                                    |   |  |              | 1,419    |   |              |   |         |   |  |   | 433      |  
|Net change in assets & liabilities:                                                         |  |                     |          |   |                   |   |         |                              |  |   |                                    |   |  |              |          |   |              |   |         |   |  |   |          |  
|Accounts receivable                                                                         |  |                     | (8,523   | ) |                   |   |         |                              |  |   | 35                                  |   |  |              | (8,670   | ) |              |   |         |   |  |   | (17,158  | )
|Inventories                                                                                 |  |                     | (15,285  | ) |                   |   |         |                              |  |   |                                    |   |  |              | (11,217  | ) |              |   |         |   |  |   | (26,502  | )
|Accounts and drafts payable                                                                 |  |                     | 42,935   |   |                   |   | 1,727    |                              |  |   | 108                                 |   |  |              | 40,800   |   |              |   |         |   |  |   | 85,570   |  
|Income taxes                                                                                |  |                     | 12,399   |   |                   |   |         |                              |  |   |                                    |   |  |              | (20,712  | ) |              |   |         |   |  |   | (8,313   | )
|Other assets                                                                                |  |                     | 25,967   |   |                   |   | (14,573  | )                            |  |   | 645                                 |   |  |              | (5,445   | ) |              |   |         |   |  |   | 6,594    |  
|Other liabilities                                                                           |  |                     | (47,898  | ) |                   |   | 13,509   |                              |  |   | (1,456                              | ) |  |              | 2,937    |   |              |   |         |   |  |   | (32,908  | )
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|                                                                                            |  |                     | (63,736  | ) |                   |   | 1,920    |                              |  |   | 21,850                              |   |  |              | 64,531   |   |              |   |         |   |  |   | 24,565   |  
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|Cash Flows (used in) from Investing Activities                                              |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |         |   |  |   |          |  
|Capital expenditures                                                                        |  |                     | (20,154  | ) |                   |   |         |                              |  |   | (51                                 | ) |  |              | (19,552  | ) |              |   |         |   |  |   | (39,757  | )
|Capitalized interest                                                                        |  |                     | (435     | ) |                   |   |         |                              |  |   |                                    |   |  |              |         |   |              |   |         |   |  |   | (435     | )
|Sale (purchase) of businesses                                                               |  |                     | 260,000  |   |                   |   |         |                              |  |   |                                    |   |  |              | (260,000 | ) |              |   |         |   |  |   |         |  
|Proceeds from sale of venture interest                                                      |  |                     |         |   |                   |   |         |                              |  |   | 2,124                               |   |  |              |         |   |              |   |         |   |  |   | 2,124    |  
|Proceeds from sale of assets                                                                |  |                     | 3,588    |   |                   |   |         |                              |  |   |                                    |   |  |              | 8,473    |   |              |   |         |   |  |   | 12,061   |  
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|                                                                                            |  |                     | 242,999  |   |                   |   |         |                              |  |   | 2,073                               |   |  |              | (271,079 | ) |              |   |         |   |  |   | (26,007  | )
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|Cash flows from (used in) Financing Activities                                              |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|Net short-term debt borrowings                                                              |  |                     | 1,040    |   |                   |   |         |                              |  |   |                                    |   |  |              | 2,381    |   |              |   |         |   |  |   | 3,421    |  
|Borrowings of long-term debt                                                                |  |                     |         |   |                   |   | 475,000  |                              |  |   |                                    |   |  |              | 249      |   |              |   |         |   |  |   | 475,249  |  
|Repayments of long-term debt                                                                |  |                     | (47,295  | ) |                   |   |         |                              |  |   |                                    |   |  |              | (2,104   | ) |              |   |         |   |  |   | (49,399  | )
|Affiliated loan (repayments) borrowings                                                     |  |                     | 177,724  |   |                   |   | (457,492 | )                            |  |   | 14,250                              |   |  |              | 247,258  |   |              |   |         |   |  |   | (18,260  | )
|Long-term debt and credit facility financing fees                                           |  |                     | (1,702   | ) |                   |   | (19,426  | )                            |  |   |                                    |   |  |              | (1,837   | ) |              |   |         |   |  |   | (22,965  | )
|Purchase of treasury stock                                                                  |  |                     | (294,918 | ) |                   |   |         |                              |  |   |                                    |   |  |              |         |   |              |   |         |   |  |   | (294,918 | )
|Dividends received (paid)                                                                   |  |                     | 40,680   |   |                   |   |         |                              |  |   | (37,724                             | ) |  |              | (2,956   | ) |              |   |         |   |  |   |         |  
|Repurchases, net of sale, of common stock (from) to management                              |  |                     | (963     | ) |                   |   |         |                              |  |   |                                    |   |  |              |         |   |              |   |         |   |  |   | (963     | )
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|                                                                                            |  |                     | (125,434 | ) |                   |   | (1,918   | )                            |  |   | (23,474                             | ) |  |              | 242,991  |   |              |   |         |   |  |   | 92,165   |  
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|Effect of exchange rates on cash                                                            |  |                     |         |   |                   |   |         |                              |  |   |                                    |   |  |              | 3,226    |   |              |   |         |   |  |   | 3,226    |  
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|Increase in cash and equivalents                                                            |  |                     | 53,829   |   |                   |   | 2        |                              |  |   | 449                                 |   |  |              | 39,669   |   |              |   |         |   |  |   | 93,949   |  
|Cash & equivalents beginning year                                                           |  |                     | 1,370    |   |                   |   |         |                              |  |   | 151                                 |   |  |              | 26,641   |   |              |   |         |   |  |   | 28,162   |  
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  
|Cash & equivalents at end of year                                                           |  | $                   | 55,199   |   |                   | $ | 2        |                              |  | $ | 600                                 |   |  | $            | 66,310   |   |              | $ |         |   |  | $ | 122,111  |  
|                                                                                            |  |                     |          |   |                   |   |          |                              |  |   |                                     |   |  |              |          |   |              |   |          |   |  |   |          |  



---

|(1) | Interest on affiliated debt to certain guarantor subsidiaries is settled by increasing the loan principal.
|--- | ----------------------------------------------------------------------------------------------------------



84



---

##### Table of Contents

BORDEN CHEMICAL, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



YEAR ENDED DECEMBER 31, 2003

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS



|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|------------------------------------------------------------------------------------ |  | ------------------- | -------- | - | ----------------- | - | ---------------------------- |  | - | --------------------------------- | - |  | ------------ | ------- | - | ------------ | - | -------- | - |  | - | ------- | -
|                                                                                     |  | BordenChemical,Inc. |          |   | SubsidiaryIssuers |   | CombinedSubsidiaryGuarantors |  |   | CombinedNon-GuarantorSubsidiaries |   |  | Eliminations |         |   | Consolidated |  
|Cash Flows from (used in) Operating Activities                                       |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net income                                                                           |  | $                   | 22,976   |   |                   | $ |                             |  | $ | 129,561                           |   |  | $            | 36,954  |   |              | $ | (166,515 | ) |  | $ | 22,976  |  
|Adjustments to reconcile net income to net cash from (used in) operating activities: |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Non-cash affiliated interest (1)                                                     |  |                     | 107,837  |   |                   |   |                             |  |   | (107,837                          | ) |  |              |        |   |              |   |         |   |  |   |        |  
|Equity in earnings of subsidiaries                                                   |  |                     | (166,515 | ) |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   | 166,515  |   |  |   |        |  
|Non-cash allocation of corporate expenses                                            |  |                     | (16,150  | ) |                   |   |                             |  |   |                                  |   |  |              | 16,150  |   |              |   |         |   |  |   |        |  
|Depreciation and amortization                                                        |  |                     | 29,789   |   |                   |   |                             |  |   |                                  |   |  |              | 17,530  |   |              |   |         |   |  |   | 47,319  |  
|Deferred tax provision                                                               |  |                     | 2,588    |   |                   |   |                             |  |   |                                  |   |  |              | 3,635   |   |              |   |         |   |  |   | 6,223   |  
|Business realignment expense (income) and impairments                                |  |                     | 5,644    |   |                   |   |                             |  |   |                                  |   |  |              | (896    | ) |              |   |         |   |  |   | 4,748   |  
|(Gain) loss on the sale of assets                                                    |  |                     | (1,061   | ) |                   |   |                             |  |   |                                  |   |  |              | 315     |   |              |   |         |   |  |   | (746    | )
|Deferred compensation expense                                                        |  |                     | 1,191    |   |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | 1,191   |  
|Other non-cash adjustments                                                           |  |                     | 727      |   |                   |   |                             |  |   |                                  |   |  |              | 343     |   |              |   |         |   |  |   | 1,070   |  
|Net change in assets and liabilities:                                                |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Accounts receivable                                                                  |  |                     | 4,562    |   |                   |   |                             |  |   |                                  |   |  |              | (7,779  | ) |              |   |         |   |  |   | (3,217  | )
|Inventories                                                                          |  |                     | 4,490    |   |                   |   |                             |  |   |                                  |   |  |              | 6,241   |   |              |   |         |   |  |   | 10,731  |  
|Accounts and drafts payable                                                          |  |                     | (2,886   | ) |                   |   |                             |  |   |                                  |   |  |              | 5,378   |   |              |   |         |   |  |   | 2,492   |  
|Income taxes                                                                         |  |                     | (12,993  | ) |                   |   |                             |  |   |                                  |   |  |              | (17,298 | ) |              |   |         |   |  |   | (30,291 | )
|Other assets                                                                         |  |                     | (4,207   | ) |                   |   |                             |  |   | (1,245                            | ) |  |              | 9,033   |   |              |   |         |   |  |   | 3,581   |  
|Other liabilities                                                                    |  |                     | 9,822    |   |                   |   |                             |  |   | 896                               |   |  |              | (44,855 | ) |              |   |         |   |  |   | (34,137 | )
|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|                                                                                     |  |                     | (14,186  | ) |                   |   |                             |  |   | 21,375                            |   |  |              | 24,751  |   |              |   |         |   |  |   | 31,940  |  
|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Cash Flows (used in) from Investing Activities                                       |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Capital expenditures                                                                 |  |                     | (24,922  | ) |                   |   |                             |  |   |                                  |   |  |              | (16,898 | ) |              |   |         |   |  |   | (41,820 | )
|Purchase of business                                                                 |  |                     | (3,140   | ) |                   |   |                             |  |   |                                  |   |  |              | (11,551 | ) |              |   |         |   |  |   | (14,691 | )
|Proceeds from the sale of assets                                                     |  |                     | 6,613    |   |                   |   |                             |  |   |                                  |   |  |              | 7,584   |   |              |   |         |   |  |   | 14,197  |  
|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|                                                                                     |  |                     | (21,449  | ) |                   |   |                             |  |   |                                  |   |  |              | (20,865 | ) |              |   |         |   |  |   | (42,314 | )
|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Cash flows from (used in) Financing Activities                                       |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Net short-term debt borrowings                                                       |  |                     | 1,727    |   |                   |   |                             |  |   |                                  |   |  |              | 3,661   |   |              |   |         |   |  |   | 5,388   |  
|Borrowings of long-term debt                                                         |  |                     | 207      |   |                   |   |                             |  |   |                                  |   |  |              | 7,718   |   |              |   |         |   |  |   | 7,925   |  
|Repayments of long-term debt                                                         |  |                     | (1,246   | ) |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | (1,246  | )
|Affiliated loan repayments                                                           |  |                     | (53,584  | ) |                   |   |                             |  |   | (9,340                            | ) |  |              | (3,496  | ) |              |   |         |   |  |   | (66,420 | )
|Decrease in restricted cash                                                          |  |                     | 67,049   |   |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | 67,049  |  
|Dividends received (paid)                                                            |  |                     | 12,000   |   |                   |   |                             |  |   | (12,000                           | ) |  |              |        |   |              |   |         |   |  |   |        |  
|Capital contribution from affiliates                                                 |  |                     | 9,300    |   |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | 9,300   |  
|Repurchases, net of sale, of common stock (from) to management                       |  |                     | (286     | ) |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | (286    | )
|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|                                                                                     |  |                     | 35,167   |   |                   |   |                             |  |   | (21,340                           | ) |  |              | 7,883   |   |              |   |         |   |  |   | 21,710  |  
|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Effect of exchange rates on cash                                                     |  |                     |         |   |                   |   |                             |  |   |                                  |   |  |              | 2,086   |   |              |   |         |   |  |   | 2,086   |  
|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Increase (decrease) in cash and equivalents                                          |  |                     | (468     | ) |                   |   |                             |  |   | 35                                |   |  |              | 13,855  |   |              |   |         |   |  |   | 13,422  |  
|Cash and equivalents at beginning of year                                            |  |                     | 1,838    |   |                   |   |                             |  |   | 116                               |   |  |              | 12,786  |   |              |   |         |   |  |   | 14,740  |  
|                                                                                     |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |         |  
|Cash and equivalents at end of year                                                  |  | $                   | 1,370    |   |                   | $ |                             |  | $ | 151                               |   |  | $            | 26,641  |   |              | $ |         |   |  | $ | 28,162  |  

---

|(1) | Interest on affiliated debt to certain guarantor subsidiaries is settled by increasing the loan principal.
|--- | ----------------------------------------------------------------------------------------------------------



85



---

##### Table of Contents

BORDEN CHEMICAL, INC.

Notes to Consolidated Financial Statements

(Dollars in thousands)



YEAR ENDED DECEMBER 31, 2002

CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS



|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|------------------------------------------------------------------------------------------- |  | ------------------- | -------- | - | ----------------- | - | ---------------------------- |  | - | --------------------------------- | - |  | ------------ | ------- | - | ------------ | - | -------- | - |  | - | -------- | -
|                                                                                            |  | BordenChemical,Inc. |          |   | SubsidiaryIssuers |   | CombinedSubsidiaryGuarantors |  |   | CombinedNon-GuarantorSubsidiaries |   |  | Eliminations |         |   | Consolidated |  
|Cash Flows from (used in) Operating Activities                                              |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Net (loss) income                                                                           |  | $                   | (36,583  | ) |                   | $ |                             |  | $ | 163,099                           |   |  | $            | (59,262 | ) |              | $ | (103,837 | ) |  | $ | (36,583  | )
|Adjustments to reconcile net (loss) income to net cash (used in) from operating activities: |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Non-cash affiliated interest (1)                                                            |  |                     | 144,340  |   |                   |   |                             |  |   | (144,340                          | ) |  |              |        |   |              |   |         |   |  |   |         |  
|Equity in earnings of subsidiaries                                                          |  |                     | (103,837 | ) |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   | 103,837  |   |  |   |         |  
|Non-cash allocation of corporate expenses                                                   |  |                     | (16,182  | ) |                   |   |                             |  |   |                                  |   |  |              | 16,182  |   |              |   |         |   |  |   |         |  
|Depreciation and amortization                                                               |  |                     | 31,034   |   |                   |   |                             |  |   |                                  |   |  |              | 16,913  |   |              |   |         |   |  |   | 47,947   |  
|Deferred tax provision                                                                      |  |                     | 15,132   |   |                   |   |                             |  |   |                                  |   |  |              | 891     |   |              |   |         |   |  |   | 16,023   |  
|Business realignment expense and impairments                                                |  |                     | 5,316    |   |                   |   |                             |  |   |                                  |   |  |              | 14,383  |   |              |   |         |   |  |   | 19,699   |  
|Loss on the sale of assets                                                                  |  |                     | 217      |   |                   |   |                             |  |   |                                  |   |  |              | 65      |   |              |   |         |   |  |   | 282      |  
|Deferred compensation expense                                                               |  |                     | 892      |   |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | 892      |  
|Cumulative effect of change in accounting principle                                         |  |                     |         |   |                   |   |                             |  |   |                                  |   |  |              | 29,825  |   |              |   |         |   |  |   | 29,825   |  
|Other non-cash adjustments                                                                  |  |                     | (867     | ) |                   |   |                             |  |   |                                  |   |  |              | 45      |   |              |   |         |   |  |   | (822     | )
|Net change in assets and liabilities:                                                       |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Accounts receivable                                                                         |  |                     | (15,812  | ) |                   |   |                             |  |   |                                  |   |  |              | 3,216   |   |              |   |         |   |  |   | (12,596  | )
|Inventories                                                                                 |  |                     | (2,466   | ) |                   |   |                             |  |   |                                  |   |  |              | 5,018   |   |              |   |         |   |  |   | 2,552    |  
|Accounts and drafts payable                                                                 |  |                     | (30,360  | ) |                   |   |                             |  |   |                                  |   |  |              | 22,057  |   |              |   |         |   |  |   | (8,303   | )
|Income taxes                                                                                |  |                     | (15,220  | ) |                   |   |                             |  |   |                                  |   |  |              | (6,560  | ) |              |   |         |   |  |   | (21,780  | )
|Other assets                                                                                |  |                     | 14,239   |   |                   |   |                             |  |   | (2,466                            | ) |  |              | (14,344 | ) |              |   |         |   |  |   | (2,571   | )
|Other liabilities                                                                           |  |                     | 1,721    |   |                   |   |                             |  |   | 743                               |   |  |              | (25,733 | ) |              |   |         |   |  |   | (23,269  | )
|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|                                                                                            |  |                     | (8,436   | ) |                   |   |                             |  |   | 17,036                            |   |  |              | 2,696   |   |              |   |         |   |  |   | 11,296   |  
|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Cash Flows (used in) from Investing Activities                                              |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Capital expenditures                                                                        |  |                     | (29,229  | ) |                   |   |                             |  |   |                                  |   |  |              | (9,544  | ) |              |   |         |   |  |   | (38,773  | )
|Proceeds from the sale of business                                                          |  |                     | 7,135    |   |                   |   |                             |  |   |                                  |   |  |              | 3,102   |   |              |   |         |   |  |   | 10,237   |  
|Proceeds from the sale of assets                                                            |  |                     | 110,000  |   |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | 110,000  |  
|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|                                                                                            |  |                     | 87,906   |   |                   |   |                             |  |   |                                  |   |  |              | (6,442  | ) |              |   |         |   |  |   | 81,464   |  
|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Cash flows (used in) from Financing Activities                                              |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Net short-term debt borrowings (repayments)                                                 |  |                     | (579     | ) |                   |   |                             |  |   |                                  |   |  |              | 1,834   |   |              |   |         |   |  |   | 1,255    |  
|Repayments of long-term debt                                                                |  |                     | (8,769   | ) |                   |   |                             |  |   |                                  |   |  |              | (1,995  | ) |              |   |         |   |  |   | (10,764  | )
|Affiliated loan (repayments) borrowings                                                     |  |                     | 23,070   |   |                   |   |                             |  |   | (16,940                           | ) |  |              |        |   |              |   |         |   |  |   | 6,130    |  
|Increase in restricted cash                                                                 |  |                     | (66,165  | ) |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | (66,165  | )
|Payment of note payable to unconsolidated subsidiary                                        |  |                     | (31,581  | ) |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | (31,581  | )
|Repurchases, net of sale, of common stock (from) to management                              |  |                     | (591     | ) |                   |   |                             |  |   |                                  |   |  |              |        |   |              |   |         |   |  |   | (591     | )
|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|                                                                                            |  |                     | (84,615  | ) |                   |   |                             |  |   | (16,940                           | ) |  |              | (161    | ) |              |   |         |   |  |   | (101,716 | )
|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Effect of exchange rates on cash                                                            |  |                     |         |   |                   |   |                             |  |   |                                  |   |  |              | (936    | ) |              |   |         |   |  |   | (936     | )
|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Increase (decrease) in cash and equivalents                                                 |  |                     | (5,145   | ) |                   |   |                             |  |   | 96                                |   |  |              | (4,843  | ) |              |   |         |   |  |   | (9,892   | )
|Cash and equivalents at beginning of year                                                   |  |                     | 6,983    |   |                   |   |                             |  |   | 20                                |   |  |              | 17,629  |   |              |   |         |   |  |   | 24,632   |  
|                                                                                            |  |                     |          |   |                   |   |                              |  |   |                                   |   |  |              |         |   |              |   |          |   |  |   |          |  
|Cash and equivalents at end of year                                                         |  | $                   | 1,838    |   |                   | $ |                             |  | $ | 116                               |   |  | $            | 12,786  |   |              | $ |         |   |  | $ | 14,740   |  

---

|(1) | Interest on affiliated debt to certain guarantor subsidiaries is settled by increasing the loan principal.
|--- | ----------------------------------------------------------------------------------------------------------



86



---

##### Table of Contents

20. Quarterly Financial Data (Unaudited)



The following represents Quarterly Financial Data for the Company:



|                                                                   |  |       |         |           |   |          |          |  |   |         |   |  |   |        
|------------------------------------------------------------------ |  | ----- | ------- | --------- | - | -------- | -------- |  | - | ------- | - |  | - | -------
|2004 Quarters                                                      |  | First |         | Second(1) |   |          | Third(2) |  |   | Fourth 
|Net sales                                                          |  | $     | 385,434 |           | $ | 412,967  |          |  | $ | 432,872 |   |  | $ | 454,748
|Gross margin(3)                                                    |  |       | 75,185  |           |   | 84,498   |          |  |   | 82,010  |   |  |   | 82,846 
|Business realignment expense (income) & impairments                |  |       | 1,494   |           |   | (1,233   | )        |  |   | 2,870   |   |  |   | 1,296  
|Net income (loss)                                                  |  |       | 4,913   |           |   | (132,014 | )        |  |   | (59,044 | ) |  |   | 6,477  
|                                                                   |  |       |         |          
|Basic and diluted, per share of common stock:                      |  |       |         |           |   |          |          |  |   |         |   |  |   |        
|Net income (loss) applicable to common stock-basic and dilutive(4) |  |       | 0.02    |           |   | (0.66    | )        |  |   | (0.40   | ) |  |   | 0.07   
|Average number of common shares outstanding-basic                  |  |       | 199,308 |           |   | 199,308  |          |  |   | 148,107 |   |  |   | 96,906 
|Average number of common shares outstanding-dilutive               |  |       | 200,449 |           |   | 199,308  |          |  |   | 148,107 |   |  |   | 96,906 



|                                                                   |  |       |         |   |        |   |          |  |   |           |   |  |   |         |  
|------------------------------------------------------------------ |  | ----- | ------- | - | ------ | - | -------- |  | - | --------- | - |  | - | ------- | -
|2003 Quarters                                                      |  | First |         |   | Second |   | Third(5) |  |   | Fourth(6) |  
|Net sales                                                          |  | $     | 349,288 |   |        | $ | 370,763  |  | $ | 358,281   |   |  | $ | 356,481 |  
|Gross margin                                                       |  |       | 65,834  |   |        |   | 72,749   |  |   | 74,390    |   |  |   | 73,321  |  
|Business realignment expense (income) & impairments                |  |       | 1,296   |   |        |   | 125      |  |   | (8,806    | ) |  |   | 12,133  |  
|Net (loss) income                                                  |  |       | (3,405  | ) |        |   | 20,150   |  |   | 11,053    |   |  |   | (4,822  | )
|                                                                   |  |       |         |  
|Basic and diluted, per share of common stock:                      |  |       |         |   |        |   |          |  |   |           |   |  |   |         |  
|Net (loss) income applicable to common stock-basic and dilutive(4) |  | $     | (0.02   | ) |        | $ | 0.10     |  | $ | 0.06      |   |  | $ | (0.02   | )
|Average number of common shares outstanding-basic                  |  |       | 199,315 |   |        |   | 199,308  |  |   | 199,308   |   |  |   | 199,308 |  
|Average number of common shares outstanding-dilutive               |  |       | 199,315 |   |        |   | 199,906  |  |   | 200,122   |   |  |   | 199,308 |  

---

|(1) | In the second quarter of 2004, in connection with the Apollo Transaction, the Company recorded a charge of approximately $137,000 to Income tax expense to increase the valuation
reserves related to the Companys net domestic deferred tax asset. See Note 17. The Company also incurred additional expenses of $7,236 related to the Apollo Transaction. See Note 1.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | In the third quarter of 2004, the Company incurred expenses of $45,442 related to the Apollo Transaction. See Note 1. The Company also recorded legal accruals of approximately
$10,300 related primarily to legacy-related legal proceedings. An additional tax charge of approximately $14,000 was recorded in connection with the Apollo Transaction to increase the valuation reserves related to the Companys net domestic
deferred tax asset. See Note 17.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | In the fourth quarter of 2004, the Company reclassified certain reported amounts from Cost of goods sold to General & administrative expense and Distribution expense. The
reclasses reduced reported gross margin by $712, $745 and $659 for the First, Second and Third quarters, respectively.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | The 2004 and 2003 quarterly earnings per share amounts do not add to the annual amounts as a result of differences in average shares outstanding between the quarterly and annual
calculations.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | In the third quarter of 2003, the Company recorded Business realignment income and impairments totaling $8,806 consisting of plant closure costs of $542, other severance and
employee costs of $2,318 and non-cash asset impairment charges of $26, offset by a gain on the sale of land associated with a previously closed plant of $11,692. See Note 4.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(6) | In the fourth quarter of 2003, the Company recorded Business realignment expense and impairments totaling $12,133, consisting of plant closure costs of $6,721, non-cash impairments
of a $3,006 and severance costs of $2,406. See Note 4.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------





87



---

##### Table of Contents

21. Reclassification



In the Companys originally issued financial statements for the year ended December 31, 2004, transaction-related costs of $41,322 (see Note 1) were classified as
a non-operating expense. However, after discussions with the staff of the U.S. Securities and Exchange Commission, management concluded that classification of transaction related costs as an operating expense would be a better presentation.
Accordingly, the Company has reflected such reclassification in the accompanying Consolidated Statement of Operations.



88



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors

and Shareholder of Borden Chemical, Inc.:



We have audited the accompanying consolidated balance sheets of Borden Chemical, Inc. (a wholly owned subsidiary of BHI Acquisition Corp.,
which is a majority owned subsidiary of BHI Investment, LLC) and subsidiaries (the Company) as of December 31, 2004 and 2003, and the related consolidated statements of operations, shareholders deficit, and cash flows for each of
the three years in the period ended December 31, 2004. 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 the standards of the Public Company Accounting
Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.



In our opinion, such consolidated financial
statements present fairly, in all material respects, the financial position of Borden Chemical, Inc. and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period
ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



As discussed in Note 7 to the consolidated financial statements, the Company changed its method of accounting for goodwill and other intangible assets in 2002 to conform
with Statement of Financial Accounting Standards No. 142.



DELOITTE &
TOUCHE LLP



Columbus, Ohio

March 24, 2005, except for the effects of Note 21, as to which the date is August 18, 2005



89



---

##### Table of Contents

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE



None



ITEM 9A. CONTROLS AND PROCEDURES



As of
the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and our management, including our President and Chief Executive Officer and
our Executive Vice President and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rules 13a-15(e) and 15d-15(e). Based on that evaluation, the President and
Chief Executive Officer and Executive Vice President and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information we are required to disclose in reports that we file or submit under the
Exchange Act are recorded, processed, summarized and reported within the time periods specified in the SECs rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There has been no change in our internal controls over financial reporting that occurred during our fourth fiscal quarter of 2004 that has materially
affected, or is reasonably likely to materially affect, our internal controls over financial reporting.



ITEM 9B. OTHER INFORMATION



Item 1.01 Entry
into a Material Definitive Agreement



The Company entered into a Letter
Agreement dated December 3, 2004 with Apollo Management V. L.P. amending the Management Consulting Agreement dated as of August 12, 2004. The Letter Agreement sets the fee the Company will pay to Apollo for consulting services, which is an annual
fee of $2.5 million for each annual period after January 1, 2005.



On November
9, 2004 the Company revised its employment arrangement with Judy Sonnett who elected to resign as Vice President of Human Resources and focus on people and organizational development, working on a part-time basis. The agreement provides for an
annual salary of $175,000 and participation in the 2005 Management Incentive Plan with a 30% target bonus. In the event she is terminated without cause, Ms. Sonnett is entitled to 12 months of severance. Ms. Sonnetts agreement is filed as an
exhibit to this Annual Report on Form 10-K.



Part III



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY



Set forth below are the names and ages of the Directors and Executive Officers of the Company as of March 1, 2005, and the positions and offices currently held by each of them. Their terms of office extend to the next
Annual Meeting of the Board of Directors or until their successors are elected.



|                   |  |                                                                   |  |                      |  |                                 
|------------------ |  | ----------------------------------------------------------------- |  | -------------------- |  | --------------------------------
|Name               |  | Position & Office                                                 |  | Age on Dec. 31, 2004 |  | Served in Present Position Since
|Joshua J. Harris   |  | Director                                                          |  | 40                   |  | 2004                            
|Scott M. Kleinman  |  | Director                                                          |  | 31                   |  | 2004                            
|Robert V. Seminara |  | Director                                                          |  | 32                   |  | 2004                            
|C. O. Morrison     |  | Director, President and Chief Executive Officer                   |  | 49                   |  | 2002                            
|J. P. Bevilaqua    |  | Executive Vice President  Forest Products and Performance Resins |  | 49                   |  | 2002                            
|W. H. Carter       |  | Director, Executive Vice President and Chief
Financial Officer    |  | 51                   |  | 1995                            
|S.R. Coffin        |  | Executive Vice President-Specialty Materials and
Asia             |  | 52                   |  | 2005                            
|N. G. Brown        |  | Vice President and General Counsel                                |  | 63                   |  | 2003                            
|R. H. Glaser       |  | Vice President-Corporate Strategy and Development                 |  | 44                   |  | 2002                            
|R. L. Monty        |  | Vice President-Environmental Health and Safety                    |  | 57                   |  | 2004                            



90



---

##### Table of Contents

Joshua J. Harris was elected a director of the Company on August 12, 2004. Mr. Harris is a founding Senior Partner at
Apollo and has served as an officer of certain affiliates of Apollo since 1990. Prior to that time, Mr. Harris was a member of the Mergers and Acquisitions Department of Drexel Burnham Lambert Incorporated. Mr. Harris is also a director of Compass
Minerals International, Inc., GNC Corporation, Nalco Holdings, Pacer International, Inc., Quality Distribution Inc., Resolution Performance Products LLC, Resolution Specialty Minerals, Inc. and United Agri Products, Inc. He is a member of the
Executive Committee and Chair of the Compensation Committee of the Board of Directors.



Scott M. Kleinman was elected a director of the Company on August 12, 2004. Mr. Kleinman is a Partner at Apollo, where he has worked since February 1996. Prior to that time, Mr. Kleinman was employed by Smith Barney Inc. in its Investment
Banking division. Mr. Kleinman is also a director of Resolution Performance Products LLC and Resolution Specialty Materials, Inc. He is a member of the Audit Committee of the Board of Directors.



Robert V. Seminara was elected a director of the Company on August 12, 2004. Mr. Seminara is
a Partner at Apollo and has served as an officer of certain affiliates of Apollo since January 2003. From June 1996 to January 2003, Mr. Seminara served as an officer in the private equity investment group at Evercore Partners LLC, where he held the
title Managing Director. He is a member of the Executive and Compensation Committees and is Chair of the Audit Committee of the Board of Directors.



Craig O. Morrison was elected President and Chief Executive Officer effective March 25, 2002. Prior to joining our Company, he served as President and General Manager of
Alcan Packagings Pharmaceutical and Cosmetic Packaging business from 1999 to 2002. From 1993 to 1998 he was President and General Manager for Van Leer Containers, Inc. Prior to joining Van Leer Containers, Mr. Morrison served in a number of
management position with General Electrics Plastics division from March 1990 to November 1993, and as a consultant with Bain and Company from 1987 to 1990. He is a member of the Executive Committee of the Board of Directors.



Joseph P. Bevilaqua is Executive Vice President-Forest Products and Performance Resins, a
position he has held since January 2004. Mr. Bevilaqua joined the Company in April 2002 as Vice President - Corporate Strategy and Development. From February 2000 to March 2002, he was the General Manager of Alcans global plastics packaging
business. Prior to Alcan, Mr. Bevilaqua served in leadership positions with companies such as General Electric, Dartco Manufacturing, Monsanto and Russell-Stanley Corporation.



William H. Carter was elected Executive Vice President and Chief Financial Officer effective April 3, 1995 and a director November 20, 2001.
Throughout his tenure with us, Mr. Carter has been instrumental in the restructuring of our holdings, including serving as a director and interim President and Chief Executive Officer of a former subsidiary, BCP Management, from January to June
2000. Prior to joining our Company in 1995, Mr. Carter was a partner with PriceWaterhouse LLP, which he joined in 1975. In addition, Mr. Carter was a director of BCP Management, Inc. and WKI, both of which filed a voluntary petition for
reorganization under Chapter 11 of the Bankruptcy Code in 2002.



Sarah R.
Coffin was elected an Executive Vice President effective February 14, 2005 to oversee our oilfield, foundry, electronics and wood products industries, including operations in the Asia Pacific region. Prior to joining the Company she was employed by
Seaman Corporation where she had the position of Vice President Sales and Marketing from May 31, 2004 to February 2005. From August, 2002 to March, 2003 Ms. Coffin was Senior Vice President Global Sourcing, Human Resources and Information Technology
of Noveon, Inc., a global producer of performance polymer systems and adhesives. From 1998 to 2002, she was Group President Specialty Plastics and Polymer Additives, Senior Vice President and General Manager Performance Coatings with BF Goodrich
Performance Materials Company/Noveon, Inc. She is a director of SPX Corporation.



Nancy G. Brown was elected a Vice President and General Counsel effective June 11, 2003. She served as Vice President, General Counsel and Secretary of Borden Foods Corporation from January 1996 to December 2001.



Raymond H. Glaser was elected Vice President - Corporate Strategy & Development in August
2002. Prior to joining our company, he served as Director of Business Development for W.R. Grace & Co. from October 1999 to August 2002. Prior to that, he worked in several capacities from May 1996 to October 1999 for Allied Signals
Performance Polymers division, including as Director of New Ventures.



Richard
L. Monty was elected Vice President - Environmental Health & Safety effective January 26, 2004. Prior to joining Borden, he was employed by Huntsman Corporation from July 1992 to January 2004 in various Environmental Health and Safety positions,
ultimately serving as Director, Global Environmental Health & Safety from 2001 to January 2004.





91



---

##### Table of Contents

Audit Committee



Our Audit Committee recommends the firm to be appointed as independent accountants to audit financial statements and to perform services related to the audit, reviews the
scope and results of the audit with the independent accountants, reviews with management and the independent accountants our annual operating results, considers the adequacy of the internal accounting procedures, considers the effect of such
procedures on the accountants independence and establishes policies for business values, ethics and employee relations. The Audit Committee consists of Messrs. Kleinman and Seminara, both of whom are audit committee financial
experts as such term is defined in Item 401(h) of Regulation S-K.



Code of Ethics



We have a Code of Business Ethics that applies
to all associates, including our Chief Executive Officer and senior financial officers. These standards are designed to deter wrongdoing and to promote the honest and ethical conduct of all associates. Excerpts from the Code of Business Ethics,
which address the subject areas covered by the Securities and Exchange Commissions rules, are posted on our website: www.bordenchem.com under About Us. Any substantive amendment to, or waiver from, any provision of the Code
of Business Ethics with respect to any senior executive or financial officer shall be posted on this website.



92



---

##### Table of Contents

ITEM 11. EXECUTIVE COMPENSATION



The
following table provides certain summary information concerning compensation of the Chief Executive Officer, the next four most highly compensated Executive Officers as of December 31, 2004 (the Named Executive Officers) for the periods
indicated.



SUMMARY COMPENSATION TABLE



|                                                                  |  |              |            |                       |     |                            |                        |        |                                       |                |     |                  |                   |     |         |                        |     |  |              |  |                       
|----------------------------------------------------------------- |  | ------------ | ---------- | --------------------- | --- | -------------------------- | ---------------------- | ------ | ------------------------------------- | -------------- | --- | ---------------- | ----------------- | --- | ------- | ---------------------- | --- |  | ------------ |  | ----------------------
|                                                                  |  | YEAR         |            | ANNUAL COMPENSATION   |     |                            | LONG-TERM COMPENSATION |        | (1) All OtherCompensation ($)        
|                                                                  |  |              | SALARY ($) |                       |     | BONUS ($)                  |                        |        | Other AnnualCompensation ($)          |                |     | Awards           |                   |     | Payouts |                       
|NAME AND PRINCIPALPOSITION                                        |  |              |            |                       |     | Restricted StockAwards ($) |                        |        | Securities UnderlyingOptions/SARs (#) |                |     | LTIP Payouts ($) |                  
|C. O. Morrison President and Chief Executive Officer              |  | 200420032002 |            | 659,230524,230375,000 |     |                            | 774,030320,000300,000  |        |                                       | NoneNoneNone   |     |                  | NoneNone2,380,952 | (2) |         | 1,297,578None1,386,667 | (6) |  | NoneNoneNone |  | 3,098,29439,17354,076 
|                                                                  |  |              |            |                       |     |                            |                        |       
|W. H. Carter Executive Vice President and Chief Financial Officer |  | 200420032002 |            | 567,277525,300506,154 | (3) |                            | 407,161627,100670,363  | (4)(4) |                                       | NoneNoneNone   |     |                  | NoneNoneNone      |     |         | 1,038,278480,000None   | (6) |  | NoneNoneNone |  | 3,016,44656,584825,449
|                                                                  |  |              |            |                       |     |                            |                        |       
|J. P. Bevilaqua Executive Vice President                          |  | 200420032002 |            | 347,899266,456182,692 |     |                            | 230,296126,71756,250   |        |                                       | NoneNone50,085 |     |                  | NoneNone1,190,475 | (2) |         | 432,526None105,333     | (6) |  | NoneNoneNone |  | 1,548,21615,71961,016 
|                                                                  |  |              |            |                       |     |                            |                        |       
|J. A. Sonnett Vice President Human Resources                      |  | 200420032002 |            | 274,249240,056225,698 |     |                            | 136,72173,81969,924    |        |                                       | None43,907None | (5) |                  | NoneNoneNone      |     |         | None131,250None        |     |  | NoneNoneNone |  | 616,09610,00014,590   
|                                                                  |  |              |            |                       |     |                            |                        |       
|C.H. Morton Vice President Manufacturing                          |  | 2004         |            | 275,000               |     |                            | 155,080                |        |                                       | None           |     |                  | None              |     |         | 333,252                | (6) |  | None         |  | 388,020               

---

|(1) | All Other Compensation includes matching company contributions to the Retirement Savings Plan and the executive supplemental benefit plans. For 2004 these matching contributions
were: Mr. Morison $40,728; Mr. Carter $43,358; Mr. Bevilaqua $19,434; Ms. Sonnett $10,250; and Mr. Morton $7,606. For Messrs. Morrison and Bevilaqua, their amounts also include payments of $3,057,566 and $1,528,782 respectively, for the cancellation
of their restricted stock at the time of the Apollo Transaction. The amount shown for Mr. Morton includes $30,212 for reimbursed moving expenses. In addition, for Mr. Morton, Mr. Carter and Ms. Sonnett the amounts shown include one-time sale bonuses
of $350,202, $2,573,088 and $605,846 respectively, paid at the time of the Apollo Transaction. For Mr. Carter, the amount also includes the final installment of his retention bonus, $400,000. Portions of the sale bonuses paid to Messrs. Carter and
Morton and the restricted stock payments to Messrs. Morrison and Bevilaqua were deferred in the form of stock units.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | Mr. Morrisons restricted stock consisted of 1,058,201 shares and Mr. Bevilaquas restricted stock consisted of 529,100 shares. See description in Employment,
Termination and Change in Control Arrangements for other terms of Mr. Morrisons and Mr. Bevilaquas restricted stock.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(3) | 100% of Mr. Carters 2002 salary was paid by Borden Capital funded by fees paid by the Company.
|--- | -----------------------------------------------------------------------------------------------

|(4) | A portion of the bonus payments made in 2002 and 2003 to Messrs. Carter, $417,263 and $380,000, respectively, relate to installments paid for a one-time retention bonus and were
paid by affiliates funded by fees paid by the Company.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(5) | Reimbursement for payment of taxes.
|--- | -----------------------------------

|(6) | Represents options to purchase BHI Acquistion Corp. common stock. For Mr. Morton, the amount includes options to purchase 131,250 shares of the Companys common stock granted
to him February 2004, which were subsequently exercised at the time of the Apollo Transaction.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



93



---

##### Table of Contents

Option Grants in Last Fiscal Year



The following table provides information on option grants during 2004 to the Named Executive
Officers



|                  |  |                                                   |        |  |                                                           |          |  |                                 |          |                 |            |                                |    |             
|----------------- |  | ------------------------------------------------- | ------ |  | --------------------------------------------------------- | -------- |  | ------------------------------- | -------- | --------------- | ---------- | ------------------------------ | -- | ------------
|INDIVIDUAL GRANTS
|NAME              |  | # OF SECURITIESUNDERLYINGOPTIONS/SARSGRANTED (#) |        |  | % OF TOTALOPTIONS/SARSGRANTED TOEMPLOYEES IN FISCAL YEAR |          |  | EXERCISE OR BASEPRICE ($/SHARE) |          | EXPIRATION DATE |            | GRANT DATE (3) PRESENT VALUE $
|C.O. MORRISON     |  | 1,297,578                                         | (1)    |  | 23.93                                                     | %(4)     |  | $                               | 2.89     |                 | 8/12/14    |                                | $  | 609,862     
|                  |  |                                                   |        |  |                                                          
|W. H. CARTER      |  | 1,038,278                                         | (1)    |  | 19.14                                                     | %(4)     |  | $                               | 2.89     |                 | 8/12/14    |                                | $  | 487,991     
|                  |  |                                                   |        |  |                                                          
|J.P. BEVILAQUA    |  | 432,526                                           | (1)    |  | 7.97                                                      | %(4)     |  | $                               | 2.89     |                 | 8/12/14    |                                | $  | 203,387     
|                  |  |                                                   |        |  |                                                          
|J.A. SONNETT      |  | 0                                                 |        |  | 0                                                         |          |  |                                 | N/A      |                 | N/A        |                                |    | N/A         
|                  |  |                                                   |        |  |                                                          
|C.H. MORTON       |  | 131,250202,002                                    | (2)(1) |  | 39.773.72                                                 | %(5)%(4) |  | $$                              | 2.002.89 |                 | N/A8/12/14 |                                | $$ | 39,37594,941

---

|(1) | Options granted by BHI Acquisition Corp. following the change in ownership.
|--- | ---------------------------------------------------------------------------

|(2) | Options granted by the Company prior to its change in ownership were exercised at the time of
the Apollo Transaction.
|--- | ---------------------------------------------------------------------------------------------------------------------

|(3) | The fair value of each option grant is estimated on the date of grant using the minimum value
method and the Black-Scholes options pricing model with a risk-free weighted average interest rate of 3.55%, dividend rate of 0.0% and expected life of five years.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(4) | Percent of total options granted by BHI Acquisition Corp.
|--- | ---------------------------------------------------------

|(5) | Percent of total options granted by the Company
|--- | -----------------------------------------------



94



---

##### Table of Contents

Option Exercises in Last Fiscal Year and FY-End Option Values



The following table provides information on options exercised in 2004 by the Named Executive
Officers and the value of their unexercised options at December 31, 2004.



|               |  |                                                               |  |                    |  |                                                                      |  |                                                                        |  |                |  |                 
|-------------- |  | ------------------------------------------------------------- |  | ------------------ |  | -------------------------------------------------------------------- |  | ---------------------------------------------------------------------- |  | -------------- |  | ----------------
|NAME           |  | NUMBER OF SHARES WITHRESPECT TO WHICHOPTIONSWERE EXERCISED(#) |  | VALUE REALIZED ($) |  | # OF SECURITIES UNDERLYINGUNEXERCISED OPTIONS/SARS ATFISCAL YEAR END |  | VALUE OF UNEXERCISED IN-THE-  MONEY OPTIONS/SARS AT FISCALYEAR END ($)
|               |  | (1)                                                           |  |                    |  | EXERCISABLE                                                          |  | UNEXERCISABLE (2)                                                      |  | EXERCISABLE(3) |  | UNEXERCISABLE(3)
|C.O. MORRISON  |  | 1,386,667                                                     |  | 886,634            |  | 0                                                                    |  | 1,297,578                                                              |  | 0              |  | 0               
|               |  |                                                               |  |                    |  |                                                                     
|W.H. CARTER    |  | 480,000                                                       |  | 426,912            |  | 0                                                                    |  | 1,038,278                                                              |  | 0              |  | 0               
|               |  |                                                               |  |                    |  |                                                                     
|J.P. BEVILAQUA |  | 105,333                                                       |  | 67,350             |  | 0                                                                    |  | 432,526                                                                |  | 0              |  | 0               
|               |  |                                                               |  |                    |  |                                                                     
|J.A. SONNETT   |  | 131,250                                                       |  | 116,734            |  | 0                                                                    |  | 0                                                                      |  | 0              |  | 0               
|               |  |                                                               |  |                    |  |                                                                     
|C.H. MORTON    |  | 131,250                                                       |  | 116,734            |  | 0                                                                    |  | 202,002                                                                |  | 0              |  | 0               

---

|(1) | Options for shares of the Registrant which were exercised in connection with the Apollo Transaction.
|--- | ----------------------------------------------------------------------------------------------------

|(2) | Represents options for shares of stock in the Registrants parent, BHI Acquisition Corp.
|--- | ----------------------------------------------------------------------------------------

|(3) | There is no established trading market for the stock of BHI Acquisition Corp.; however, based on its estimated fair value at December 31, 2004, no options have been designated to be
in-the money. The estimated market value was calculated based on the formula as defined in the Investor Rights Agreement.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Deferred Compensation Plan



In connection with the Apollo Transaction, BHI Acquisition adopted a deferred compensation plan for the benefit of certain of our executives. Under the plan, individual
deferred compensation accounts were created for certain of our executives and credited with deferred shares of common stock. The accounts of our Chief Executive Officer and our 2004 Named Executive Officers have been credited with the number of
deferred shares of common stock as set forth opposite such executives name below.



|                    |  |                            
|------------------- |  | ---------------------------
|Name                |  | Deferred Compensation Units
|Craig O. Morrison   |  | 519,031                    
|William H. Carter   |  | 415,311                    
|Joseph P. Bevilaqua |  | 173,010                    
|Judith A. Sonnett   |  |                           
|C.H. Morton         |  | 80,801                     



The plan prohibits the assignment of
the deferred shares except upon an executives death. The plan also provides for the forfeiture of an executives deferred shares upon such executives termination for cause or voluntary resignation at any time prior to either
December 31, 2005 (for those executives who held shares of our restricted stock that were cancelled in connection with the Apollo Transaction) or December 10, 2004 (for all other executives). Plan participants will be entitled to receive
distributions of BHI Acquisitions common stock at the times described below. At the discretion of the administrator of the plan, certain distributions may be made in cash.



Unless otherwise forfeited as described above, and except as may otherwise be agreed by BHI Acquisition, each executives deferred
shares will be distributed to such executive upon the earliest to occur of (i) the executives termination of employment or upon death or disability, (ii) the exercise by the executive of certain tag along or piggy back registration rights, or
(iii) the occurrence of certain mergers, stock or asset sales or other change of control transactions. The deferred compensation plan described above is only available to our employees who earn at least $125,000.



95



---

##### Table of Contents

Pursuant to a letter agreement entered into between BHI Investment, LLC and Mr. Morrison in connection with the Apollo
Transaction, all of the shares of our restricted stock held by Mr. Morrison at the time of the Apollo Transaction were cancelled, and Mr. Morrison received in exchange a cash payment of $1,557,566 and an interest in a deferred stock account as
described above. Mr. Morrison also received Tranche A Options and Tranche B Options pursuant to the 2004 option plan described below.



Pursuant to a letter agreement entered into between BHI Investment, LLC and Mr. Bevilaqua in connection with the Apollo Transaction, all of the shares of our restricted
stock held by Mr. Bevilaqua at the time of the Apollo Transaction were cancelled, and Mr. Bevilaqua received in exchange a cash payment of $1,028,781 and an interest in a deferred stock account as described above. Mr. Bevilaqua also received Tranche
A Options and Tranche B Options pursuant to the 2004 option plan described below.



2004 Stock Incentive Plan



In connection with the Apollo
Transaction, BHI Acquisition adopted a stock incentive plan for the benefit of certain of our employees, which we refer to as the 2004 incentive plan. The purpose of the 2004 incentive plan is to further our growth and success, to enable our
employees to acquire shares of BHI Acquisitions common stock, thereby increasing their personal interest in our growth and success, and to provide a means of rewarding outstanding performance by such persons. Awards granted under the 2004
incentive plan may be not assigned or transferred, except upon the participants death. The 2004 incentive plan will terminate ten years after its adoption and no awards may be granted under the plan thereafter. The 2004 incentive plan allows
for the issuance of non-qualified options and rights to purchase shares of common stock.



The employees participating in the 2004 incentive plan receive stock options under the 2004 stock incentive plan pursuant to individual stock option agreements, the terms and conditions of which will be substantially
identical. Each agreement provides for the issuance of two tranches of options to purchase common stock of BHI Acquisition. The Tranche A Options will vest 20% on each of the first five anniversaries of the grant date or, to the extent not yet
vested, on the first anniversary of the closing of the sale of our business. All of the Tranche B Options will vest in whole or in part upon the earlier to occur of the eighth anniversary of the grant date or the date occurring six months after the
date on which the sale of our business has been completed in the event certain financial milestones are met. Certain employees will also be awarded the right to purchase shares of the Company.



The aggregate options authorized to be issued will amount to approximately 5.0% of the equity
of BHI Acquisition on a fully diluted basis.



Retirement Benefits,
Compensation of Directors, Employment, Termination and Change in Control Arrangements, Compensation Committee Interlocks and Insider Participation



The Long-Term Incentive Plans-Awards In Last Fiscal Year table is not included since we have no long-term incentive plan.



Retirement Benefits



The Borden Employees Retirement Income Plan (ERIP) for salaried employees was
amended as of January 1, 1987, to provide benefit credits of 3% of earnings which are less than the Social Security wage base for the year plus 6% of earnings in excess of the wage base. Earnings include annual incentive awards paid currently but
exclude any long-term incentive awards. Benefits for service through December 31, 1986, are based on the plan formula then in effect and have been converted to opening balances under the plan. Both opening balances and benefit credits receive
interest credits at one-year Treasury bill rates until the participant commences receiving benefit payments. For the year 2004, the interest rate as determined in accordance with the plan language was 1.34%. Benefits vest after completion of five
years of employment for employees hired on or after July 1, 1990.



We have a
supplemental plan which provides those benefits which are otherwise produced by application of the ERIP formula, but which, under Section 415 or Section 401 (a)(17) of the Internal Revenue Code, are not permitted to be paid through a qualified plan
and its related trust. The supplemental plan also provides a pension benefit using the ERIP formula based on deferred incentive compensation awards and certain other deferred compensation, which are not considered as part of compensation under the
ERIP.



96



---

##### Table of Contents

The total projected annual benefits payable under the formulas of the ERIP at age 65 without regard to the Section 415 or
401(a)(17) limits and recognizing supplemental pensions as described above, are as follows for the Named Executive Officers in 2004: C.O. Morrison-$84,468, W. H. Carter-$123,520, J.P. Bevilaqua-$42,017, J.A. Sonnett-$36,292 and C. H. Morton-$23,527.



In addition, certain Executive Officers receive Company matching contributions
up to the first 7% of contributions to the Retirement Savings Plan. Company matching contributions on employee contributions in excess of IRS limitations are provided under the supplemental plans. This benefit is not provided if the executive has
any other pension benefit guarantee.



Compensation of Directors



Non-employee directors are paid an
annual retainer of $30,000, paid quarterly after each fiscal quarter of service. Each non-employee director also receives a fee of $2,000 per board meeting attended, $1,000 for each regularly scheduled committee meeting attended and lasting over 30
minutes and 50% of such amount for board meetings attended via teleconference.



Directors who served prior to March 15, 1995 and who were not employees of the Company are provided, upon attaining age 70, annual benefits through a funded grantor trust equal to their final annual retainer if they served in at least three
plan years. Such benefits can continue for up to 15 years.



Employment, Termination and Change in Control Arrangements



In connection with the Apollo Transaction, BCI entered into employment agreements with Craig O. Morrison, Joseph P. Bevilaqua and William H. Carter. The new employment agreements contain terms which are substantially
similar to those contained in their existing employment arrangements. Under the terms of each employment agreement, each employee has agreed not to disclose any confidential information concerning our business. In addition, the employee has agreed
not to solicit or hire any of our employees or solicit any of our customers, suppliers, licensees or other business relations until one year after he ceases to receive any payments under the agreement. Furthermore, the employee has agreed not to
engage in any business competing with our business or products anywhere in the world where we are doing business until after he ceases to receive any payments pursuant to the agreement (or in certain circumstances, the first anniversary of such
date).



We incurred additional expense of $11.9 million associated with
employee compensation as a result of certain compensation arrangements that were triggered as part of the Apollo Transaction. A portion of these amounts were allocated to our executive officers.



Mr. Morrisons new employment arrangement entitles him to receive a perquisite payment
in the amount of $40,000 annually, usual and customary health and pension benefits and a bonus opportunity and provides for eighteen months severance based on his monthly base salary in the event of termination of employment by us for reasons other
than for cause, death or disability. Under his prior employment arrangement, Mr. Morrison was provided with a bonus opportunity, an equity investment opportunity as described above, and a 2001 incentive payment guarantee. Mr. Bevilaquas new
employment arrangement entitles him to receive a perquisite payment in the amount of $30,000 annually, usual and customary health and pension benefits and a bonus opportunity and provides for twelve months severance based on his monthly base salary
in the event of termination of employment by us for reasons other than for cause, death or disability. Under his prior employment arrangement, he was provided with relocation assistance, a bonus opportunity, an equity investment opportunity and a
2001 incentive payment guarantee. Mr. Carters new employment arrangement entitles him to receive a perquisite payment in the amount of $30,000 annually, usual and customary health and pension plan benefits and a bonus opportunity and provides
for twenty-four months base salary in the event of termination of employment by us for reasons other than for cause, death or disability. Under his prior employment arrangement, he was provided with a bonus opportunity, an equity investment
opportunity and a retention bonus.



The Company has an employment agreement
with Mr. Morton which entitles him to participate in the Management Perquisite Program, the 2004 Management Incentive Plan, the usual and customary health and pension benefits, a deferred compensation plan, a stock incentive plan, and provides him
four weeks paid vacation per year. His agreement also provided him with relocation assistance and an equity investment opportunity. In addition, in connection with the Apollo Transaction, Mr. Morton was granted the right to participate in the BHI
Acquisition Deferred Compensation Plan and Stock Incentive Plan and was given a letter entitling him to twelve months of base salary in the event of termination of employment without cause.



Ms. Sonnett entered into an arrangement with the Company in November 2004 to relinquish her
role as Vice PresidentHuman Resources in 2005 and become Vice President of People and Organizational Development, working on a part-time basis. In connection with this change in responsibilities, Ms. Sonnett will be paid a base salary of
$175,000 and will continue to participate in the Management Incentive Program with a 30% target. In addition, Ms. Sonnett will be provided with twelve months of severance pay if the Company terminates her employment without cause.



97



---

##### Table of Contents

Compensation Committee Interlocks and Insider Participation



Messrs. Harris and Seminara are members of the Compensation Committee of the Board of
Directors and both are partners of Apollo Management L.P.



ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT



The following table sets forth certain information regarding the beneficial ownership of BHI Acquisition Common Stock as of March 1, 2005, by (a) persons known to us to
be the beneficial owners of more than five percent of the outstanding voting stock of BHI Acquisition, (b) each of our directors, (c) each of our 2004 Named Executive Officers and (d) all of our directors and executive officers as a group. Except as
otherwise noted, the persons named in the table below have sole voting and investment power with respect to all securities shown as beneficially owned by them.



|                                                                |  |                                          |  |         |  
|--------------------------------------------------------------- |  | ---------------------------------------- |  | ------- | -
|Name of Beneficial Owner                                        |  | Beneficial Ownership ofEquity Securities | 
|                                                                |  | Shares                                   |  | Percent |  
|Apollo Management, L.P.                                         |  | 96,905,936                               |  | 100     | %
|Robert Seminara(1)                                              |  | -0-                                      |  |         |  
|Scott Kleinman(1)                                               |  | -0-                                      |  |         |  
|Joshua Harris(1)                                                |  | -0-                                      |  |         |  
|Craig O. Morrison(2)                                            |  | -0-                                      |  |         |  
|William H. Carter(2)                                            |  | -0-                                      |  |         |  
|Joseph P. Bevilaqua(2)                                          |  | -0-                                      |  |         |  
|Judy A. Sonnett                                                 |  | -0-                                      |  |         |  
|C. Hugh Morton(2)                                               |  | -0-                                      |  |         |  
|All Directors and Executive Officers as a group (12 persons)(1) |  | 96,905,936                               |  | 100     | %

---

|(1) | Includes all shares held of record by BHI Investment, LLC. BHI Investment, LLC is an
affiliate of, and is controlled by Apollo through its beneficial ownership of BHI Investment, LLCs equity interests. Each of Messrs. Harris, Kleinman and Seminara may be deemed a beneficial owner of shares of BHI Acquisition due to his status
as a partner or senior partner of Apollo. Apollo and each such person disclaims beneficial ownership of any such shares in which he does not have a pecuniary interest. The address of Messrs. Harris, Kleinman and Seminara and Apollo is c/o Apollo
Management, L.P., 9 West 57th Street, New York, New York 10019.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | The amounts and percentages of interests beneficially owned are reported on the basis of
regulations of the SEC governing the determination of the beneficial ownership of securities. Accordingly, the amounts shown for management do not include Deferred Common Stock Units credited to their accounts pursuant to the BHI Acquisition Corp.
2004 Deferred Compensation Plan.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS



Transaction



On August 12, 2004, BHI
Investment, LLC, an affiliate of Apollo, acquired all of the outstanding capital stock of our parent, Borden Holdings, for total consideration of approximately $1.2 billion, including debt assumed. In addition, all of the outstanding capital stock
of BCI held by management was redeemed or otherwise cancelled. Immediately following the acquisition, BHI Investment, LLC reorganized our existing corporate structure so that BCI became directly owned by BHI Acquisition, a subsidiary of BHI
Investment, LLC. Immediately following the acquisition of Borden Holdings, we also reorganized the ownership of BCIs foreign subsidiaries.



The acquisition of Borden Holdings, and the payment of transaction fees and expenses, was financed by the net proceeds of the offering by Borden U.S. Finance Corp. and
Borden Nova Scotia Finance, ULC of the old notes, and with certain equity contributions to BHI Acquisition from Apollo. With a portion of the proceeds, we redeemed our 9.25% debentures on August 12, 2004 for total cash of $49,249. Included in the
total cash paid was $47,295 for the principal of the debentures, $1,069 of accrued interest and an early redemption premium of $885.



98



---

##### Table of Contents

Arrangements in Connection with the Transaction



Investor Rights Agreement



All employees who own deferred stock and stock options of BHI Acquisition enter into an investor rights agreement with Apollo and BHI Acquisition (the Investor
Rights Agreement), which governs certain aspects of BHI Acquisitions relationship with its security holders. The Investor Rights Agreement, among other things:



| |  |  | allows security holders to join, and allows Apollo and its affiliates to require security holders to join, in any sale or transfer of shares of common stock to any third party prior
to a qualified public offering of common stock, following which (when aggregated with all prior such sales or transfers) Apollo and its affiliates shall have disposed of at least 10% of the number of shares of common stock that Apollo and its
affiliates owned as of the closing date of the Transaction; provided that Apollo may dispose of up to 25% of such number of shares of common stock during the first twelve months after consummation of the Transaction without triggering these co-sale
rights;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | restricts the ability of security holders, other than Apollo and its affiliates, to transfer, assign, sell, gift, pledge, hypothecate or encumber, or otherwise dispose of, common
stock or of all or part of the voting power associated with common stock;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | allows BHI Acquisition or its designated Administrator and Apollo to repurchase all or any portion of the common stock held by employees of the Company upon the termination of their
employment with the Company;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | allows an employee of the Company to force BHI Acquisition or its designated Administrator to acquire all (but not less than all) of the shares of common stock held by the employee
upon the termination of their employment with the Company for certain specified reasons; and
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | contains a provision that at any meeting of the BHI Acquisition stockholders and in any action by written consent of BHI Acquisitions stockholders, Apollo will have the
ability to vote the shares of common stock.
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The Investor Rights
Agreement prohibits our employees who are parties to the agreement from soliciting or hiring any of our employees or soliciting any of our customers, suppliers, licensees or other business relations until one year after they cease to receive any
payments from us or our affiliates. Furthermore, the Investor Rights Agreement prohibits our employees from competing with our business or products anywhere in the world where we are doing business until they cease to receive any payments from us or
our affiliates (or, in certain cases, until the first anniversary of the date on which they cease to receive payments).



The Investor Rights Agreement will terminate upon the earliest to occur of the dissolution of BHI Acquisition, the determination of Apollo and the holders of a majority
of shares of common stock not held by Apollo and the transfer to person or group other than Apollo and its affiliates of a number of shares of common stock having the power to elect a majority of BHI Acquisitions Board of Directors.



Registration Rights Agreement



In connection with the Transaction, Apollo and its affiliates entered into a registration
rights agreement with BHI Acquisition pursuant to which Apollo and its affiliates have certain demand rights and Apollo, its affiliates and all employees who receive deferred stock and stock options have certain incidental registration rights with
respect to BHI Acquisitions common stock. Under this agreement, BHI Acquisition has agreed to assume the fees and expenses associated with registration. The registration rights agreement also contains customary provisions with respect to
registration proceedings, underwritten offerings and indemnity and contribution rights.



This registration rights agreement allows employees holding common stock to include their shares in a registration statement filed by the Company with respect to an offering of common stock (i) in connection with the exercise of any demand
rights by Apollo and its affiliates, or (ii) in connection with which Apollo and its affiliates exercise piggyback registration rights.



99



---

##### Table of Contents

Transaction Fee Agreement



In connection with the Apollo Transaction, we entered into a transaction fee agreement with Apollo and its affiliates for the provision of
certain structuring and advisory services. The agreement allows Apollo and its affiliates to provide certain advisory services to the Company for a seven-year period, with an automatic extension of the term for a one-year period beginning on the
fourth anniversary of the commencement of the agreement and at the end of each year thereafter, unless notice to the contrary is given by either party. The agreement, as later supplemented, provides for an annual fee of $2,500 for each annual period
after January 1, 2005. Upon closing the Apollo Transaction, we paid $10,000 of aggregate transaction and advisory fees, under this agreement, and reimbursed expenses of $750. In the fourth quarter of 2004, we paid $975 of fees pursuant to the
agreement. Under the agreement, we have also agreed to indemnify Apollo and its affiliates and their directors, officers and representatives for potential losses relating to the services contemplated under this agreement.



Other Arrangements



Financing and Investing Arrangements



We had a borrowing arrangement with BW Holdings, LLC (BWHLLC), a former affiliate, evidenced by a demand promissory note bearing interest at a variable
rate, which terminated upon the completion of the Transaction. Interest expense under the BWHLLC arrangement totaled $138 for the year ended December 31, 2004.



In addition, we hold a note receivable in an aggregate principal amount of $404.8 million and accrued interest of $155.6 million as of December 31, 2004 from BHI
Acquisition, which has been accounted for as a reduction of equity. We accrued interest quarterly on the note receivable in paid-in capital. Historically, the interest payments were funded through common stock dividends that we paid to them;
however, we have neither received quarterly interest nor declared an associated dividend since October 15, 2001 (see Note 15 to our audited Consolidated Financial Statements included elsewhere in this Form 10-K).



Administrative Service, Management, Consulting Arrangements



Prior to the Apollo Transaction, KKR provided certain management, consulting and board
services to the Company for an annual fixed fee. In 2003 and through April 2004, the fixed fee was $3,000 annually. Beginning in May 2004, the fee was reduced to $1,000 annually. For the year ended December 31, 2004, the Company recorded expense of
$1,284 for amounts due to KKR under this arrangement.



With respect to the
above-described agreements, the fees charged were determined based upon factors including the nature of the services provided, total compensation and benefits of the employees involved in providing the services, the estimated percentage of time
required to perform the services, the knowledge, expertise, experience and availability of the employees and the value of the services performed to the parties involved.



Other Transactions and Arrangements



From time to time, we sell finished goods to certain Apollo affiliates. These sales totaled $3,413 from the date of the Transaction through December 31, 2004. Accounts
receivable from these affiliates totaled $2,345 at December 31, 2004.



In
addition, upon closing the Apollo Transaction, the Company paid additional transaction-related costs of $8,721 on behalf of BHI Investment LLC, $21,851 on behalf of BWHLLC and shared compensation costs of $14,264. These amounts are included within
Transaction related costs.



Prior to the Apollo Transaction, the Company
utilized Willis Group Holdings, Ltd. (Willis), an entity controlled by KKR, as its insurance broker. Through the date of the Apollo Transaction, the Company had paid $598 to Willis for their services.



100



---

##### Table of Contents

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES



The following table sets forth the aggregate fees billed to us during the fiscal years ended December 31, 2004 and 2003 by our principal accounting firm, Deloitte & Touche LLP, the member firms of Deloitte Touche
Tohmatsu, and their respective affiliates (collectively, Deloitte):



|                       |  |                        |       |      |   |      
|---------------------- |  | ---------------------- | ----- | ---- | - | -----
|                       |  | Years endedDecember 31
|                       |  | 2004                   |       | 2003
|Audit fees (a)         |  | $                      | 1,700 |      | $ | 1,545
|Audit-Related fees (b) |  |                        | 2,120 |      |   | 493  
|Tax fees (c)           |  |                        | 2,383 |      |   | 2,494
|All other fees         |  |                        |      |      |   |     
|                       |  |                        |       |      |   |      
|Total fees             |  | $                      | 6,203 |      | $ | 4,532
|                       |  |                        |       |      |   |      

---

|(a) | Audit Fees. This category includes fees and expenses paid to Deloitte for the audit of our annual financial statements and for the reviews of the financial statements
included in our Quarterly Reports on Form 10-Q. This includes audit fees for engagements performed at U.S. and international locations, for the fiscal years ended December 31, 2004 and 2003.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(b) | Audit-Related Fees. This category includes fees and expenses paid to Deloitte for stand-alone audits of HAI and Borden Chemical Canada, Inc., an audit of BHI, other
audit-related accounting and SEC reporting services, consultations on Sarbanes-Oxley matters and employee benefit plan audits for the year ended December 31, 2004. Audit-related fees and expenses for the year ended December 31, 2003 relate to a
stand-alone audit of HAI, other audit-related accounting and SEC reporting services, consultations on Sarbanes-Oxley matters and employee benefit plan audits for the year ended December 31, 2003.
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|(c) | Tax Fees. This category includes fees and expenses paid to Deloitte for domestic and international tax compliance and planning services and tax advice.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------



Pre-Approval Policy and Procedures. Under a policy and
procedures adopted by the Audit Committee, all audit and non-audit services provided by our principal accounting firm must be pre-approved by the Audit Committee or its designated member. All services pre-approved by the designated member are
reported to the full Audit Committee at its next regularly scheduled meeting. The pre-approval of audit and non-audit services may be given at any time up to a year before the commencement of the specified service. Under the policy, management is
prohibited from using its principal accounting firm for certain non-audit services, the list of which is based upon the list of prohibited activities in the SECs rules and regulations.



101



---

##### Table of Contents

Part IV



ITEM 15 Exhibits and Financial Statement Schedules



|(1) | Consolidated Financial Statements  The financial statements and related notes of Borden Chemical, Inc., and the report of independent registered public accounting firm
are included at Item 8 of this report.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(2) | Financial Statement Schedules  Schedule II  Valuation and Qualifying Accounts and Reserves. Also included are the financial statements and related notes of Borden
Chemical Canada, Inc., as its securities collateralize an issue being registered, as defined by Rule 3-16 of Regulation S-X under the Securities Act of 1933, and report of independent auditors. All other schedules are omitted because they are not
applicable or not required, or because that required information is shown in either the Consolidated Financial Statements or in the notes thereto.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|(3) | Exhibits Required by SEC Regulation S-K  Management contracts, compensatory, plans and arrangements are listed herein at Exhibits (10) (ii) through (10) (xxii). The
following Exhibits are filed herewith or incorporated herein by reference:
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (3)(i)* | Restated Certificate of Incorporation dated January 11, 2005.
| | ------- | -------------------------------------------------------------



| | (ii)* | Amended and Restated By-Laws dated as of December 15, 2004.
| | ----- | -----------------------------------------------------------



| | (4)(i) | Form of Indenture between the Registrant and The First National Bank of Chicago, as Trustee, dated as of January 15, 1983, as supplemented by the First Supplemental Indenture dated
as of March 31, 1986, and the Second Supplemental Indenture, dated as of June 26, 1996, relating to the $200,000,000 8-3/8% Sinking Fund Debentures due 2016, incorporated herein by reference from Exhibits (4)(a) and (b) to Amendment No. 1 to
Registration Statement on Form S-3, File No. 33-4381 and Exhibit (4)(iv) to the June 30, 1996, Form 10-Q.
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Form of Indenture between the Registrant and The Bank of New York, as Trustee, dated as of December 15, 1987, as supplemented by the First Supplemental Indenture dated as of
December 15, 1987, and the Second Supplemental Indenture dated as of February 1, 1993, and the Third Supplemental Indenture dated as of June 26, 1996, incorporated herein by reference from Exhibits (4)(a) through (d) to Registration Statement on
Form S-3, File No. 33-45770, and Exhibit (4)(iii) to the June 30, 1996, Form 10-Q, relating to the following Debentures and Notes:
| | ---- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (a) | The $200,000,000 9-1/5% Debentures due 2021.
| | --- | --------------------------------------------



| | (b) | The $250,000,000 7-7/8% Debentures due 2023.
| | --- | --------------------------------------------



| | (iii) | Indenture dated as of August 12, 2004 amount Borden US Finance Corp. and Borden Nova Scotia ULC, as Issuers, Borden Chemical, Inc., and Wilmington Trust Co., as Trustee,
incorporated by reference to Exhibit 4(i) to the September 30, 2004 Form 10-Q, File No. 001-00071.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (10)(i) | Amended and Restated Loan and Security Agreement dated as of August 12, 2004 among Borden Chemical, Inc., Borden Chemical Canada, Inc., Borden Chemical UK Limited, Borden Chemical
GB Limited, the Lenders named therein, Credit Suisse First Boston, as Agent, and Fleet Capital Corporation, as U.S. Collateral Agent, incorporated by reference to Exhibit 10(i)(x) to the September 30, 2004 Form 10-Q, File No. 001-00071.
| | ------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ii) | Executive Supplemental Pension Plan Amended and Restated as of January, 1996 incorporated by reference to Exhibit (10)(xiii) to the 1998 Form 10-K Annual Report.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------



102



---

##### Table of Contents

| | (iii) | Advisory Directors Plan, incorporated herein by reference from Exhibit (10)(viii) to the 1989 Form 10-K Annual Report.
| | ----- | ----------------------------------------------------------------------------------------------------------------------



| | (iv) | Borden Chemical, Inc. 2004 Management Incentive Plan, incorporated by reference to Exhibit 10(ii) to the June 30, 2004 Form 10-Q, File No. 001-00071.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------------



| | (v)* | Description of the Borden Chemical, Inc. 2005 Management Incentive Plan.
| | ---- | ------------------------------------------------------------------------



| | (v).1 | Borden Chemical, Inc. 2005 Management Incentive Plan.
| | ----- | -----------------------------------------------------



| | (vi) | Amended and Restated Employment Agreement dated as of August 12, 2004 between the Company and Craig O. Morrison, incorporated by reference to Exhibit (10)(i)(i) to the
September 30, 2004 Form 10-Q, File No. 001-00071.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (vii) | Amended and Restated Employment Agreement dated as of August 12, 2004 between the Company and Joseph P. Bevilaqua, incorporated by reference to Exhibit (10)(i)(ii) to the September
30, 2004 Form 10-Q, File No. 001-00071.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (viii) | Amended and Restated Employment Agreement dated as of August 12, 2004 between the Company and William H. Carter, incorporated by reference to Exhibit (10)(i)(iii) to the September
30, 2004 Form 10-Q, File No. 001-00071.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (ix)* | Terms of employment dated February 19, 2005 between Judy A. Sonnett and the Company.
| | ----- | ------------------------------------------------------------------------------------



| | (x)* | Terms of employment dated December 31, 2003 between C. H. Morton and the Company.
| | ---- | ---------------------------------------------------------------------------------



| | (xi) | Terms of employment dated January 21, 2005 between Sarah R. Coffin and the Company, incorporated by reference from Exhibit (10) to the Current Report on Form 8-K dated February 14,
2005, File No. 001-00071.
| | ---- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xii) | Amended and Restated 1996 Stock Purchase and Option Plan for Key Employees of Borden Chemical, Inc., and Subsidiaries dated September 2003, incorporated by reference to Exhibit 4.3
to the Registration Statement on Form S-8, File No. 333-109490.
| | ----- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xiii) | Form of Management Stockholder Agreement incorporated by reference from Exhibit 4.4 to the Registration Statement on Form S-8, File No. 333-109490.
| | ------ | ---------------------------------------------------------------------------------------------------------------------------------------------------



| | (xiv) | Form of Non-Qualified Stock Option Agreement incorporated by reference from Exhibit 4.5 to the Registration Statement on Form S-8, File No. 333-109490.
| | ----- | -------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xv) | Form of Sale Participation Agreement incorporated by reference from Exhibit 4.6 to the Registration Statement on Form S-8, File No. 333-109490.
| | ---- | -----------------------------------------------------------------------------------------------------------------------------------------------



| | (xvi) | Form of Registration Rights Agreement dated January 1, 2002 among Borden Chemical, Inc., Borden Holdings, Inc., and BDS Two, Inc., incorporated by reference from Exhibit 4.7 to the
Registration Statement on Form S-8, File No. 333-109490.
| | ----- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xvii) | BHI Acquisition Corp. 2004 Deferred Compensation Plan, incorporated by reference to Exhibit 10(i)(iv) to the September 20, 2004 Form 10-Q, File No. 001-00071.
| | ------ | --------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xviii) | BHI Acquisition Corp. 2004 Stock Incentive Plan, incorporated by reference to Exhibit 10(i)(v) to the September 20, 2004 Form 10-Q, File No. 001-00071.
| | ------- | -------------------------------------------------------------------------------------------------------------------------------------------------------



103



---

##### Table of Contents

| | (xix) | Investor Rights Agreement dated as of August 12, 2004 among BHI Acquisition Corp., and The Holders that are parties thereto, incorporated by reference to Exhibit 10(i)(vi) to the
September 20, 2004 Form 10-Q, File No. 001-00071.
| | ----- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xx) | Registration Rights Agreement dated as of August 12, 2004 among BHI Acquisition Corp., BHI Investment, LC, and the Management Holders party thereto, incorporated by reference to
Exhibit 10(i)(vii) to the September 20, 2004 Form 10-Q, File No. 001-00071.
| | ---- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxi) | Form of Non-Qualified Stock Option Agreement between BHI Acquisition Corp. and certain optionees, incorporated by reference to Exhibit 10.12 to the Registration Statement on Form
S-4 filed by Borden U.S. Finance Corp. and Borden Nova Scotia Finance, ULC on February 14, 2005.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxii) | Perquisite Benefits Policy, incorporated by reference to Exhibit (10)(xviii) to the 2001 Form 10-K Annual Report.
| | ------ | -----------------------------------------------------------------------------------------------------------------



| | (xxiii) | Consulting Agreement with Kohlberg Kravis Roberts & Co., LP dated August 21, 1995, incorporated herein by reference to Exhibit 10 to the September 30, 1995 Form 10-Q, and
amendment dated May 30, 2002, incorporated by reference to Exhibit (10) to the June 30, 2002 Form 10-Q.
| | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxiv) | Management Consulting Agreement dated August 12, 2004 between Borden Chemical, Inc. and Apollo Management V, L.P., incorporated by reference to Exhibit 10(i)(viii) to the September
30, 2004 Form 10-Q, File No. 001-00071.
| | ------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxv) | Letter Agreement dated December 3, 2004 between Borden Chemical, Inc. and Apollo Management V, L.P., incorporated by reference to Exhibit 10.10 to the Registration Statement on Form
S-4 filed by Borden U.S. Finance Corp. and Borden Nova Scotia Finance, ULC on February 14, 2005.
| | ----- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxvi) | Joint Management Services Agreement dated October 1, 2001 between Borden Chemical, Inc. and Borden Capital, Inc., incorporated by reference to Exhibit (10) (xiv) to the 2001 Form
10-K Annual Report.
| | ------ | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxvii) | Master Asset Conveyance and Facility Support Agreement dated as of December 20, 2002 between the Company and Borden Chemicals and Plastics Operating Limited Partnership,
incorporated herein by reference from Exhibit (xxvi) to the 2002 Annual Report on Form 10-K.
| | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxviii) | Environmental Servitude Agreement dated as of December 20, 2002 between the Company and Borden Chemicals and Plastics Operating Limited Partnership incorporated herein by reference
from Exhibit (xxvii) to the 2002 Annual Report on Form 10-K.
| | -------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxix) | Settlement Agreement, dated September 13, 2002, among Borden Chemical, Borden Chemicals and Plastics Operating Limited Partnership, BCP Management, Inc., the U.S.E.P.A. and the
Louisiana Department of Environmental Quality, incorporated by reference to Exhibit (10)(xxviii) to the 2002 Annual Report on Form 10-K.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxx) | Stock Purchase Agreement dated as of July 5, 2004 among BHI Investment, LLC, BW Holdings LLC, Borden Holdings, Inc. Borden Chemical, Inc. Craig O. Morrison and Joseph P. Bevilaqua,
incorporated by reference to Exhibit (10)(i) to the June 30, 2004 Form 10-Q.
| | ----- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxxi) | Amendment No. 1 dated as of August 11, 2004, to the Stock Purchase Agreement dated July 5, 2004 by and among BHI Investment, LLC, Borden Holdings, Inc., Borden Chemical, Inc., Craig
O. Morrison and Joseph P. Bevilaqua, incorporated by reference to Exhibit 10(viii) to the September 30, 2004 Form 10-Q.
| | ------ | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (xxxii) | Share Purchase Agreement dated October 6, 2004 among RÜTGERS AG, RÜTGERS Bakelite Projekt GmbH, National Borden Chemical Germany GmbH, and Borden Chemical, Inc,
incorporated by reference to Exhibit 10(xi) to the September 30, 2004 Form 10-Q, File No. 001-00071.
| | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (12)* | Ratio of Earning to Fixed Charges.
| | ----- | ----------------------------------



| | (21)* | Subsidiaries of Registrant.
| | ----- | ---------------------------



| | (31) | Rule 13a-14 Certifications
| | ---- | --------------------------



| | (a) | Certificate of the Chief Executive Officer
| | --- | ------------------------------------------



| | (b) | Certificate of the Chief Financial Officer
| | --- | ------------------------------------------



| | (32) | Section 1350 Certifications
| | ---- | ---------------------------

---

|* | Filed as an exhibit to the initial filing of this Report and incorporated herein by reference thereto.
|- | ------------------------------------------------------------------------------------------------------



104



---

##### Table of Contents

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors

and Shareholder of Borden Chemical, Inc.:



We have audited the consolidated financial statements of Borden Chemical, Inc. (a wholly owned subsidiary of BHI Acquisition Corp., which is a majority owned subsidiary of BHI Investment, LLC) and subsidiaries (the Company) as
of December 31, 2004 and 2003, and for each of the three years in the period ended December 31, 2004, and have issued our report thereon dated March 24, 2005, except for the effects of Note 21, as to which the date is August 18, 2005 (which report
expresses an unqualified opinion and includes an explanatory paragraph regarding the adoption in 2002 of Statement of Financial Accounting Standard No. 142); such financial statements and report are included elsewhere in this Form 10-K/A. Our audits
also included the financial statement schedule of the Company, except for the effects of Note 21, as to which the date is August 18, 2005, listed in Item 15. This financial statement schedule is the responsibility of the Companys management.
Our responsibility is to express an opinion based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the
information set forth therein.



DELOITTE & TOUCHE LLP



Columbus, Ohio

March 24, 2005



105



---

##### Table of Contents

Schedule II  Valuation and Qualifying Accounts



|                                |  |                  |        |                    |   |       |            |  |   |                  |   |  |   |       
|------------------------------- |  | ---------------- | ------ | ------------------ | - | ----- | ---------- |  | - | ---------------- | - |  | - | ------
|                                |  | Balance 12/31/01 |        | Charged to Expense |   |       | Write-offs |  |   | Balance 12/31/02
|Allowance for doubtful accounts |  | $                | 16,659 |                    | $ | (690  | )          |  | $ | (3,750           | ) |  | $ | 12,219
|                                |  |                  |        |                   
|                                |  | Balance 12/31/02 |        | Charged to Expense |   |       | Write-offs |  |   | Balance 12/31/03
|Allowance for doubtful accounts |  | $                | 12,219 |                    | $ | 2,526 |            |  | $ | (286             | ) |  | $ | 14,459
|                                |  |                  |        |                   
|                                |  | Balance 12/31/03 |        | Charged to Expense |   |       | Write-offs |  |   | Balance 12/31/04
|Allowance for doubtful accounts |  | $                | 14,459 |                    | $ | 1,065 |            |  | $ | (5,327           | ) |  | $ | 10,197



106



---

##### Table of Contents



REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM



To the Board of Directors and
Shareholder of

Borden Chemical, Inc.:



We have audited the accompanying consolidated / combined balance sheets of Borden Chemical Canada, Inc. (a wholly owned subsidiary of Borden Chemical,
Inc.) and affiliates (the Company) as of December 31, 2004 and 2003, and the related consolidated / combined statements of operations, shareholders (deficit) equity, and cash flows for each of the three years in the period ended
December 31, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.



In our
opinion, such consolidated / combined financial statements present fairly, in all material respects, the financial position of Borden Chemical Canada, Inc. and affiliates at December 31, 2004 and 2003, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2004, in conformity with accounting principles generally accepted in the United States of America.



As discussed in Note 8 to the combined financial statements, the Company changed its method of accounting for goodwill and
other intangible assets in 2002 to conform to Statement of Financial Accounting Standards No. 142.



DELOITTE & TOUCHE LLP



Columbus, Ohio

March 24, 2005, except for the effects of Note 18, as to which the date is August 18, 2005



107



---

##### Table of Contents



CONSOLIDATED / COMBINED STATEMENTS OF
OPERATIONS

BORDEN CHEMICAL CANADA, INC. AND SUBSIDIARIES



|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|---------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                   |  | Year ended December 31, |        
|(In thousands)                                                                     |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Net sales                                                                          |  | $                       | 637,078 |   |      | $ | 533,098 |      |  | $ | 435,715 |  
|Cost of goods sold                                                                 |  |                         | 524,932 |   |      |   | 438,384 |      |  |   | 346,434 |  
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Gross margin                                                                       |  |                         | 112,146 |   |      |   | 94,714  |      |  |   | 89,281  |  
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Distribution expense                                                               |  |                         | 24,832  |   |      |   | 20,845  |      |  |   | 19,169  |  
|Marketing expense                                                                  |  |                         | 15,369  |   |      |   | 13,726  |      |  |   | 11,670  |  
|General & administrative expense                                                   |  |                         | 32,221  |   |      |   | 26,562  |      |  |   | 30,748  |  
|Transaction related costs                                                          |  |                         | 20,052  |   |      |   |        |      |  |   |        |  
|Business realignment expense (income) and impairments                              |  |                         | 2,915   |   |      |   | (4,568  | )    |  |   | 4,255   |  
|Other operating income                                                             |  |                         | (1,586  | ) |      |   | (2,239  | )    |  |   | (3,581  | )
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Operating income                                                                   |  |                         | 18,343  |   |      |   | 40,388  |      |  |   | 27,020  |  
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Interest expense                                                                   |  |                         | 2,148   |   |      |   | 1,635   |      |  |   | 1,090   |  
|Affiliated interest expense                                                        |  |                         | 12,321  |   |      |   | 2,755   |      |  |   | 3,423   |  
|Other non-operating expense (income)                                               |  |                         | 1,918   |   |      |   | 369     |      |  |   | (702    | )
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Income before income taxes and cumulative effect of change in accounting principle |  |                         | 1,956   |   |      |   | 35,629  |      |  |   | 23,309  |  
|Income tax expense (benefit)                                                       |  |                         | 23,440  |   |      |   | (839    | )    |  |   | 8,667   |  
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|(Loss) income before cumulative effect of change in accounting principle           |  |                         | (21,484 | ) |      |   | 36,468  |      |  |   | 14,542  |  
|Cumulative effect of change in accounting principle                                |  |                         |        |   |      |   |        |      |  |   | (27,533 | )
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                                                  |  | $                       | (21,484 | ) |      | $ | 36,468  |      |  | $ | (12,991 | )
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  
|Comprehensive (loss) income                                                        |  | $                       | (27,938 | ) |      | $ | 59,433  |      |  | $ | (35,171 | )
|                                                                                   |  |                         |         |   |      |   |         |      |  |   |         |  



See Notes to Consolidated / Combined Financial Statements



108



---

##### Table of Contents



CONSOLIDATED / COMBINED BALANCE SHEETS

BORDEN CHEMICAL CANADA, INC. AND SUBSIDIARIES



|                                                                                                |  |                  |          |   |                  |   |          |  
|----------------------------------------------------------------------------------------------- |  | ---------------- | -------- | - | ---------------- | - | -------- | -
|(In thousands)                                                                                  |  | December 31,2004 |          |   | December 31,2003 |  
|ASSETS                                                                                          |  |                  |          |   |                  |   |          |  
|Current Assets                                                                                  |  |                  |          |   |                  |   |          |  
|Cash and equivalents                                                                            |  | $                | 57,829   |   |                  | $ | 22,588   |  
|Accounts receivable (less allowance for doubtful accounts of $3,110 in 2004 and $3,372 in 2003) |  |                  | 105,078  |   |                  |   | 90,798   |  
|Inventories:                                                                                    |  |                  |          |   |                  |   |          |  
|Finished and in-process goods                                                                   |  |                  | 17,694   |   |                  |   | 12,950   |  
|Raw materials and supplies                                                                      |  |                  | 22,014   |   |                  |   | 14,067   |  
|Other current assets                                                                            |  |                  | 3,742    |   |                  |   | 3,338    |  
|                                                                                                |  |                  |          |   |                  |   |          |  
|                                                                                                |  |                  | 206,357  |   |                  |   | 143,741  |  
|                                                                                                |  |                  |          |   |                  |   |          |  
|Other Assets                                                                                    |  |                  |          |   |                  |   |          |  
|Deferred income taxes                                                                           |  |                  | 6,835    |   |                  |   | 5,732    |  
|Other assets                                                                                    |  |                  | 12,729   |   |                  |   | 5,482    |  
|                                                                                                |  |                  |          |   |                  |   |          |  
|                                                                                                |  |                  | 19,564   |   |                  |   | 11,214   |  
|                                                                                                |  |                  |          |   |                  |   |          |  
|Property and Equipment                                                                          |  |                  |          |   |                  |   |          |  
|Land                                                                                            |  |                  | 7,254    |   |                  |   | 6,605    |  
|Buildings                                                                                       |  |                  | 33,405   |   |                  |   | 31,980   |  
|Machinery and equipment                                                                         |  |                  | 294,634  |   |                  |   | 263,580  |  
|                                                                                                |  |                  |          |   |                  |   |          |  
|                                                                                                |  |                  | 335,293  |   |                  |   | 302,165  |  
|Less accumulated depreciation                                                                   |  |                  | (138,549 | ) |                  |   | (119,252 | )
|                                                                                                |  |                  |          |   |                  |   |          |  
|                                                                                                |  |                  | 196,744  |   |                  |   | 182,913  |  
|Goodwill                                                                                        |  |                  | 10,467   |   |                  |   | 15,331   |  
|Other Intangibles                                                                               |  |                  | 4,868    |   |                  |   |         |  
|                                                                                                |  |                  |          |   |                  |   |          |  
|Total Assets                                                                                    |  | $                | 438,000  |   |                  | $ | 353,199  |  
|                                                                                                |  |                  |          |   |                  |   |          |  



See Notes to Consolidated / Combined
Financial Statements



109



---

##### Table of Contents



CONSOLIDATED / COMBINED BALANCE SHEETS

BORDEN CHEMICAL CANADA, INC. AND SUBSIDIARIES



|                                                                                                                 |  |                  |         |   |                  |   |         |  
|---------------------------------------------------------------------------------------------------------------- |  | ---------------- | ------- | - | ---------------- | - | ------- | -
|(In thousands, except share data)                                                                                |  | December 31,2004 |         |   | December 31,2003 |  
|LIABILITIES AND SHAREHOLDERS (DEFICIT) EQUITY                                                                   |  |                  |         |   |                  |   |         |  
|Current Liabilities                                                                                              |  |                  |         |   |                  |   |         |  
|Accounts and drafts payable                                                                                      |  | $                | 89,707  |   |                  | $ | 55,003  |  
|Accounts payable to affiliates                                                                                   |  |                  | 5,330   |   |                  |   | 2,540   |  
|Income taxes payable                                                                                             |  |                  | 2,728   |   |                  |   | 6,062   |  
|Debt payable within one year                                                                                     |  |                  | 7,997   |   |                  |   | 5,616   |  
|Loans due to affiliates                                                                                          |  |                  | 27      |   |                  |   | 46,399  |  
|Affiliated interest payable                                                                                      |  |                  | 11,002  |   |                  |   | 268     |  
|Other current liabilities                                                                                        |  |                  | 21,334  |   |                  |   | 17,996  |  
|                                                                                                                 |  |                  |         |   |                  |   |         |  
|                                                                                                                 |  |                  | 138,125 |   |                  |   | 133,884 |  
|                                                                                                                 |  |                  |         |   |                  |   |         |  
|Other Liabilities                                                                                                |  |                  |         |   |                  |   |         |  
|Long-term debt                                                                                                   |  |                  | 7,234   |   |                  |   | 9,089   |  
|Affiliated long-term debt                                                                                        |  |                  | 285,142 |   |                  |   | 4,279   |  
|Deferred income taxes                                                                                            |  |                  | 25,312  |   |                  |   | 7,737   |  
|Affiliated royalties                                                                                             |  |                  | 8,138   |   |                  |   | 7,626   |  
|Other long-term liabilities                                                                                      |  |                  | 6,328   |   |                  |   | 6,474   |  
|                                                                                                                 |  |                  |         |   |                  |   |         |  
|                                                                                                                 |  |                  | 332,154 |   |                  |   | 35,205  |  
|                                                                                                                 |  |                  |         |   |                  |   |         |  
|Commitments and Contingencies (See Notes 8 and 11)                                                               |  |                  |         |   |                  |   |         |  
|Shareholders (Deficit) Equity                                                                                   |  |                  |         |   |                  |   |         |  
|Common stock  no par value: authorized shares unlimited, issued and outstanding 489,866 shares in 2004 and 2003 |  |                  | 3,148   |   |                  |   | 3,148   |  
|Paid-in-capital                                                                                                  |  |                  | 568     |   |                  |   | 133     |  
|Shareholders investment of combined subsidiaries                                                                |  |                  | 979     |   |                  |   | 95,851  |  
|Accumulated other comprehensive loss                                                                             |  |                  | (57,389 | ) |                  |   | (50,935 | )
|Retained earnings                                                                                                |  |                  | 20,415  |   |                  |   | 135,913 |  
|                                                                                                                 |  |                  |         |   |                  |   |         |  
|                                                                                                                 |  |                  | (32,279 | ) |                  |   | 184,110 |  
|                                                                                                                 |  |                  |         |   |                  |   |         |  
|Total Liabilities and Shareholders (Deficit) Equity                                                             |  | $                | 438,000 |   |                  | $ | 353,199 |  
|                                                                                                                 |  |                  |         |   |                  |   |         |  



See
Notes to Consolidated / Combined Financial Statements



110



---

##### Table of Contents



CONSOLIDATED / COMBINED STATEMENTS OF
CASH FLOWS

BORDEN CHEMICAL CANADA, INC. AND SUBSIDIARIES



|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|------------------------------------------------------------------------------------------ |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|                                                                                           |  | Year ended December 31, |        
|(In thousands)                                                                             |  | 2004                    |         |   | 2003 |   |         | 2002 | 
|Cash Flows from (used in) Operating Activities                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Net (loss) income                                                                          |  | $                       | (21,484 | ) |      | $ | 36,468  |      |  | $ | (12,991 | )
|Adjustments to reconcile net (loss) income to net cash from (used in) operating activities |  |                         |         |   |      |   |         |      |  |   |         |  
|Cumulative effect of change in accounting principle                                        |  |                         |        |   |      |   |        |      |  |   | 27,533  |  
|Allocations of corporate overhead                                                          |  |                         | 33,946  |   |      |   | 12,707  |      |  |   | 11,797  |  
|Deferred tax provision                                                                     |  |                         | 15,746  |   |      |   | 1,492   |      |  |   | 3,779   |  
|Depreciation and amortization                                                              |  |                         | 17,784  |   |      |   | 15,625  |      |  |   | 14,501  |  
|Business realignment expense (income) and impairments                                      |  |                         | 2,915   |   |      |   | (4,568  | )    |  |   | 4,255   |  
|Other non-cash adjustments                                                                 |  |                         | 1,973   |   |      |   | 696     |      |  |   | 263     |  
|Net change in assets and liabilities:                                                      |  |                         |         |   |      |   |         |      |  |   |         |  
|Accounts receivable                                                                        |  |                         | (8,018  | ) |      |   | (5,778  | )    |  |   | (3,226  | )
|Inventories                                                                                |  |                         | (10,102 | ) |      |   | 5,177   |      |  |   | (6,949  | )
|Accounts and drafts payable                                                                |  |                         | 31,714  |   |      |   | 4,420   |      |  |   | 1,279   |  
|Income taxes                                                                               |  |                         | (9,102  | ) |      |   | (16,142 | )    |  |   | 10,204  |  
|Other assets                                                                               |  |                         | 1,184   |   |      |   | 2,228   |      |  |   | (5,829  | )
|Other liabilities                                                                          |  |                         | (391    | ) |      |   | (16,192 | )    |  |   | (30,642 | )
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                           |  |                         | 56,165  |   |      |   | 36,133  |      |  |   | 13,974  |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash Flows (used in) from Investing Activities                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Capital expenditures                                                                       |  |                         | (18,775 | ) |      |   | (16,122 | )    |  |   | (7,177  | )
|Purchase of business                                                                       |  |                         |         |   |      |   | (11,551 | )    |  |   |        |  
|Liquidating dividend from investment                                                       |  |                         |         |   |      |   | 1,029   |      |  |   |        |  
|Proceeds from the sale of assets                                                           |  |                         | 8,473   |   |      |   | 7,084   |      |  |   |        |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                           |  |                         | (10,302 | ) |      |   | (19,560 | )    |  |   | (7,177  | )
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash Flows from (used in) Financing Activities                                             |  |                         |         |   |      |   |         |      |  |   |         |  
|Net short-term debt borrowings                                                             |  |                         | 2,219   |   |      |   | 2,195   |      |  |   | 697     |  
|Borrowings of long-term debt                                                               |  |                         | 222     |   |      |   | 9,316   |      |  |   | 106     |  
|Repayments of long-term debt                                                               |  |                         | (2,400  | ) |      |   | (765    | )    |  |   | (161    | )
|Affiliated loan (repayments) borrowings, net                                               |  |                         | (13,337 | ) |      |   | (15,586 | )    |  |   | (7,217  | )
|Common stock dividends paid                                                                |  |                         | (681    | ) |      |   | (1,750  | )    |  |   | (2,810  | )
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|                                                                                           |  |                         | (13,977 | ) |      |   | (6,590  | )    |  |   | (9,385  | )
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Effect of exchange rates on cash                                                           |  |                         | 3,355   |   |      |   | 2,386   |      |  |   | (922    | )
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Increase (decrease) in cash and equivalents                                                |  | $                       | 35,241  |   |      | $ | 12,369  |      |  | $ | (3,510  | )
|Cash and equivalents at beginning of year                                                  |  |                         | 22,588  |   |      |   | 10,219  |      |  |   | 13,729  |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  
|Cash and equivalents at end of year                                                        |  | $                       | 57,829  |   |      | $ | 22,588  |      |  | $ | 10,219  |  
|                                                                                           |  |                         |         |   |      |   |         |      |  |   |         |  



111



---

##### Table of Contents



CONSOLIDATED / COMBINED STATEMENTS OF
CASH FLOWS (continued)

BORDEN CHEMICAL CANADA, INC. AND SUBSIDIARIES



|                                                                                                                    |  |                         |          |   |      |   |        |  |   |      
|------------------------------------------------------------------------------------------------------------------- |  | ----------------------- | -------- | - | ---- | - | ------ |  | - | -----
|                                                                                                                    |  | Year ended December 31,
|(In thousands)                                                                                                      |  | 2004                    |          |   | 2003 |   | 2002  
|Supplemental Disclosures of Cash Flow Information                                                                   |  |                         |          |   |      |   |        |  |   |      
|Cash paid:                                                                                                          |  |                         |          |   |      |   |        |  |   |      
|Interest, net                                                                                                       |  | $                       | 1,794    |   |      | $ | 819    |  | $ | 149  
|Income taxes, net                                                                                                   |  |                         | 16,796   |   |      |   | 14,981 |  |   | 5,024
|Non-cash activity:                                                                                                  |  |                         |          |   |      |   |        |  |   |      
|Affiliate note issued to purchase businesses, net of note payable to parent acquired of $37,849 (see Notes 1 and 9) |  |                         | 222,151  |   |      |   |       |  |   |     
|Distribution to parent  acquisition of subsidiaries previously combined (see Note 1)                               |  |                         | (222,151 | ) |      |   |       |  |   |     
|Capital contributions from parent (see Note 15)                                                                     |  |                         | 435      |   |      |   | 52,227 |  |   |     



See
Notes to Consolidated / Combined Financial Statements



112



---

##### Table of Contents



CONSOLIDATED / COMBINED STATEMENTS OF
SHAREHOLDERS (DEFICIT) EQUITY

BORDEN CHEMICAL CANADA, INC. AND SUBSIDIARIES



|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|------------------------------------------------------------------------------------- |  | ----------- | ----- | -------------- | - | ----------------------- |  | - | --------------------------------- | - |  | ---------------- | ------- | - | ----- | - | ------- | - |  | - | -------- | -
|(In thousands)                                                                        |  | CommonStock |       | Paid-inCapital |   | ShareholdersInvestment |  |   | AccumulatedOtherComprehensiveLoss |   |  | RetainedEarnings |         |   | Total |  
|Balance, December 31, 2001                                                            |  | $           | 3,148 |                | $ |                        |  | $ | 19,253                            |   |  | $                | (51,720 | ) |       | $ | 116,996 |   |  | $ | 87,677   |  
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Net loss                                                                              |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   | (12,991 | ) |  |   | (12,991  | )
|Translation adjustments                                                               |  |             |       |                |   |                         |  |   |                                   |   |  |                  | (21,616 | ) |       |   |         |   |  |   | (21,616  | )
|Minimum pension liability adjustment (net of $304 tax)                                |  |             |       |                |   |                         |  |   |                                   |   |  |                  | (564    | ) |       |   |         |   |  |   | (564     | )
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Comprehensive loss                                                                    |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   | (35,171  | )
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Common stock dividends paid                                                           |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   | (2,810  | ) |  |   | (2,810   | )
|Allocations of corporate overhead                                                     |  |             |       |                |   |                         |  |   | 11,797                            |   |  |                  |         |   |       |   |         |   |  |   | 11,797   |  
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Balance, December 31, 2002                                                            |  |             | 3,148 |                |   |                        |  |   | 31,050                            |   |  |                  | (73,900 | ) |       |   | 101,195 |   |  |   | 61,493   |  
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Net income                                                                            |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   | 36,468  |   |  |   | 36,468   |  
|Translation adjustments                                                               |  |             |       |                |   |                         |  |   |                                   |   |  |                  | 23,567  |   |       |   |         |   |  |   | 23,567   |  
|Minimum pension liability adjustment (net of $324 tax)                                |  |             |       |                |   |                         |  |   |                                   |   |  |                  | (602    | ) |       |   |         |   |  |   | (602     | )
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Comprehensive income                                                                  |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   | 59,433   |  
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Capital contributions from parent (See Note 15)                                       |  |             |       |                |   | 133                     |  |   | 52,094                            |   |  |                  |         |   |       |   |         |   |  |   | 52,227   |  
|Common stock dividends paid                                                           |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   | (1,750  | ) |  |   | (1,750   | )
|Allocations of corporate overhead                                                     |  |             |       |                |   |                         |  |   | 12,707                            |   |  |                  |         |   |       |   |         |   |  |   | 12,707   |  
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Balance, December 31, 2003                                                            |  |             | 3,148 |                |   | 133                     |  |   | 95,851                            |   |  |                  | (50,935 | ) |       |   | 135,913 |   |  |   | 184,110  |  
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Net loss                                                                              |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   | (21,484 | ) |  |   | (21,484  | )
|Translation adjustments                                                               |  |             |       |                |   |                         |  |   |                                   |   |  |                  | (6,072  | ) |       |   |         |   |  |   | (6,072   | )
|Minimum pension liability adjustment (net of $206 tax)                                |  |             |       |                |   |                         |  |   |                                   |   |  |                  | (382    | ) |       |   |         |   |  |   | (382     | )
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Comprehensive loss                                                                    |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   | (27,938  | )
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Distribution to parent  acquisition of subsidiaries previously combined (See Note 1) |  |             |       |                |   |                         |  |   | (128,818                          | ) |  |                  |         |   |       |   | (93,333 | ) |  |   | (222,151 | )
|Capital contribution from parent (See Note 15)                                        |  |             |       |                |   | 435                     |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   | 435      |  
|Common stock dividends paid                                                           |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   | (681    | ) |  |   | (681     | )
|Allocations of corporate overhead                                                     |  |             |       |                |   |                         |  |   | 33,946                            |   |  |                  |         |   |       |   |         |   |  |   | 33,946   |  
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  
|Balance, December 31, 2004                                                            |  | $           | 3,148 |                | $ | 568                     |  | $ | 979                               |   |  | $                | (57,389 | ) |       | $ | 20,415  |   |  | $ | (32,279  | )
|                                                                                      |  |             |       |                |   |                         |  |   |                                   |   |  |                  |         |   |       |   |         |   |  |   |          |  



See
Notes to Consolidated / Combined Financial Statements



113



---

##### Table of Contents



Borden Chemical Canada, Inc. and
Subsidiaries

Notes to Consolidated / Combined Financial Statements

(In thousands)



|1. | Background and Basis of Presentation
|-- | ------------------------------------



Borden Chemical Canada, Inc. (BCCI) and its subsidiaries (collectively, the Companies) are engaged in the manufacture and distribution of forest
products and industrial resins, formaldehyde and other specialty and industrial chemicals. At December 31, 2004, the Companies operations included 18 manufacturing facilities in Canada, Brazil, Australia, Malaysia, the Netherlands and the
United Kingdom (the U.K.). BCCI is owned 100% by Borden Chemical, Inc. (BCI).



On August 12, 2004, BHI Investment, LLC (LLC), an affiliate of Apollo Management, L.P. (Apollo), acquired all of the outstanding capital stock of Borden Holdings, Inc. (BHI), at
that time, the parent company of BCI, for total consideration of approximately $1.2 billion, including assumption of debt (the Acquisition). Immediately following the Acquisition, LLC reorganized the existing corporate structure of BCI
such that BCI became directly owned by BHI Acquisition Corporation, a subsidiary of LLC. In addition, BCCI acquired most of BCIs foreign subsidiaries for a note payable of CDN$342,800, or $260,000 at August 12, 2004 (see Note 9). As the
reorganization is between related parties and BCI elected not to apply push-down accounting relating to the Acquisition, BCCIs basis in the acquired subsidiaries is BCIs historical cost basis. As a result, BCCIs net purchase price
of the assets acquired of $222,151 is reflected in Shareholders (Deficit) Equity as a distribution to parent.



The Acquisition was financed through a private debt offering issued by two newly formed, wholly owned subsidiaries of BCI, which is guaranteed by BCI and certain of its
domestic subsidiaries (the Guarantors), and with certain equity contributions from Apollo and management of BCI. The private debt offerings and related guarantees are senior obligations secured by a second-priority lien (subject to
certain exceptions and permitted liens) on certain of the Guarantors existing and future domestic assets, including the stock of BCCI.



In accordance with Rule 3-16 of Regulation S-X under the Securities Act of 1933, BCI is required to file the annual financial statements of BCCI and subsidiaries with the
U.S. Securities and Exchange Commission as if the Companies were a registrant. The financial statements for the Companies, which are consolidated from the date of the Acquisition, are presented on a combined basis for periods prior to the
Acquisition and the related reorganization.



BCI incurs various costs,
including corporate and administrative expenses, on behalf of the Companies; the allocation of these costs is reflected in these financial statements. See Note 5.



|2. | Summary of Significant Accounting Policies
|-- | ------------------------------------------



Significant accounting policies followed by the Companies, as summarized below, are in conformity with accounting principles generally accepted in the United States of
America.



Principles of Consolidation / Combination The
accompanying consolidated / combined financial statements include the accounts of the following entities, all of which are under the common control and management of BCI:



Borden Chemical Canada Inc.

BCHP, LLC, parent of Borden Chemical Panama Holdings, SA (Borden Panama) and subsidiaries

Borden Chemical Australia Pty. Ltd. (Borden Australia) and subsidiaries

Borden International Holdings Ltd.
(Borden U.K.) and subsidiaries

Borden Lux, LLC

Borden Luxembourg, SARL

National Borden Chemical Germany GmbH



Subsequent to the Acquisition, BCCI wholly owns 100% of these entities with the exception of
a 34% interest in Borden Chemical (M) Sdn. Bhd. (Borden Malaysia), a subsidiary of Borden Panama, which is owned by BCI. The accounts of Borden Malaysia are included within the financial statements presented herein. Intercompany
transactions and balances have been eliminated.



114



---

##### Table of Contents

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting
principles in the United States of America 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,
as well as the reported amounts of revenues and expenses during the reporting period. The most significant estimates reflected in the financial statements include valuation allowances for accounts receivable and inventories, general insurance
liabilities, asset impairments, legal liabilities, pension and postretirement assets and liabilities, deferred taxes and valuation allowances and related party transactions. Actual results could differ from estimated amounts.



Cash and Equivalents The Companies consider all highly liquid investments
purchased with an original maturity of three months or less to be cash equivalents. Included in the Companies cash and equivalents are interest-bearing time deposits of $22,125 and $5,056 at December 31, 2004 and 2003, respectively.



Inventories Inventories are stated at lower of cost or market.
Cost is determined using the first-in, first-out method.



Property and
Equipment Land, buildings and machinery and equipment are carried at cost. Depreciation is recorded on the straight-line basis by charges to expense at rates based on estimated useful lives of properties (average rates for buildings 3%;
machinery and equipment 7%). Major renewals and betterments are capitalized. Maintenance, repairs and minor renewals are expensed as incurred.



Goodwill and Intangibles  The excess of purchase price over net tangible and identifiable intangible assets of non-affiliated businesses acquired is carried
as Goodwill on the Consolidated / Combined Balance Sheets. As of January 1, 2002, the Companies no longer amortize goodwill. Certain trademarks, patents and other intangible assets used in the operations of the business are carried as Other
Intangibles on the Consolidated / Combined Balance Sheets. These intangible assets are amortized on a straight-line basis over the shorter of the legal or useful lives of the asset which range from 8 to 10 years. Certain trademarks and patents used
in operations are owned by BCI and are used on a royalty-free basis by the Companies. See Note 6.



Impairment As events warrant, but at least annually, the Companies evaluate the recoverability of long-lived assets by assessing whether the carrying value can be recovered over their remaining useful
lives through the expected future undiscounted operating cash flows of the underlying business. Any impairment loss required is determined by comparing the carrying value of the assets to operating cash flows on a discounted basis.



The Companies perform an annual impairment test for goodwill. See Note 6.



Deferred Expenses Deferred financing costs are classified as Other assets on
the balance sheets and are amortized over the lives of the related debt or credit facility using the straight-line method since no installment payments are required. Upon retirement of any of the related debt, a proportional share of debt issuance
costs is expensed. At December 31, 2004 and 2003, the unamortized balance was $1,826 and $206, respectively.



General Insurance The Companies are generally self-insured for losses and liabilities relating to workers' compensation, physical damage to property, business interruption and comprehensive general,
product and vehicle liability. The Companies maintain insurance policies for certain items exceeding deductible limits. The Companies are covered by certain policies, primarily excess liability coverage, maintained by BCI and are allocated a share
of these premiums (see Note 5). Losses are accrued for the estimated aggregate liability for claims using certain actuarial assumptions followed in the insurance industry and the Companies experience.



Legal Costs Legal costs are accrued in the period in which a claim is made or
an event becomes known, if the amounts are probable and reasonably estimable. Each claim is assigned a range of potential liability, with the most likely amount being accrued. The amount accrued includes all costs associated with a claim, including
settlements, assessments, judgments, fines and legal fees.



Revenue
Recognition Revenue for product sales, net of allowances, is recognized as risk and title to the product transfer to the customer, which usually occurs at the time shipment is made. Substantially all of the Companies products are
sold FOB (free on board) shipping point. Other terms include sales where risk and title passes upon delivery (FOB destination point). In situations where our product is delivered by pipeline, risk and title transfers when our product
moves across an agreed transfer point, which is typically the customers property line. Product sales delivered by pipeline are measured based on daily flow meter readings. The Companies standard terms of delivery are included in their
contracts of sale and invoices.



115



---

##### Table of Contents

Shipping and Handling  The Companies record freight billed to customers in net sales. Shipping costs are
incurred to move products from production and storage facilities to the customers. Handling costs are incurred from the point the product is removed from inventory until it is provided to the shipper and generally include costs to store, move and
prepare the products for shipment. The Companies incurred shipping costs of $24,832 in 2004, $20,845 in 2003 and $19,169 in 2002. These costs are classified as Distribution expense in the Consolidated / Combined Statements of Operations. Due to the
nature of the Companies business, handling costs incurred prior to shipment are not significant.



Research and Development Costs Funds are committed to research and development for technical improvement of products that are expected to contribute to operating profits in future years. All costs
associated with research and development are charged to expense as incurred. Research and development costs were $3,669, $3,514 and $3,914 for 2004, 2003 and 2002, respectively.



Advertising Costs The Companies charge advertising costs to expense as incurred. Advertising costs were $64, $114 and $1,286
for 2004, 2003 and 2002, respectively.



Foreign Currency Translations Although the functional currency of BCCI is the Canadian dollar, the accompanying financial statements are presented in the reporting currency of BCCIs parent, BCI. Accordingly, assets and liabilities of the Companies are translated into
BCIs reporting currency, the U.S. dollar, at the exchange rates in effect at the balance sheet date, and income and expenses are translated at average exchange rates prevailing during the year. The effect of translation is accounted for as an
adjustment to Shareholders (deficit) equity and is included in Accumulated other comprehensive loss.



The Companies incurred realized and unrealized net foreign transaction (losses) gains aggregating $(210) in 2004, $139 in 2003 and $1,281 in 2002.



Income Taxes The Companies file individual tax returns in their respective countries. Income tax expense is based on reported
results of operations before income taxes using the prevailing rates for each tax jurisdiction. Deferred income taxes represent the tax effect of temporary differences between amounts of assets and liabilities recognized for financial reporting
purposes and such amounts recognized for tax purposes. Deferred tax balances are adjusted to reflect tax rates, based on current tax laws that will be in effect in the years in which temporary differences are expected to reverse. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. For purposes of these financial statements, the international subsidiaries
are treated as foreign subsidiaries of a domestic parent, BCCI, for all periods presented. Reconciliations of tax rates are calculated at the statutory Canadian tax rates.



Derivative Financial Instruments The Companies do not hold or issue derivative financial instruments for trading purposes. The
Companies are parties to foreign currency forward contracts and options to reduce the Companies cash flow exposure to changes in foreign exchange rates. These instruments are not accounted for using hedge accounting, but are measured at fair
value and recorded on the balance sheet as an asset or liability, depending upon the Companies underlying rights or obligations. See Note 7.



Stock-Based Compensation The Companies account for stock-based compensation under Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees (APB No. 25) and has adopted the disclosure-only provisions of Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No. 123. Pro forma net (loss) income under SFAS No. 148 was not materially different from Net (loss) income for the years ended December 31, 2004,
2003 and 2002.



Concentrations of Credit Risk Financial
instruments that potentially subject the Companies to concentrations of credit risk consist principally of cash and accounts receivable. The Companies place cash with high quality institutions and, by policy, limit the amount of credit exposure to
any one institution. Approximately $18,300 of the Companies cash is invested in a guaranteed investment certificate with the remaining cash being held primarily in six financial institutions. Concentrations of credit risk with respect to
accounts receivable are limited, due to the large number of customers comprising the Companies customer base and their dispersion across many different industries and geographies. The Companies generally do not require collateral or other
security to support customer receivables.



116



---

##### Table of Contents

Recently Issued Accounting Standards



In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, Inventory Costs. The
statement amends Accounting Research Bulletin (ARB) No. 43, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. ARB No. 43 previously
stated that these costs must be so abnormal as to require treatment as current-period charges. SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of so
abnormal. In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005, with earlier application permitted for fiscal years beginning after the issue date of the statement. The adoption of SFAS No. 151 is not expected to have any impact on the Companies financial
condition or results of operations.



In December 2004, the FASB revised its
SFAS No. 123 (SFAS No. 123R), Accounting for Stock Based Compensation. The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services,
particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires an entity to measure the cost of employee services received in exchange for an award of equity instruments
based on the grant-date fair value of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award. Changes in fair value during the requisite service period are to be
recognized as compensation cost over that period. In addition, the revised statement amends SFAS No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing cash flow rather than as a reduction of
taxes paid. The provisions of the revised statement are effective for financial statements of the Companies issued for the first annual reporting period beginning after December 15, 2005, with early adoption encouraged. The Companies are evaluating
the impact that this statement will have on their financial condition or results of operations.



In December 2004, the FASB issued SFAS No. 153, Exchanges of Nonmonetary Assets  An Amendment of APB Opinion No. 29. APB Opinion No. 29, Accounting For Nonmonetary Transactions, is based
on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces
it with a general exception for exchanges of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. This statement is effective for non-monetary asset exchanges beginning December 4, 2005, and
is not expected to have any impact on the Companies financial condition or results of operations.



|3. | Acquisitions
|-- | ------------



Pending Acquisition



On October 6, 2004, BCI entered into a share purchase agreement with RÜTGERS AG and RÜTGERS Bakelite Projekt GmbH (collectively, the Sellers).
Pursuant to the terms of the share purchase agreement, BCI agreed to purchase from the Sellers all outstanding shares of capital stock of Bakelite Aktiengesellschaft (Bakelite) for a net purchase price ranging from approximately
175 million to 200 million, subject to certain adjustments. Based in Iserlohn-Letmathe, Germany, Bakelite is a leading source of phenolic and epoxy thermosetting resins and molding compounds with 13 manufacturing facilities and 1,700
employees in Europe and Asia.



The share purchase agreement contains customary
representations, warranties and covenants, including non-compete, non-solicitation and confidentiality agreements by the Sellers. The Sellers have also agreed, subject to various provisions set forth in the share purchase agreement, to indemnify BCI
for breaches of the representations and warranties contained in the share purchase agreement and in connection with various tax, environmental, certain pension and other matters. Until the closing date, the Sellers have agreed to operate the
business of Bakelite in the ordinary course. Completion of the share purchase is subject to regulatory and other customary closing conditions. Bakelite will be structured as a subsidiary of BCCI. BCCI intends to finance this transaction through a
combination of available cash and debt financing. There is no material relationship between BCCI or its affiliates and any of the Sellers other than in respect of the share purchase agreement.



2003 Acquisition



In November 2003, Borden Australia acquired Fentak Pty. Ltd. (Fentak), an
international manufacturer of specialty chemical products for engineered wood, laminating and paper impregnation markets, for cash of $11,551 and additional deferred payments of approximately $3,050. The Fentak acquisition has been accounted for
using the purchase method of accounting. Accordingly, results of operations of the acquired entity have been included from the date of acquisition. The pro forma effects of the acquisition are not material.



117



---

##### Table of Contents

At the time of the Fentak acquisition in 2003, the Companies recorded goodwill totaling $14,387. In 2004, purchase
accounting adjustments in the amount of $5,480 were made to allocate amounts originally recorded as goodwill to other intangible assets. Separately identifiable intangible assets included customer lists, proprietary technology and trade names.



|4. | Business Realignment
|-- | --------------------



In 2003, BCI initiated a program of plant consolidations and other business realignment initiatives (the 2003 program), which include initiatives impacting the Companies. These initiatives are focused on
improving the efficiency of both manufacturing and administrative functions and are designed to focus resources on core operational strengths. The associated business realignment charges consist primarily of employee severance, plant consolidation
and environmental remediation costs and asset write-offs.



In addition to the
2003 program, the Companies have realignment activities relating to programs initiated in prior years (the prior years programs), primarily related to plant consolidations and reorganization of certain administrative functions. The
following is a brief overview of significant business realignment activities relating to the Companies.



Year Ended December 31, 2004



During 2004, the Companies recorded net business realignment and impairment expense of $2,915, consisting of plant closure costs (which included asset write-down and environmental remediation costs) and other severance and employee costs of
$2,701 and non-cash impairment charges of $214.



Plant Closure Costs



Expenses during 2004 for plant closures
of $2,303 relate primarily to environmental remediation and other closure costs for previously closed sites in Brazil ($1,399) and the U.K. ($994) partially offset by favorable adjustments to other plant closure costs at various sites of $90.



Other Severance Costs



Business realignment expense includes additional net severance costs incurred during 2004
totaling $398 primarily related to prior year programs.



Asset Impairment



The Companies
recorded an impairment charge of $214 in 2004 to adjust the carrying value of a U.K. plant site that is held for sale to its expected sales price less costs of disposal.



Following is a rollforward of the Companies business realignment reserves for 2004:



|                                            |  |                  |       |              |   |       |                          |  |   |                   |   |  |   |      
|------------------------------------------- |  | ---------------- | ----- | ------------ | - | ----- | ------------------------ |  | - | ----------------- | - |  | - | -----
|                                            |  | Reserves12/31/03 |       | 2004 Expense |   |       | 2004Settlements/Payments |  |   | Reserves 12/31/04
|Plant closure costs Prior years programs   |  | $                | 4,487 |              | $ | 2,345 |                          |  | $ | (3,226            | ) |  | $ | 3,606
|2003 program                                |  |                  | 43    |              |   | (42   | )                        |  |   | (1                | ) |  |   |     
|Other severance costs Prior years programs |  |                  | 19    |              |   | 371   |                          |  |   | (390              | ) |  |   |     
|2003 program                                |  |                  |      |              |   | 27    |                          |  |   | (27               | ) |  |   |     
|                                            |  |                  |       |              |   |       |                          |  |   |                   |   |  |   |      
|Total reserve activity                      |  | $                | 4,549 |              | $ | 2,701 |                          |  | $ | (3,644            | ) |  | $ | 3,606



Year Ended December 31, 2003



During 2003, the Companies recorded net business realignment and
impairment income of $4,568, consisting of gains on the sale of assets of $12,260, offset by plant closure costs (which included asset impairment and environmental remediation costs) and other severance and employee costs of $5,698 and other
non-cash asset impairment charges of $1,994.



118



---

##### Table of Contents

Plant Closure Costs



Plant closure costs in 2003 include $3,508 for prior years programs and $1,994 for the
2003 program. Costs relating to prior years programs include environmental remediation of approximately $800 for closed plants in Latin America and other plant closure costs of approximately $2,708. The $1,994 of charges for the 2003 program
primarily relate to costs associated with a plant consolidation program in Canada. Manufacturing was transitioned from the North Bay, Ontario plant to another facility; the North Bay site was idled as of the end of 2003, resulting in asset
impairment charges of $1,430. The remaining charges pertain to plants in Brazil and the U.K. The impairment charges represent the excess of the carrying value of assets over the undiscounted cash flows expected to result from the eventual
disposition of the North Bay site.



Gain on
the Sale of Assets



In 2003, Borden U.K. sold land associated with a
closed plant for a gain of $12,260. This gain was recorded as business realignment income because the facility was closed in conjunction with prior years programs.



Asset Impairment



Borden Malaysia recorded a goodwill impairment of $762 as a result of the annual impairment analysis conducted at year-end (see Note 6). In
addition, the Companies recorded impairment charges of $1,232 pertaining to a plant in the U.K. that was held for sale. The amount of the impairment was based on expected proceeds from a sale in negotiation.



Following is a rollforward of the Companies business realignment reserves for 2003:



|                       |  |                  |       |              |   |                          |  |   |                   |   |  |   |      
|---------------------- |  | ---------------- | ----- | ------------ | - | ------------------------ |  | - | ----------------- | - |  | - | -----
|                       |  | Reserves12/31/02 |       | 2003 Expense |   | 2003Settlements/Payments |  |   | Reserves 12/31/03
|Plant closure costs    |  |                  |       |              |   |                          |  |   |                   |   |  |   |      
|Prior years programs  |  | $                | 6,289 |              | $ | 3,508                    |  | $ | (5,310            | ) |  | $ | 4,487
|2003 program           |  |                  |      |              |   | 1,994                    |  |   | (1,951            | ) |  |   | 43   
|Other severance costs  |  |                  |       |              |   |                          |  |   |                   |   |  |   |      
|Prior years programs  |  |                  | 551   |              |   | 47                       |  |   | (579              | ) |  |   | 19   
|2003 program           |  |                  |      |              |   | 149                      |  |   | (149              | ) |  |   |     
|                       |  |                  |       |              |   |                          |  |   |                   |   |  |   |      
|Total reserve activity |  | $                | 6,840 |              | $ | 5,698                    |  | $ | (7,989            | ) |  | $ | 4,549



Year Ended December 31, 2002



During 2002, the Companies recorded net business realignment expense
of $4,255, consisting of plant closure costs of $3,558 and other severance and employee costs of $697.



Plant Closure Costs



Plant closure costs in 2002 of $3,558 consisted of plant demolition, employee severance and other related costs of $2,459 and a $1,099 increase to the reserve for revised
estimates of environmental clean-up and demolition for several locations closed in previous years.



Other Severance Costs



Other severance costs primarily pertains to administrative reductions in Brazil and the U.K.



Following is a rollforward of the Companies business realignment reserve activity for 2002:



|                       |  |                   |       |             |   |                           |  |   |                   |   |  |   |      
|---------------------- |  | ----------------- | ----- | ----------- | - | ------------------------- |  | - | ----------------- | - |  | - | -----
|                       |  | Reserves 12/31/01 |       | 2002Expense |   | 2002Settlements/ Payments |  |   | Reserves 12/31/02
|Plant closure costs    |  | $                 | 9,238 |             | $ | 3,558                     |  | $ | (6,507            | ) |  | $ | 6,289
|Other severance costs  |  |                   | 70    |             |   | 697                       |  |   | (216              | ) |  |   | 551  
|                       |  |                   |       |             |   |                           |  |   |                   |   |  |   |      
|Total reserve activity |  | $                 | 9,308 |             | $ | 4,255                     |  | $ | (6,723            | ) |  | $ | 6,840



119



---

##### Table of Contents

|5. | Related Party Transactions
|-- | --------------------------



BCI incurs various administrative and operating costs on behalf of the Companies that are reimbursed by the Companies. These costs include engineering and technical
support, purchasing, quality assurance, sales and customer service, information systems, research and development and certain administrative services. These service costs have been allocated to the Companies generally based on sales or sales volumes
and when determinable, based on the actual usage of resources. These costs are included within General & administrative expense and Cost of goods sold and were $6,965, $8,424 and $9,092 in 2004, 2003 and 2002, respectively. In addition, BCI
maintains certain insurance policies, primarily excess liability coverage, that benefit the Companies. Amounts pertaining to these policies and allocated to the Companies based upon sales were $1,803, $1,847 and $1,285 in 2004, 2003 and 2002,
respectively.



The Companies sell finished goods and certain raw materials to
BCI and some of its subsidiaries. Total sales were $28,847, $24,934 and $24,698, in 2004, 2003 and 2002, respectively. In addition, the Companies purchase raw materials and finished goods from BCI and some of its subsidiaries, which totaled $10,685,
$8,063 and $8,654, in 2004, 2003 and 2002, respectively. These sales and purchases are priced similarly to prices charged to outside customers.



Total accounts payable, net of receivables, relating to these intercompany transactions was $5,330 and $2,540 at December 31, 2004 and 2003, respectively.



In addition to direct charges, BCI provides certain administrative services that are not
reimbursed by the Companies. These costs include corporate controlled expenses such as executive management, legal, health and safety, accounting, tax and credit, and have been allocated herein to the Companies on the basis of Net sales. Management
believes that the amounts allocated in such a manner are reasonable and consistent and are necessary in order to properly depict the consolidated / combined statements of financial position, operations and cash flows of the Companies on a
stand-alone basis. However, the amounts are not necessarily indicative of the costs that would have been incurred if the Companies had operated independently. This expense is included in General & administrative expense with the offsetting
credit recorded in Shareholders (deficit) equity. There is no income tax provided on these amounts as they are not deductible.



The following table summarizes these allocations for the years ended December 31:



|                                          |  |      |        |      |   |        |  |   |       
|----------------------------------------- |  | ---- | ------ | ---- | - | ------ |  | - | ------
|                                          |  | 2004 |        | 2003 |   | 2002  
|Executive Group                           |  | $    | 4,343  |      | $ | 4,136  |  | $ | 5,767 
|General Counsel                           |  |      | 2,559  |      |   | 2,990  |  |   | 2,243 
|Health, Safety and Environmental Services |  |      | 686    |      |   | 553    |  |   | 543   
|Finance                                   |  |      | 6,306  |      |   | 5,028  |  |   | 3,244 
|                                          |  |      |        |      |   |        |  |   |       
|                                          |  | $    | 13,894 |      | $ | 12,707 |  | $ | 11,797



In addition to the BCI
administrative services costs, the Companies have been allocated a share of the transaction costs associated with the Acquisition totaling $20,052. The allocation of these costs was made on the basis of Net sales. The offsetting credit relating to
this allocation is included in Shareholders (deficit) equity.



BCCI,
Borden U.K. and a subsidiary of Borden U.K. jointly and severally guarantee BCIs $34,000 Parish of Ascension Industrial Revenue Bonds. BCCI guarantees the full amount, and Borden U.K. and its subsidiary each guarantee up to $30,000 of this
debt. BCI pays these companies a guarantor fee totaling $75 annually.



Prior to
2001, the Companies incurred royalties for the use in operations of certain trademarks and patents owned by BCI. At December 31, 2004 and 2003, the Companies had amounts due to BCI under these arrangements of $8,138 and $7,626, respectively. These
amounts are included within Affiliated royalties and are classified as long-term due to restrictions on the ability to repay.



BCCI and Borden Panama held a 12.6% interest in BCIs Spanish subsidiary, Quimica Borden Espana S.A. (Borden Espana). Borden Espana filed for liquidation
prior to 2000, and paid a liquidating dividend to the Companies in 2003. The liquidation of Borden Espana was completed in the third quarter of 2004.



See Note 9 for a description of the Companies affiliated financing activities.



120



---

##### Table of Contents

|6. | Goodwill and Intangible Assets
|-- | ------------------------------



At December 31, 2004 and 2003, management performed the annual goodwill impairment test. As required by SFAS No. 142, Goodwill and Other Intangible Assets,
management identified the appropriate reporting units and identified the assets and liabilities (including goodwill) of the reporting units. They determined estimated fair values of the reporting units and assessed whether the estimated fair value
of each reporting unit was more or less than the carrying amount of the assets and liabilities assigned to the units.



Valuations were performed using a standard methodology based largely on comparable company analysis. Comparable company analysis ascribes a value to an entity by
comparing certain operating metrics of the entity to those of a set of comparable companies in the same industry. Using this method, market multiples and ratios based on operating, financial and stock market performance are compared across different
companies and to the entity being valued. Management employed a comparable analysis technique commonly used in the investment banking and private equity industries to estimate the values of its reporting units - the EBITDA (earnings before interest,
taxes, depreciation and amortization) multiple technique. Under this technique, estimated values are the result of an EBITDA multiple derived from this process applied to an appropriate historical EBITDA amount. At December 31, 2004, the fair value
of each reporting unit exceeded the carrying amount of assets and liabilities assigned to the units.



At December 31, 2003, the fair value of each reporting unit exceeded the carrying amount of assets and liabilities, except for Borden Malaysia. Based on the excess of the carrying value over the estimated fair value
of Borden Malaysia, the Companies recorded a goodwill impairment charge of $762 due to a decline in operating performance that represented 100% of the units recorded goodwill balance. This impairment charge is reflected in the 2003 Combined
Statement of Operations as Business realignment expense (income) and impairments.



Upon the adoption of SFAS No. 142, on January 1, 2002, fair values of the Companies reporting units as of December 31, 2001 were determined by employing a methodology similar to that described above. As a result of the initial test,
the fair value of each reporting unit exceeded the carrying amount of assets and liabilities assigned, except for Borden U.K. Based on the excess of the carrying value over the estimated fair value of Borden U.K., the Companies recorded a goodwill
impairment charge of $27,533 that represented 100% of the December 31, 2001 carrying amount. This impairment charge is reported as Cumulative effect of change in accounting principle in the 2002 Combined Statement of Operations.



The following table provides a comparison of 2004, 2003 and 2002 as if the new accounting
principle were applied for all years:



|                                                                                      |  |                         |         |   |      |   |        |  |   |         |  
|------------------------------------------------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------ |  | - | ------- | -
|                                                                                      |  | Year Ended December 31, |        
|                                                                                      |  | 2004                    |         |   | 2003 |   | 2002   | 
|Reported net (loss) income                                                            |  | $                       | (21,484 | ) |      | $ | 36,468 |  | $ | (12,991 | )
|Add back cumulative effect of change in accounting principle                          |  |                         |        |   |      |   |       |  |   | 27,533  |  
|                                                                                      |  |                         |         |   |      |   |        |  |   |         |  
|Adjusted net (loss) income before cumulative effect of change in accounting principle |  | $                       | (21,484 | ) |      | $ | 36,468 |  | $ | 14,542  |  
|                                                                                      |  |                         |         |   |      |   |        |  |   |         |  



The changes in the carrying amount of
goodwill for the years ended December 31, 2004 and 2003 are as follows:



|                                      |  |       |        |  
|------------------------------------- |  | ----- | ------ | -
|                                      |  | Total |       
|Goodwill balance at December 31, 2002 |  | $     | 1,523  |  
|Acquisitions                          |  |       | 14,387 |  
|Impairment                            |  |       | (762   | )
|Foreign currency translation          |  |       | 183    |  
|                                      |  |       |        |  
|Goodwill balance at December 31, 2003 |  |       | 15,331 |  
|                                      |  |       |        |  
|Purchase accounting adjustments       |  |       | (5,480 | )
|Foreign currency translation          |  |       | 616    |  
|                                      |  |       |        |  
|Goodwill balance at December 31, 2004 |  | $     | 10,467 |  



121



---

##### Table of Contents

Intangible assets consist of the following:



|                         |  |                      |       |                         |   |    
|------------------------ |  | -------------------- | ----- | ----------------------- | - | ---
|                         |  | At December 31, 2004
|                         |  | GrossCarryingAmount  |       | AccumulatedAmortization
|Intangible assets:       |  |                      |       |                         |   |    
|Customer relationships   |  | $                    | 2,547 |                         | $ | 298
|Patents and technologies |  |                      | 2,154 |                         |   | 314
|Trademarks               |  |                      | 779   |                         |   |   
|                         |  |                      |       |                         |   |    
|                         |  | $                    | 5,480 |                         | $ | 612
|                         |  |                      |       |                         |   |    



The impact of foreign currency
translation adjustments is included in accumulated amortization.



Total
intangible amortization expense for the year ended December 31, 2004 was $612. Estimated annual intangible amortization expense for 2005 through 2009 is $579 per year.



|7. | Financial Instruments
|-- | ---------------------



The following table presents the carrying or notional amounts and fair values of the Companies financial instruments at December 31, 2004 and 2003. The fair value
of a financial instrument is the estimated amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Fair values are determined from quoted market prices where
available or based on other similar financial instruments.



The carrying
amounts of cash and equivalents, accounts receivable, accounts payable, affiliated royalties and other liabilities are considered reasonable estimates of their fair values.



The following table includes the carrying and fair values of the Companies financial instruments.



|                                                  |  |                        |         |                       |      |         |                        |  |                       |        |  |   |        |  
|------------------------------------------------- |  | ---------------------- | ------- | --------------------- | ---- | ------- | ---------------------- |  | --------------------- | ------ |  | - | ------ | -
|                                                  |  | 2004                   |         |                       | 2003 |        
|                                                  |  | CarryingAmount         |         | Fair Value            |      |         | CarryingAmount         |  | Fair Value            |       
|Nonderivatives                                    |  |                        |         |                       |      |         |                        |  |                       |        |  |   |        |  
|Liabilities                                       |  |                        |         |                       |      |         |                        |  |                       |        |  |   |        |  
|Debt                                              |  | $                      | 15,231  |                       | $    | 15,231  |                        |  | $                     | 14,876 |  | $ | 14,901 |  
|Affiliated debt                                   |  |                        | 285,169 |                       |      | 285,169 |                        |  |                       | 50,678 |  |   | 50,678 |  
|                                                  |  |                        |         |                      
|                                                  |  | NotionalAverage Amount |         | Fair ValueGain (Loss) |      |         | NotionalAverage Amount |  | Fair ValueGain (Loss) |       
|Derivatives relating to:                          |  |                        |         |                       |      |         |                        |  |                       |        |  |   |        |  
|Foreign currency contracts to sell British Pounds |  | $                      | 41,577  |                       | $    | 521     |                        |  | $                     |       |  | $ |       |  
|Call options sold                                 |  |                        | 36,000  |                       |      | (1,547  | )                      |  |                       | 12,000 |  |   | (181   | )
|Put options purchased                             |  |                        | 36,000  |                       |      | 114     |                        |  |                       | 12,000 |  |   | 18     |  



At December 31, 2004, the Companies
had derivative losses of $1,547 classified as Other current liabilities and derivative gains of $635 classified as Other assets. At December 31, 2003, the Companies had derivative losses of $181 classified as Other current liabilities and derivative
gains of $18 classified as Other assets.



Gains and losses arising from
contracts are recognized on a quarterly basis through the Consolidated / Combined Statement of Operations (see Note 2). The Companies do not hold or issue derivative financial instruments for trading purposes.



At December 31, 2004, the Companies had a foreign currency exchange forward contract
outstanding with a notional value of $41,577. At December 31, 2004, the Companies forward position of $41,577 was to sell British Pounds for Canadian Dollars at a rate of 2.3255. The unsecured contract matures within 31 days and is placed with
a financial institution with investment



122



---

##### Table of Contents

grade credit ratings. The Companies are exposed to credit loss in the event of non-performance by the other party to the contract. The Companies evaluate the
credit worthiness of the counterpartys financial condition and does not expect default by the counterparty. At December 31, 2004, the Companies recorded an unrealized gain of $521 related to this contract.



At December 31, 2004 and 2003, respectively, the Companies had put options totaling $36,000
and $12,000, respectively, to buy U.S. Dollars with Canadian Dollars. The 2004 options have an average maturity of 183 days and a contract rate of 1.3200. The 2003 options had average maturities of 47 days and a contract rate of 1.3600. At December
31, 2004 and 2003, the Companies recorded gains of $114 and $18, respectively, related to these options. During 2004, the Companies also recorded gains of $69 related to put options that were exercised in 2004.



The Companies are also a party to call options held by financial institutions totaling
$36,000 and $12,000 at December 31, 2004 and 2003, respectively, to sell Canadian Dollars for U.S. Dollars. The 2004 options have an average maturity of 183 days and a contract rate of 1.2300. The 2003 options had average maturities of 47 days and
an average contract rate of 1.3068. At December 31, 2004 and 2003, the Companies recorded a loss of $1,547 and $181, respectively, related to these options.



|8. | Debt and Lease Obligations
|-- | --------------------------



BCI entered into a three-year asset based revolving credit facility in the third quarter of 2002 (the Credit Facility), which provides for a maximum aggregate
borrowing of $175,000 for the Companies, including letters of credit (LOC). BCI amended this Credit Facility (the Amended Credit Facility) on August 12, 2004 as part of the Acquisition. The Amended Credit Facility is a
five-year asset based revolving credit facility with the same borrowing capacity as the Credit Facility.



The Amended Credit Facility is secured with inventory and accounts receivable in the United States, Canada and the U.K., a portion of property and equipment in Canada and the U.K. and the stock of certain U.S.
subsidiaries. At December 31, 2004, the net book value of the collateral securing the Amended Credit Facility was approximately $266,000 excluding the pledged subsidiary stock, of which, approximately $117,000 represents assets of the Companies and
approximately $149,000 represents assets of BCI. The maximum borrowing allowable under the Amended Credit Facility is calculated monthly (quarterly if availability is greater than $100,000), and is based upon specific percentages of eligible
accounts receivable, inventory and fixed assets. The Amended Credit Facility contains restrictions on dividends, capital expenditures and payment of management fees. It also includes a minimum trailing twelve-month fixed charge coverage ratio
requirement of 1.1 to 1.0 if aggregate availability is less than $50,000. As of December 31, 2004, the maximum borrowing allowable under the Amended Credit Facility for BCCI and Borden U.K. was $68,421, of which $68,403, net of LOCs, was unused and
available. Based upon the aggregate availability at December 31, 2004, BCI had no fixed charge coverage ratio requirements.



Under the terms of the Amended Credit Facility, BCCI and Borden U.K. have the ability to borrow funds at either the prime rate plus an applicable margin (the prime
rate option) or at LIBOR plus an applicable margin. The option must be designated at the time of the borrowing. The applicable margin for any prime rate borrowing is 50 basis points and for any LIBOR borrowing is 200 basis points. As of
December 31, 2004, the Companies had no borrowings outstanding under the prime rate option. For LOCs issued under the Amended Credit Facility, the Companies pay a per annum fee equal to the LIBOR applicable margin, or 2.00%, plus a fronting fee of
..125%. In addition, BCI and the Companies pay a .375% per annum fee on the amount of the revolving loan commitment less any borrowings or outstanding LOCs. The Companies incurred commitment fees of $332, $335 and $92 in 2004, 2003 and 2002,
respectively, related to the Amended Credit Facility.



Borden Australia entered
into a five-year secured credit facility in the fourth quarter of 2003 (the "Australian Facility"), which provided for a maximum borrowing of AUD$19,900, or approximately $15,500. At December 31, 2004, outstanding debt under this facility was
$11,295, of which $6,557 is classified as long-term. In addition, there was $3,334 of short-term debt outstanding under the facility. The Australian Facility provided the funding for the Fentak acquisition made in the fourth quarter of 2003 (see
Note 3) and is secured by liens against substantially all of the assets of the Australian business, including the stock of Australian subsidiaries. At December 31, 2004, the net book value of the collateral securing this facility was approximately
$29,700. In addition, BCCI has pledged the stock of Borden Australia as collateral for borrowings under this facility. This facility includes a fixed rate facility used for the acquisition, as well as a revolver. At December 31, 2004, $7,961 was
outstanding under the fixed rate facility at an interest rate of 6.4%. The Australian Facility contains restrictions relative to Borden Australia on the payment of dividends, the sale of assets and additional borrowings. The Australian Facility also
contains financial covenants applying to Borden Australia and its subsidiaries including current ratio, interest coverage, debt service coverage and leverage. The fixed portion of the Australian Facility requires minimum quarterly principal
reductions totaling AUD$450 (approximately $350). The Australian facility requires semi-annual principal reductions based on a portion of excess cash as defined in the agreement. There were no repayments made under this provision during 2004. As of
December 31, 2004, the maximum borrowing allowable under the Australian Facility was AUD$18,100 (approximately $14,100), of



123



---

##### Table of Contents

which about AUD$3,600 (approximately $2,800), after outstanding LOCs and other draws, was unused and available. . The Companies incurred commitment fees of
$173 in 2004 related to the Australian Facility.



Additional international
credit facilities provide availability totaling approximately $26,100. Of this amount, approximately $12,200 (net of approximately $3,900 of borrowings, LOCs and other guarantees of approximately $4,600 and $5,400 of other draws) was available to
fund working capital needs and capital expenditures at December 31, 2004. These credit facilities have various expiration dates ranging from 2006 through 2008. Of the total $3,935 of outstanding debt at December 31, 2004, $677 is classified as
long-term. Average interest rates on the outstanding debt were 14.0% and 14.8% at December 31, 2004 and 2003, respectively. While these facilities are primarily unsecured, portions of the lines are secured by equipment with a net book value of
approximately $750 at December 31, 2004. BCI guarantees up to $6,700 of the debt of a Brazilian subsidiary included in these facilities.



Aggregate maturities of total non-affiliated debt and minimum annual rentals under operating leases at December 31, 2004, for the Companies are as follows:



|                |  |      |        |                                      |   |      
|--------------- |  | ---- | ------ | ------------------------------------ | - | -----
|Year            |  | Debt |        | MinimumRentals UnderOperating Leases
|2005            |  | $    | 7,997  |                                      | $ | 2,175
|2006            |  |      | 1,991  |                                      |   | 1,704
|2007            |  |      | 1,489  |                                      |   | 1,453
|2008            |  |      | 3,754  |                                      |   | 1,277
|2009            |  |      |       |                                      |   | 1,202
|2010 and beyond |  |      |       |                                      |   | 1,637
|                |  |      |        |                                      |   |      
|                |  | $    | 15,231 |                                      | $ | 9,448



Rental expense amounted to $2,139,
$1,998 and $1,927 in 2004, 2003 and 2002, respectively.



|9. | Loans Due To Affiliates
|-- | -----------------------



To finance the acquisition of the subsidiaries from BCI, BCCI assumed a fixed rate note of CDN$342,836, or approximately $285,000 at December 31, 2004, with Borden Nova
Scotia Finance ULC, a subsidiary of BCI. The note has an interest rate of 10% and becomes due July 15, 2014. BCCI recorded interest expense of $10,641 during 2004, and the December 31, 2004 balance sheet includes $11,000 of interest payable. In
tandem with the issuance of this note, BCI entered into a common share forward subscription agreement with BCCI requiring BCI to subscribe to shares of BCCI stock at CDN$845 per share at the principal repayment date for the loan.



In conjunction with the Acquisition, a demand note payable by Borden U.K. to BCI was
contributed by BCI to a newly formed subsidiary, Borden Lux, LLC. Borden Lux, LLC was subsequently acquired by BCCI in the Acquisition, therefore the loan and related interest is eliminated subsequent to August 12, 2004. In December 2003, BCI made a
capital contribution to Borden U.K. in the amount of $49,087 reducing the outstanding loan payable. This portion of the loan was non-interest bearing during 2002. At December 31, 2003, $44,608 was outstanding at an interest rate of 6.6%. This amount
is classified as current due to the note being a demand instrument. Interest expense to BCI totaled $1,538, $2,100 and $2,196, for the years ended December 31, 2004, 2003 and 2002, respectively.



In addition, Borden U.K. had demand notes, denominated in Euros, with BCIs French
subsidiary, Borden Chimie S.A. Amounts outstanding under the loans totaled $0 and $1,764 at December 31, 2004 and 2003, respectively. The interest rate at December 31, 2003 was 4.2%. Interest expense to Borden Chimie S.A. totaled $16, $59 and $10
for the years ended December 31, 2004, 2003 and 2002, respectively.



Borden
U.K. also had a loan from Borden Espana with an outstanding balance of $7,958 at December 31, 2002, which was repaid during 2003. The loan, which was denominated in GBP, bore an interest rate of 4.5%. Interest expense to Borden Espana totaled $84
and $355 for the years ended December 31, 2003 and 2002, respectively.



Borden
Quimica Industria E Comercio Ltda. (Brazil Quimica), a subsidiary of Borden Panama, maintained a demand note from BCI with a fixed interest rate of 8% and an installment loan from BCI with a fixed interest rate of 6%. Amounts outstanding
under the demand note totaled $0 and $4,000 at December 31, 2004 and 2003, respectively, and were classified as



124



---

##### Table of Contents

long-term in 2003, due to local restrictions on the ability to repay without obtaining governmental approval. Amounts outstanding under the installment loan
totaled $279 and $306 at December 31, 2004 and 2003. Brazil Quimica makes annual payments on the installment loan of $27 with a final balloon payment due in 2013. Interest expense on these notes totaled $126, $512 and $811 for the years ended
December 31, 2004, 2003 and 2002, respectively.



Borden Panama had a borrowing
arrangement with BCI during 2002, which was terminated. Interest expense accrued under this arrangement totaled $51 for 2002.



|10. | Guarantees, Indemnities and Warranties
|--- | --------------------------------------



Standard Guarantees / Indemnifications



In the ordinary course of business, the Companies enter into numerous agreements that contain standard guarantees and indemnities whereby third parties are indemnified
for, among other things, breaches of representations and warranties. Such guarantees or indemnifications are granted under various agreements, including those governing (i) purchases and sales of assets or businesses, (ii) leases of real property,
(iii) licenses of intellectual property and (iv) long-term supply agreements. The guarantees or indemnifications issued are for the benefit of the (i) buyers in sale agreements and sellers in purchase agreements, (ii) landlords or lessors in lease
contracts, (iii) licensors or licensees in license agreements and (iv) vendors or customers in long-term supply agreements.



These parties may also be indemnified against any third party claim resulting from the transaction that is contemplated in the underlying agreement. Additionally, in
connection with the sale of assets and the divestiture of businesses, the Companies may agree to indemnify the buyer with respect to liabilities related to the pre-closing operations of the assets or businesses sold. Indemnities related to
pre-closing operations generally include tax liabilities, environmental liabilities and employee benefit liabilities not assumed by the buyer in the transaction.



Indemnities related to the pre-closing operations of sold assets normally do not represent additional liabilities to the Companies, but
simply serve to protect the buyer from potential liability associated with its existing obligations at the time of sale. As with any liability, the Companies have accrued for those pre-closing obligations that are considered probable and reasonably
estimable. Such amounts are not significant.



While some of these guarantees
extend only for the duration of the underlying agreement, many survive the expiration of the term of the agreement or extend into perpetuity (unless subject to a legal statute of limitations). With respect to certain of the aforementioned
guarantees, the Companies maintain limited insurance coverage that mitigates any potential payments to be made. There are no specific limitations on the maximum potential amount of future payments that the Companies could be required to make under
these guarantees, nor are the Companies able to develop an estimate of the maximum potential amount of future payments to be made under these guarantees as the triggering events are not predictable.



The Companies have not entered into any significant agreement subsequent to January 1, 2003
that would require them, as guarantors, to recognize a liability for the fair value of obligations they have undertaken in issuing the guarantee.



Related Party Guarantees



BCCI and certain subsidiaries of Borden U.K. have guaranteed BCIs $34,000 Parish of Ascension Industrial Revenue Bonds.



Warranties



The Companies do not make express warranties on its products, other than that they comply
with their defined specifications; therefore, no warranty liability has been recorded. Adjustments for product quality claims are not material and are charged against sales revenues.



|11. | Commitments and Contingencies
|--- | -----------------------------



Environmental Matters



Because the operations of the Companies involve the use, handling, processing, storage, transportation and disposal of hazardous materials, it is subject to extensive
environmental regulation and is exposed to the risk of claims for environmental remediation or restoration. In addition, violations of environmental laws or permits may result in restrictions being imposed on operating activities, substantial fines,
penalties, damages or other costs, any of which could have a material adverse effect on the Companies business, financial condition, results of operations or cash flows.



125



---

##### Table of Contents

Accruals for environmental matters are recorded following the guidelines of Statement of Position 96-1,
Environmental Remediation Liabilities, when it is probable that a liability has been incurred and the amount of the liability can be estimated. Environmental accruals are reviewed on an interim basis and as events and developments
warrant. Based on managements estimates, which are determined through historical experience and consultation with outside experts, the Companies have recorded liabilities, relating to seven locations, of approximately $4,200 and $4,800 at
December 31, 2004 and 2003, respectively, for all probable environmental remediation, indemnification and restoration liabilities. These amounts include estimates of unasserted claims the Companies believe are possible of loss and reasonably
estimable.



Based on currently available information and analysis, management
believes that it is reasonably possible that costs associated with such sites may fall within a range of $2,400 to $10,400, in the aggregate, at December 31, 2004. This estimate of the range of reasonably possible costs is less certain than the
estimates upon which the liabilities are based, and in order to establish the upper end of such range, assumptions less favorable to the Companies among the range of reasonably possible outcomes were used. As with any estimate, if facts or
circumstances change, the final outcome could differ materially from these estimates. The factors influencing the ultimate outcome include the methods of remediation to be elected, the conclusions and assessment of site studies remaining to be
completed and the time period required to complete the work. The Companies do not anticipate any recoveries of these costs from insurance coverage or from other third parties. There are no other potentially responsible parties for these sites.



At six of these locations, the Companies are conducting environmental
remediation and restoration under business realignment programs due to closure of the sites. Total reserves related to these sites included in realignment were $3,606 and $3,844 at December 31, 2004 and 2003, respectively. Much of this remediation
is being performed by the Companies on a voluntary basis in coordination with local regulatory authorities; therefore, management has greater control over the costs to be incurred and the timing of cash flows. The Companies anticipate approximately
$3,200 of these liabilities will be paid within the next four years, with the remaining amounts being paid over the next ten years.



Legal Matters



The Companies are involved in various product liability, commercial and employment litigation, personal injury, property damage and other legal proceedings that are
considered to be in the ordinary course of business. The following legal claim is not in the ordinary course of business:



In 1992, the State of Sao Paulo Tax Bureau issued an assessment against Brazil Quimica claiming that excise taxes were owed on certain intercompany loans made for
centralized cash management purposes, characterized by the Tax Bureau as intercompany sales. Since that time, management and the Tax Bureau have held discussions, and Brazil Quimica has filed an administrative appeal seeking cancellation of the
assessment. In December 2001, the Administrative Court upheld the assessment in the amount of 60.8 million Brazilian Reais, or approximately $22,900, including tax, penalties, monetary correction and interest. In September 2002, Brazil Quimica filed
a second appeal with the highest level administrative court, again seeking cancellation of the assessment. Management believes Brazil Quimica has a strong defense against the assessment and will pursue the appeal vigorously; however, no assurance
can be given that the assessment will not be upheld. At this time the Companies do not believe a loss is probable, therefore, only related legal fees have been accrued. Reasonably possible losses to the Companies on the resolution of this matter
range from zero to $22,900.



The Companies have reserved approximately $2,137
and $1,628 at December 31, 2004 and 2003, respectively, relating to all non-environmental legal matters for legal defense and settlement costs that it believes are probable and estimable at this time.



Other Contingencies



The Fentak acquisition agreement includes a contingent purchase consideration provision
based on achievement of certain targeted earnings before interest and taxes. No payment was required for 2004. Maximum annual payments are AU$600 for the period 2005-2006.



At December 31, 2004, BCCI is a party to a contingent foreign currency exchange forward contract to purchase 175million for US$235
million, with BCI as the primary beneficiary. The contract is contingent upon the close of the Bakelite share purchase agreement (see Note 3) and has a target settlement date of March 31, 2005 and provides for an extension and adjustments through
July 6, 2005. The purpose of the hedge is to mitigate BCIs risk of foreign currency exposure related to the pending transaction.



126



---

##### Table of Contents

|12. | Pension and Retirement Savings Plans
|--- | ------------------------------------



Most of BCCIs Canadian employees are covered under a non-contributory defined benefit plan (the Canadian Plan). The Canadian Plan provides benefits for
salaried employees based on eligible compensation and years of credited service, and for hourly employees based on an established annual amount of pension benefit multiplied by years of credited service. For hourly employees covered under a
collective bargaining agreement, the benefit is determined using a flat dollar multiplier times credited service plus a percentage of participant contributions, if any.



Following is a rollforward of the assets and benefit obligations of the Canadian Plan. The measurement date for the plan assets is September
30.



|                                               |  |      |        |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------ | - | ---- | - | ------ | -
|                                               |  | 2004 |        |   | 2003 |  
|Change in Benefit Obligation                   |  |      |        |   |      |   |        |  
|Benefit obligation at beginning of year        |  | $    | 6,558  |   |      | $ | 4,923  |  
|                                               |  |     
|Service cost                                   |  |      | 231    |   |      |   | 197    |  
|Interest cost                                  |  |      | 389    |   |      |   | 401    |  
|Actuarial losses                               |  |      | 361    |   |      |   | 536    |  
|Foreign currency exchange rate changes         |  |      | 493    |   |      |   | 1,096  |  
|Benefits paid                                  |  |      | (507   | ) |      |   | (595   | )
|                                               |  |      |        |   |      |   |        |  
|                                               |  | $    | 7,525  |   |      | $ | 6,558  |  
|                                               |  |      |        |   |      |   |        |  
|Change in Plan Assets                          |  |      |        |   |      |   |        |  
|                                               |  |     
|Fair value of plan assets at beginning of year |  | $    | 4,538  |   |      | $ | 3,615  |  
|Actual return on plan assets                   |  |      | 285    |   |      |   | 353    |  
|Foreign currency exchange rate changes         |  |      | 345    |   |      |   | 805    |  
|Employer contribution                          |  |      | 359    |   |      |   | 360    |  
|Benefits paid                                  |  |      | (507   | ) |      |   | (595   | )
|                                               |  |      |        |   |      |   |        |  
|Fair value of plan assets at end of year       |  | $    | 5,020  |   |      | $ | 4,538  |  
|                                               |  |      |        |   |      |   |        |  
|Plan assets less than benefit obligation       |  | $    | (2,505 | ) |      | $ | (2,020 | )
|Unrecognized net actuarial loss                |  |      | 4,388  |   |      |   | 3,792  |  
|                                               |  |      |        |   |      |   |        |  
|Net amount recognized                          |  | $    | 1,883  |   |      | $ | 1,772  |  



Amounts recognized in the balance
sheets, after reclassification of the prepaid pension asset to reflect a minimum pension liability adjustment, consist of:



|                                     |  |      |        |   |      |   |        |  
|------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                     |  | 2004 |        |   | 2003 |  
|Accrued benefit liability            |  | $    | (2,068 | ) |      | $ | (1,591 | )
|Accumulated other comprehensive loss |  |      | 3,951  |   |      |   | 3,363  |  
|                                     |  |      |        |   |      |   |        |  
|Net amount recognized                |  | $    | 1,883  |   |      | $ | 1,772  |  



The weighted average rates used to
determine benefit obligations for BCCI were as follows:



|                                               |  |      |   |  |      |  
|---------------------------------------------- |  | ---- | - |  | ---- | -
|                                               |  | 2004 |   |  | 2003 |  
|Discount rate                                  |  | 6.0  | % |  | 6.0  | %
|Rate of increase in future compensation levels |  | 3.0  | % |  | 3.0  | %



The following summarizes BCCIs
benefit obligations and plan assets:



|                               |  |      |       |      |   |      
|------------------------------ |  | ---- | ----- | ---- | - | -----
|                               |  | 2004 |       | 2003
|Projected benefit obligation   |  | $    | 7,525 |      | $ | 6,558
|Accumulated benefit obligation |  |      | 7,088 |      |   | 6,128
|Fair value of plan assets      |  |      | 5,020 |      |   | 4,538



127



---

##### Table of Contents

Following are the components of net pension expense recognized by BCCI for the years ended December 31:



|                                              |  |      |      |   |      |   |      |      |  |   |      |  
|--------------------------------------------- |  | ---- | ---- | - | ---- | - | ---- | ---- |  | - | ---- | -
|                                              |  | 2004 |      |   | 2003 |   |      | 2002 | 
|Service cost                                  |  | $    | 231  |   |      | $ | 197  |      |  | $ | 134  |  
|Interest cost on projected benefit obligation |  |      | 389  |   |      |   | 401  |      |  |   | 320  |  
|Expected return on assets                     |  |      | (403 | ) |      |   | (399 | )    |  |   | (345 | )
|Recognized actuarial loss                     |  |      | 160  |   |      |   | 146  |      |  |   | 76   |  
|                                              |  |      |      |   |      |   |      |      |  |   |      |  
|Net pension expense                           |  | $    | 377  |   |      | $ | 345  |      |  | $ | 185  |  



The weighted average rates used to
determine net pension expense for BCCI were as follows:



|                                                 |  |      |   |  |      |   |  |      |  
|------------------------------------------------ |  | ---- | - |  | ---- | - |  | ---- | -
|                                                 |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate                                    |  | 6.0  | % |  | 6.5  | % |  | 6.8  | %
|Rate of increase in future compensation levels   |  | 3.0  | % |  | 3.5  | % |  | 3.8  | %
|Expected long-term rate of return on plan assets |  | 7.8  | % |  | 7.8  | % |  | 7.8  | %



In determining the expected overall
long-term rate of return on assets, BCCI takes into account the rates on long-term debt investments held within the portfolio, as well as expected trends in the equity markets. Peer data and historical returns are reviewed, and BCCI consults with
actuarial experts to confirm that BCCIs assumptions are reasonable.



BCCIs investment strategy for defined benefit pension plan assets is to maximize the long-term return on plan assets using a mix of equities and fixed income investments and accepting a prudent level of risk. Risk tolerance is
established through careful consideration of plan liabilities, plan funded status and expected timing of future cash flow requirements. The investment portfolio contains a diversified blend of equity and fixed-income investments. Furthermore, equity
investments are diversified across various countries, as well as growth, value and small and large capital investments. Investment risk and performance are measured and monitored on an ongoing basis through quarterly investment portfolio reviews,
annual liability measurements and periodic asset / liability studies.



Following is a summary of actual 2004 and 2003, at the measurement date, and target 2005 allocations of plan assets by investment type:



|                                |  |        |   |  |        |   |  |      |  
|------------------------------- |  | ------ | - |  | ------ | - |  | ---- | -
|                                |  | Actual |   |  | Target |  
|                                |  | 2004   |   |  | 2003   |   |  | 2005 |  
|Fixed income securities         |  | 38     | % |  | 50     | % |  | 40   | %
|Equity securities               |  | 58     | % |  | 45     | % |  | 60   | %
|Cash and short-term investments |  | 4      | % |  | 5      | % |  |     |  
|                                |  |        |   |  |        |   |  |      |  
|                                |  | 100    | % |  | 100    | % |  | 100  | %



BCCI expects to make contributions
totaling $950 to the Canadian Plan in 2005.



Estimated future plan benefit
payments as of December 31, 2004 are as follows:



|            |  |   |      
|----------- |  | - | -----
|2005        |  | $ | 509  
|2006        |  |   | 503  
|2007        |  |   | 503  
|2008        |  |   | 512  
|2009        |  |   | 516  
|2010 - 2014 |  |   | 2,517



The Companies provide benefits under
various defined contribution plans to their employees in various countries. Depending upon the country and plan, eligible salaried and hourly employees may contribute up to 7% of their pay as basic contributions to the plans. The Companies make
contributions to these plans in amounts up to 100% of basic contributions. Charges to operations for matching contributions under these defined contribution plans in 2004, 2003 and 2002 totaled $1,797, $1,814 and $1,584, respectively.



128



---

##### Table of Contents

|13. | Postretirement Benefit Obligations
|--- | ----------------------------------



BCCI provides certain health and life insurance benefits for eligible Canadian retirees and their dependents. The cost of postretirement benefits is accrued during
employees working careers. Participants are provided with supplemental benefits to the respective provincial healthcare plans in Canada. These benefits are non-contributory and are funded on a pay-as-you-go basis.



Following is a rollforward of the changes in the non-pension postretirement benefit
obligations of BCCI for the years ended December 31. BCCI uses a measurement date of September 30.



|                                                 |  |      |        |   |      |   |        |  
|------------------------------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                                                 |  | 2004 |        |   | 2003 |  
|Change in Benefit Obligation                     |  |      |        |   |      |   |        |  
|Benefit obligation at beginning of year          |  | $    | 3,058  |   |      | $ | 677    |  
|Service cost                                     |  |      | 114    |   |      |   | 48     |  
|Interest cost                                    |  |      | 206    |   |      |   | 55     |  
|Actuarial losses                                 |  |      | 163    |   |      |   | 2,170  |  
|Benefits paid                                    |  |      | (50    | ) |      |   | (42    | )
|Foreign currency exchange rate changes           |  |      | 99     |   |      |   | 150    |  
|                                                 |  |      |        |   |      |   |        |  
|Benefit obligation at end of year                |  |      | 3,590  |   |      |   | 3,058  |  
|Unrecognized net actuarial loss                  |  |      | (2,112 | ) |      |   | (2,103 | )
|                                                 |  |      |        |   |      |   |        |  
|Accrued postretirement obligation at end of year |  | $    | 1,478  |   |      | $ | 955    |  



The unrealized net actuarial loss
recognized in 2003 relates to updated estimates on future benefit payments for medical and prescription drug coverage, as well as updates to population and other actuarial assumptions.



The weighted average rates used to determine the benefit obligations for BCCI were as follows:



|              |  |      |   |  |      |  
|------------- |  | ---- | - |  | ---- | -
|              |  | 2004 |   |  | 2003 |  
|Discount rate |  | 6.5  | % |  | 6.0  | %



Following are the components of net
postretirement expense recognized by BCCI for the years ended December 31:



|                                              |  |      |     |      |   |      |  |   |   
|--------------------------------------------- |  | ---- | --- | ---- | - | ---- |  | - | --
|                                              |  | 2004 |     | 2003 |   | 2002
|Service cost                                  |  | $    | 114 |      | $ | 48   |  | $ | 35
|Interest cost on projected benefit obligation |  |      | 206 |      |   | 55   |  |   | 43
|Recognized actuarial loss                     |  |      | 149 |      |   |     |  |   |  
|                                              |  |      |     |      |   |      |  |   |   
|Net postretirement expense                    |  | $    | 469 |      | $ | 103  |  | $ | 78



The weighted average rates used to
determine net postretirement expense for BCCI were as follows:



|              |  |      |   |  |      |   |  |      |  
|------------- |  | ---- | - |  | ---- | - |  | ---- | -
|              |  | 2004 |   |  | 2003 |   |  | 2002 |  
|Discount rate |  | 6.0  | % |  | 6.5  | % |  | 6.8  | %



Following are the assumed health care
cost trend rates at December 31, 2004 and 2003.



|                                                                                  |  |      |   |  |      |  
|--------------------------------------------------------------------------------- |  | ---- | - |  | ---- | -
|                                                                                  |  | 2004 |   |  | 2003 |  
|Health care cost trend rate assumed for next year                                 |  | 7.5  | % |  | 7.8  | %
|Rate to which the cost trend rate is assumed to decline (the ultimate trend rate) |  | 4.4  | % |  | 4.4  | %
|Year that the rate reaches the ultimate trend rate                                |  | 2015 |   |  | 2015 |  



129



---

##### Table of Contents

A one-percentage-point change in the assumed health care cost trend rates would have the following impact on the
Companies:



|                                                          |  |             |     |             |   |      |  
|--------------------------------------------------------- |  | ----------- | --- | ----------- | - | ---- | -
|                                                          |  | 1% increase |     | 1% decrease |  
|Effect on total service cost and interest cost components |  | $           | 67  |             | $ | (51  | )
|Effect on postretirement benefit obligation               |  |             | 594 |             |   | (474 | )



Estimated future plan benefit payments
as of December 31, 2004 are as follows:



|            |  |   |      
|----------- |  | - | -----
|2005        |  | $ | 128  
|2006        |  |   | 144  
|2007        |  |   | 162  
|2008        |  |   | 181  
|2009        |  |   | 200  
|2010 - 2014 |  |   | 1,303



|14. | Accumulated Other Comprehensive Loss
|--- | ------------------------------------



The components of Accumulated other comprehensive loss as of December 31, 2004 and 2003 are as follows:



|                                                    |  |      |         |   |      |   |         |  
|--------------------------------------------------- |  | ---- | ------- | - | ---- | - | ------- | -
|                                                    |  | 2004 |         |   | 2003 |  
|Cumulative foreign currency translation adjustments |  | $    | (54,821 | ) |      | $ | (48,749 | )
|Minimum pension liability adjustment, net of tax    |  |      | (2,568  | ) |      |   | (2,186  | )
|                                                    |  |      |         |   |      |   |         |  
|                                                    |  | $    | (57,389 | ) |      | $ | (50,935 | )



|15. | Shareholders (Deficit) Equity
|--- | ------------------------------



Shareholders deficit at December 31, 2004 reflects the common equity of BCCI with all of the common equity of BCCIs subsidiaries eliminated, except for the
equity of Malaysia representing BCIs 34% interest, totaling $979. Shareholders investment for periods prior to the reorganization of the Companies on August 12, 2004 are presented on a combined basis and include the combined equity of
BCCI and its current immediate dependents, including 100% of Malaysias equity.



BCCI has 489,866 shares of no-par common stock outstanding during all periods presented with an unlimited number of shares of common preference and Preference B shares authorized.



Borden Panama had 2,100 shares of no-par common stock issued at December 31, 2003, and a
total of 5,100 authorized. Borden U.K. had 57,700,000 units with £1 par value outstanding at December 31, 2003, and 100,000,000 units authorized. Borden Australia had 577,500 shares of AUD$2 par common stock outstanding at December 31, 2003,
and a total of 1,000,000 shares authorized.



In 2004, BCI made a capital
contribution to BCCI for $435 relating to interest capitalized by BCI in association with a capital project completed by BCCI during 2004. In 2003, BCI made a capital contribution to Borden U.K. in the amount of $49,087 in exchange for a loan due to
BCI from Borden U.K. (see Note 9). Also in 2003, BCI made a capital contribution to Brazil Quimica of a $3,007 receivable due to BCI from Brazil Quimica. In addition, BCI made a capital contribution in 2003 to BCCI of inventory acquired in
connection with the Fentak acquisition totaling $133.



Borden Panama paid
common stock dividends to BCI prior to BCCIs ownership totaling $1,750 and $1,450 for the years ended December 31, 2003 and 2002, respectively. Borden Malaysia paid common stock dividends to BCI of $681, $0 and $1,360 for the years ended
December 31, 2004, 2003 and 2002, respectively.



|16. | Stock-Based Compensation
|--- | ------------------------



Stock Options



The Companies account for stock-based compensation under APB No. 25 and have adopted the disclosure-only provisions of SFAS No. 123 and SFAS No. 148. During 2004, BHI
Acquisition granted options to purchase BHI Acquisition common stock to key employees of the Companies under the BHI Acquisition Corp. 2004 Stock Incentive Plan (the BHI Option Plan). Prior



130



---

##### Table of Contents

to the Acquisition, BCI had granted options under its Amended and Restated 1996 Stock Purchase and Option Plan for Key Employees (the BCI Option
Plan). Together these plans are referred to herein as the Option Plans.



During 2004, BHI Acquisition granted to employees of the Companies options to purchase 230,861 shares of BHI Acquisition stock that vest ratably over a five-year period. In addition, BHI Acquisition granted to employees of the Companies
options to purchase 230,861 shares of BHI Acquisition stock (the performance options) that vest after the eighth anniversary of the grant date. The performance options provide for accelerated vesting upon the sale of BHI Acquisition and
the achievement of certain financial targets. The exercise price for the BHI Acquisition option grants is $2.89. The options were granted at fair value, but are variable because the BHI Option Plan is a book value plan as the value of the options is
determined by a formula. The Companies have not recorded any expense under APB No. 25 related to these options, as their value as determined by this formula is less than the exercise price.



During the fourth quarter of 2003, BCI granted 382,500 options to key employees of the
Companies to purchase BCI common stock under its Amended and Restated 1996 Stock Purchase and Option Plan for Key Employees (the Option Plan). The options vested ratably over five years, had an exercise price of $2.00 and were granted at
their estimated fair value. While this plan was administered and accounted for in BCIs U.S. business, certain key employees of the Companies had been granted options in BCI stock under this plan. Compensation expense on options to purchase BCI
stock held by the Companies employees was immaterial to net income for the years ended December 31, 2003, 2002 and 2001. During 2004, as a result of the Acquisition, all of the options granted to employees of the Companies were exercised,
resulting in the recognition of $340 for option expense.



Deferred Compensation



Certain key
employees of the Companies have been granted 92,344 deferred common stock units under the BHI Acquisition Corp. 2004 Deferred Compensation Plan (the BHI Deferred Compensation Plan), which is an unfunded plan. Each unit gives the grantee
the right to one share of common stock of BHI Acquisition following the completion of the forfeiture period, upon the earlier of termination of employment or upon certain other events triggered by a registration of BHI Acquisition common stock for
sale to the public. The forfeiture period for these deferred common stock units expired on December 10, 2004. The expense for employees of the Companies relating to the BHI Deferred Compensation Plan during 2004 was $267, and is included in the
allocations of corporate overhead (see Note 5), and the related credit is in Shareholders deficit.



Repurchase of Stock from Management



From 1996 through 1999, a former subsidiary of BCI, Borden Chemical Holdings Inc. (BCHI), issued stock options and sold equity to key management, including
four employees of the Companies, under the Option Plan (the BCHI option grants). The BCHI option grants had exercise prices between $5.00 and $7.50, the estimated fair values at the grant dates, and vested over five years. The
outstanding BCHI option grants became options of BCI in 2001 when BCHI was merged into BCI. The conversion of the BCHI option grants provided BCHI management with equivalent intrinsic value in BCI at the new measurement date; therefore, no
compensation expense was recorded. The strike prices of the converted options ranged from $4.13 to $5.00, which exceeded estimated fair market value. During 2003, all of the $4.13 options were cancelled upon the repurchase of the related shares from
management. As the repurchase of shares was at an amount exceeding fair value, the Companies recorded expense of $74 in 2003.



Included in allocations of BCI administrative services costs (see Note 5) are stock-based compensation expenses totaling $3,238, $435 and $277 for 2004, 2003 and 2002,
respectively.



131



---

##### Table of Contents

|17. | Income Taxes
|--- | ------------



Comparative analysis of the Companies income tax expense (benefit) follows:



|                             |  |      |        |      |   |        |      |  |   |        |  
|---------------------------- |  | ---- | ------ | ---- | - | ------ | ---- |  | - | ------ | -
|                             |  | 2004 |        | 2003 |   |        | 2002 | 
|Current                      |  |      |        |      |   |        |      |  |   |        |  
|Federal & provincial         |  | $    | 5,373  |      | $ | (5,735 | )    |  | $ | 8,555  |  
|Foreign                      |  |      | 2,321  |      |   | 3,404  |      |  |   | (3,667 | )
|                             |  |      |        |      |   |        |      |  |   |        |  
|Total                        |  |      | 7,694  |      |   | (2,331 | )    |  |   | 4,888  |  
|                             |  |      |       
|Deferred                     |  |      |        |      |   |        |      |  |   |        |  
|Federal & provincial         |  |      | 14,170 |      |   | 509    |      |  |   | (10    | )
|Foreign                      |  |      | 1,576  |      |   | 983    |      |  |   | 3,789  |  
|                             |  |      |        |      |   |        |      |  |   |        |  
|Total                        |  |      | 15,746 |      |   | 1,492  |      |  |   | 3,779  |  
|                             |  |      |        |      |   |        |      |  |   |        |  
|Income tax expense (benefit) |  | $    | 23,440 |      | $ | (839   | )    |  | $ | 8,667  |  



A reconciliation of the
Companies combined differences between income taxes computed at Canadian Federal statutory tax rate of 36.12% and provisions for income taxes follows:



|                                                    |  |      |        |   |      |   |         |      |  |   |        |  
|--------------------------------------------------- |  | ---- | ------ | - | ---- | - | ------- | ---- |  | - | ------ | -
|                                                    |  | 2004 |        |   | 2003 |   |         | 2002 | 
|Income taxes computed at Federal statutory tax rate |  | $    | 707    |   |      | $ | 12,869  |      |  | $ | 8,383  |  
|Foreign rate differentials                          |  |      | 5,415  |   |      |   | 2,497   |      |  |   | 1,846  |  
|Expenses not deductible for tax                     |  |      | 6,735  |   |      |   | 2,074   |      |  |   | 1,882  |  
|Credits                                             |  |      | (3,823 | ) |      |   | (4,336  | )    |  |   | (3,423 | )
|Unrepatriated earnings of foreign subsidiaries      |  |      | 14,463 |   |      |   |        |      |  |   |       |  
|Adjustment of prior estimates                       |  |      | (3,189 | ) |      |   | (15,597 | )    |  |   |       |  
|Provincial taxes and other                          |  |      | 3,132  |   |      |   | 1,654   |      |  |   | (21    | )
|                                                    |  |      |        |   |      |   |         |      |  |   |        |  
|Income tax expense (benefit)                        |  | $    | 23,440 |   |      | $ | (839    | )    |  | $ | 8,667  |  



The 2004 foreign rate differential
provision of $5,415 includes a provision for valuation allowances on foreign deferred tax assets and a provision for foreign allocations of administrative services costs, which are not deductible for income tax purposes (see Note 5). Expenses not
deductible for tax of $6,735 represent a provision for domestic allocations of administrative services costs, which are not deductible for income tax purposes. Following the Acquisition, Apollo made a determination that the unrepatriated earnings of
BCCIs foreign subsidiaries are no longer considered permanently reinvested. As such, the 2004 consolidated tax rate reflects a provision of $14,463 for taxes associated with the unrepatriated earnings of the foreign subsidiaries. The 2004
consolidated rate also reflects adjustments of prior estimates related to the settlement of Canadian audit issues of $2,175 and provincial refunds totaling $1,343, offset by other adjustments of $329.



The 2003 consolidated rate reflects a release of reserves for prior years Canadian tax
audits of $15,597. These reserves were released as a result of the settlement of audit issues relating to the divestiture of operating businesses by BCCI in prior years.



The domestic and foreign components of the Companies combined Income (loss) before income taxes are as follows:



|         |  |      |        |   |      |   |        |  |   |        |  
|-------- |  | ---- | ------ | - | ---- | - | ------ |  | - | ------ | -
|         |  | 2004 |        |   | 2003 |   | 2002   | 
|Domestic |  | $    | 6,157  |   |      | $ | 22,718 |  | $ | 23,519 |  
|Foreign  |  |      | (4,201 | ) |      |   | 12,911 |  |   | (310   | )
|         |  |      |        |   |      |   |        |  |   |        |  
|         |  | $    | 1,956  |   |      | $ | 35,629 |  | $ | 23,209 |  



132



---

##### Table of Contents

The tax effects of the Companies significant temporary differences, and net operating loss and credit
carryforwards, which comprise the deferred tax assets and liabilities at December 31, 2004 and 2003, are as follows:



|                                               |  |      |         |   |      |   |        |  
|---------------------------------------------- |  | ---- | ------- | - | ---- | - | ------ | -
|                                               |  | 2004 |         |   | 2003 |  
|Assets                                         |  |      |         |   |      |   |        |  
|Accrued and other expenses                     |  | $    | 3,125   |   |      | $ | 5,738  |  
|Net operating loss and credit carryforwards    |  |      | 13,861  |   |      |   | 6,504  |  
|Pension liability                              |  |      | 1,728   |   |      |   |       |  
|Certain intangibles                            |  |      | 463     |   |      |   | 278    |  
|                                               |  |      |         |   |      |   |        |  
|Gross deferred tax assets                      |  |      | 19,177  |   |      |   | 12,520 |  
|Valuation allowance                            |  |      | (10,279 | ) |      |   | (5,313 | )
|                                               |  |      |         |   |      |   |        |  
|                                               |  |      | 8,898   |   |      |   | 7,207  |  
|                                               |  |     
|Liabilities                                    |  |      |         |   |      |   |        |  
|Property, plant, equipment and intangibles     |  |      | 12,580  |   |      |   | 9,606  |  
|Unrepatriated earnings of foreign subsidiaries |  |      | 14,463  |   |      |   |       |  
|                                               |  |      |         |   |      |   |        |  
|Gross deferred tax liabilities                 |  |      | 27,043  |   |      |   | 9,606  |  
|                                               |  |      |         |   |      |   |        |  
|Net deferred tax liability                     |  | $    | 18,145  |   |      | $ | 2,399  |  



At December 31, 2004, the
Companies net deferred tax liability was $18,145, and primarily represents the Companies liability for withholding taxes related to unrepatriated earnings from BCCIs foreign subsidiaries as a result of Apollos decision to
repatriate earnings. At December 31, 2004, the Companies had $13,861 of deferred tax assets related to net operating loss (NOL) carryforwards. These amounts have been offset by a valuation allowance of $10,279 primarily related to
NOLs in Argentina and Borden U.K. The deferred tax assets are reduced by a valuation allowance when it is determined that it is more likely than not that these assets will not be fully utilized in the future. The unreserved NOL carryforward
deferred tax asset of $3,582 pertains to Borden U.K. ($3,098) and Brazil Quimica ($484). These net operating losses were incurred beginning in 1997 and are available for utilization indefinitely, with a limitation in Brazil, where the utilization is
limited to 30% of the taxable income for the year in which the loss is being applied.



At December 31, 2003, the Companies had $6,504 of deferred tax assets related to NOL carryforwards. These amounts were offset by a valuation allowance of $5,313 primarily related to NOLs in Argentina and Borden U.K. The unreserved NOL
carryforward deferred tax asset at year-end of $1,191 pertained to Brazil Quimica ($772) and Borden Australia ($419).



At December 31, 2004, the Companies have $3,059 accrued for probable tax liabilities primarily for BCCI ($1,213) and Borden U.K. ($1,846).



The Canada Revenue Agency is currently auditing BCCI for the period 19911995. The years
19962004 remain open for inspection and examination by various Canadian taxing authorities. Since 1995, BCCI has divested its foods, consumer adhesives and wallcoverings businesses, which operated in Canada. Deposits have been made to offset
the accrued probable additional taxes related to the divestiture of these businesses.



133



---

##### Table of Contents

18. Reclassification



In the Companys originally issued financial statements for the year ended December 31, 2004, transaction-related costs of $14,907 (see Note 5) were classified as
a non-operating expense. However, after discussions with the staff of the U.S. Securities and Exchange Commission, management concluded that classification of transaction related costs as an operating expense would be a better presentation.
Accordingly, the Company has reflected such reclassification in the accompanying Consolidated/Combined Statement of Operations. In addition, the Company has reclassified $5,145 of allocated transaction-related compensation costs from General &
administrative expense to Transaction related costs to appropriately reflect all transaction related costs in a single line item in the accompanying Consolidated/Combined Statement of Operations.



134



---

##### Table of Contents

SIGNATURES



Pursuant to the requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.



BORDEN CHEMICAL, INC.By

/s/ William H. CarterWilliam H. CarterExecutive Vice President and Chief Financial Officer(Principal Financial Officer)




Date: August 22, 2005



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 Company and in the capacities indicated, on the date set forth above.



|                    |  |                                                                |  |                         |  |          
|------------------- |  | -------------------------------------------------------------- |  | ----------------------- |  | ---------
|Name                |  | Title                                                          |  | Signature               |  | Date     
|Craig O. Morrison   |  | Director, Chairman, President and Chief Executive Officer      |  | /s/ Craig O. Morrison   |  | 8/22/2005
|                    |  |                                                                | 
|William H. Carter   |  | Director, Executive Vice President and Chief Financial Officer |  | /s/ William H. Carter   |  | 8/22/2005
|                    |  |                                                                | 
|Joshua J. Harris    |  | Director                                                       |  | /s/ Joshua J. Harris    |  | 8/22/2005
|                    |  |                                                                | 
|Scott M. Kleinman   |  | Director                                                       |  | /s/ Scott M. Kleinman   |  | 8/22/2005
|                    |  |                                                                | 
|Robert V. Seminara  |  | Director                                                       |  | /s/ Robert V. Seminara  |  | 8/22/2005
|                    |  |                                                                | 
|Marvin O. Schlanger |  | Director, Vice Chairman                                        |  | /s/ Marvin O. Schlanger |  | 8/22/2005
|                    |  |                                                                | 
|Jordan C. Zaken     |  | Director                                                       |  | /s/ Jordan C. Zaken     |  | 8/22/2005





135