10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-K

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

For the fiscal year ended December 31, 2002         Commission file number 1-496

                           --------------------------

                              HERCULES INCORPORATED

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

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

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

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

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

         Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Act). Yes [X].

         The aggregate market value of registrant's common stock, $ 25/48 stated
value ("Common Stock")held by non-affiliates based on the closing price on the
last day of the Company's most recently completed second fiscal quarter, or June
28, 2002, was approximately $1.2 billion.

         As of February 28, 2003, registrant had 109,361,651 shares of Common
Stock outstanding, which is registrant's only class of common stock.

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

         Portions of the registrant's definitive Proxy Statement (the "Proxy
Statement"), when filed, will be incorporated by reference in Part III of this
report. Other documents incorporated by reference in this report are listed in
the Exhibit Index (see page 88).

         On the corporate website, www.herc.com, Hercules Incorporated provides
access to the Company's filings with the Securities and Exchange Commission via
a hyperlink to the Commission's website.



                                     PART I

FORWARD-LOOKING STATEMENT

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

ITEM 1.  BUSINESS

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

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

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

         Although price is important to the Company's competitive strategy, the
Company primarily competes based on the performance and quality of its products,
combined with high quality service. The Company strives to continually improve
its products by investing in technology and research and development. The
Company has committed substantial resources to its research and development
efforts. Research and development expenditures totaled approximately $42 million
in 2002. Such expenditures enable the Company to consistently bring products to
market which have improved functional properties or which offer similar
properties at a lower cost. This area has become increasingly important, as
customers have come to rely more on the Company to provide new solutions to
improve their product offerings and processes. Additionally, the Company strives
to make its products more price-competitive by effectively managing its
production costs and sharing savings with customers.

         The Company continually reviews its corporate strategy and directives
in order to compete most effectively in its changing markets. From 1995 through
2000, the Company implemented internal and external initiatives to achieve
growth. The Company divested a number of businesses that did not fit its
strategy and acquired other businesses that complemented its strategy and
product offerings. In 1998, the Company made five acquisitions. The
largest of these was the purchase of BetzDearborn, Inc., a global specialty
company providing water and process treatment to a variety of commercial and
industrial processes. Additionally, the Company acquired Houghton
International's paper chemicals group; Citrus Colloids, a pectin manufacturer;
Alliance Technical Products ("ATP"), a manufacturer of resins serving the
water-based adhesives

                                       2



industry; and the 49% share of FiberVisions owned by its joint venture partner,
making FiberVisions a wholly-owned subsidiary.

         Starting in 2000, the Company implemented a program designed to refocus
its business by monetizing certain assets, thereby generating cash to reduce its
debt, while concentrating on improving the efficiency, profitability and growth
potential of the Company's core businesses. As part of this strategy, the
Company actively sold non-core businesses. In June 2000, Aqualon sold its
nitrocellulose operations, which it had decided to exit in December 1999 due to
economic conditions brought on by a persistent worldwide over-supply. In
September 2000, the Food Gums business, including Citrus Colloids, was sold to
CP Kelco. In May 2001, the hydrocarbon resins business and select portions of
the rosin resins business, including ATP, were sold to Eastman Chemical Company,
the peroxy chemicals business was sold to GEO Specialty Chemicals Inc. and the
Company's interest in a toner resin joint venture was sold to Sanam Corporation
(collectively, the "Resins Divestitures"). The Company received in excess of
$730 million in gross proceeds in consideration for these sales, which was used
to reduce debt.

         In 2001, the Company's strategy was expanded to include an aggressive
and comprehensive cost reduction and work process redesign program to improve
return on capital and cash flow, streamline organizational structure, improve
work processes, consolidate manufacturing and non-manufacturing resources and
better serve customers. The initial objective was to achieve fixed cost
reductions of $100 million on an annualized basis (as compared to 2000 results,
excluding the Food Gums business and the Resins Divestitures) by June 2002 which
was achieved by December 31, 2001. In the beginning of 2002, the cost reduction
target was increased to $200 million in annualized fixed cost reductions (as
compared to 2000 results, excluding the Food Gums business and the Resins
Divestitures), including $75 million for the Water Treatment Business and $125
million for the other remaining businesses to be achieved by December 2002.

         On April 29, 2002, the Company completed the sale of the Water
Treatment Business of its BetzDearborn Division to GE Specialty Materials, a
unit of General Electric Company. The sale price was $1.8 billion in cash,
resulting in net after tax proceeds of approximately $1.7 billion. The Company
used the majority of the proceeds to prepay debt under its senior credit
facility and ESOP credit facility (see Notes 5 and 8 in the Notes to
Consolidated Financial Statements). The Water Treatment Business has been
treated as a discontinued operation as of February 12, 2002. The loss from
discontinued operations for the year ended December 31, 2002 includes an
after-tax loss on the disposal of the business of $230 million.

         Subsequent to the sale of the Water Treatment Business, the Company
raised the cost reduction target to be achieved by December 2002 relating to its
comprehensive cost reduction and work process redesign program to $150 million
in annualized fixed cost reductions (as compared to 2000 results, excluding the
Food Gums business, the Resins Divestitures and the Water Treatment Business)
for the remaining businesses. At the end of 2002, the Company achieved
approximately $160 million in annualized cost reductions, exceeding the
Company's twice upwardly revised cost reduction target. Approximately 1,330
employees have left or will leave the Company pursuant to this initiative.

         Over the long term, the Company is focused on increasing its
competitive advantage through work process redesign; value-added innovation to
our customers' products and operations; leveraging strengths in key markets and
strengthening growth and profitability through product and service extensions
and small bolt-on acquisitions.


         On March 20, 2003, the Hercules Shareholders' Committee for New
Management filed a preliminary proxy statement with the SEC announcing that it
will solicit proxies to elect four candidates to the Board of Directors of
Hercules Incorporated at the upcoming 2003 Annual Meeting. The Committee is
comprised of International Specialty Products Inc., a privately-held
international specialty chemicals company, four current members of the Hercules
Board and the Committee's four nominees for election to the Board of Directors
at this year's annual meeting.


REPORTABLE SEGMENTS

         The Company operates through two reportable segments and four
divisions. The Performance Products segment is comprised of Pulp and Paper and
Aqualon. The Engineered Materials and Additives segment is composed of
FiberVisions and Pinova (formerly Rosin and Terpenes). The financial information
regarding these segments, which includes net sales and profit from operations
for each of the three years ended December 31, 2002, 2001 and 2000 and capital
employed as of December 31, 2002, 2001 and 2000, is provided in Note 20 to the
Consolidated Financial Statements (See Part II, Item 8).

PERFORMANCE PRODUCTS

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

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

                                       3



         Products offered by Aqualon are designed to manage the properties of
aqueous (water-based) systems. Most of the products are derived from renewable
natural raw materials and are sold as key ingredients to other manufacturers
where they are used as small-quantity additives to provide functionality such as
thickening, water retention, rheology control, film formation, suspending and
emulsifying action and binding power. Major end uses for the division's products
include personal care products, food additives, pharmaceutical products,
construction, paints, coatings and oil recovery, where Aqualon's polymers are
used to modify viscosity, gel strength and/or fluid loss.

         At December 31, 2002, the principal products and primary markets of
this segment were:



    DIVISION                             PRINCIPAL PRODUCTS                                     PRIMARY MARKETS
- ------------------     -------------------------------------------------------  -----------------------------------------------
                                                                          
                       Functional Performance chemicals:                        Makers of tissues, paper towels, packaging,
                                                                                beverage containers, newsprint, papers for
                       Sizing (improving printability), strength, tissue        magazines and books, printing and writing paper
                       creping, and coatings.                                   and other stationery items such as labels and
PULP AND PAPER         -------------------------------------------------------  envelopes.
                       Process treatment chemicals:

                       Deposit, contaminant, microbiological and foam control,
                       clarification, retention, drainage, felt conditioning,
                       deinking, fiber recovery and water closure.
                       -------------------------------------------------------
                       Water treatment chemicals:

                       Utility systems, cooling water and water clarification.
- ------------------     -------------------------------------------------------  -----------------------------------------------
                       Water-soluble polymers:                                  Manufacturers of interior and exterior
                                                                                architectural paints, oilfield service
                       Hydroxyethylcellulose (HEC), Carboxymethylcellulose      companies for oil and gas drilling and
    AQUALON            (CMC), Methylcellulose (MC) and derivatives,             recovery, paper mills, construction material
                       Hydroxypropylcellulose (HPC) and Guar and its            manufacturers and makers of oral hygiene
                       derivatives.                                             products, personal care products and
                                                                                pharmaceuticals.
                       -------------------------------------------------------  -----------------------------------------------
                       Solvent-soluble polymers:                                Producers of coating resins, printing inks and
                                                                                aviation fluids.
                       Pentaerythritol (PE) and Ethylcellulose (EC).
- ------------------     -------------------------------------------------------  -----------------------------------------------


ENGINEERED MATERIALS AND ADDITIVES

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

         Pinova consists of the rosin and terpenes specialty business. Pinova
manufactures wood and gum rosin resins and terpene specialties. Product
applications include adhesives, rubber and plastic modifiers, food and beverages
and aroma chemicals.

         At December 31, 2002, the principal products and primary markets of
this segment were:

                                       4





      DIVISION                           PRINCIPAL PRODUCTS                                     PRIMARY MARKETS
- ------------------     -------------------------------------------------------  -----------------------------------------------
                                                                          
                       Staple fibers: for hygiene products, wipes,              Makers of nonwoven and woven fabrics for
                       geotextiles and filtration.                              applications including baby care, feminine
    FIBERVISIONS       -------------------------------------------------------  care, adult incontinence, wipes, geotextile,
                       Filament yarns: for residential and commercial           construction and upholstery.
                       upholstery fabrics.
- ------------------     -------------------------------------------------------  -------------------------------------------------
                       Rosin resins: for adhesives, flavors and fragrances.     Makers of consumer and industrial products such
      PINOVA           -------------------------------------------------------  as masking, packaging, arts and duct tape,
                       Terpene specialties: for flavors, fragrances,            construction materials, beverages, chewing gum,
                       disinfectants and plastics.                              plastics, adhesives, fragrances and flavors.
- ------------------     -------------------------------------------------------  -----------------------------------------------


RAW MATERIALS AND ENERGY SUPPLY

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

         Important raw materials for Pulp and Paper are cationic and anionic
polyacrylamides and emulsions, biocides, amines, surfactants, rosin, adipic
acid, epichlorohydrin, fumaric acid, stearic acid, diethylenetriamine,
phosphorous trichloride, wax and starch.

         Raw materials important to Aqualon are cellulose (derived from wood
pulp and cotton linters), and guar splits, both renewable resources. Other
commodity and specialty chemical inputs include acetaldehyde, fatty acids, ethyl
chloride, ethylene oxide, propylene oxide, chlorine, caustic soda,
monochloroacetic acid (MCAA), methyl chloride, and inorganic acids. Aqualon is a
small consumer of most of these raw materials, except for MCAA, which is
consumed in CMC production. Other raw materials are bulk commodities or readily
available specialty chemicals.

         The important raw materials for the Engineered Materials and Additives
segment are polypropylene, polyethylene, pine wood stumps, limonene, gum rosin
and crude sulfate terpentine.

         FiberVisions purchases polypropylene flakes and pellets based on
discounts from market prices as indicated domestically by the CDI and
internationally by the Platts and ICIS Indices. FiberVisions has historically
been limited in its supplier base because a major processing line required
polypropylene in flake form, which is not as readily available as pellets.
FiberVisions has undertaken initiatives to expand its qualified flake suppliers,
as well as modify major lines to run pellets. FiberVisions has fully qualified
alternative suppliers which allows greater flexibility and reliability of
supply.

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

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

COMPETITION

         The specialty chemicals industry is highly fragmented and its
participants offer a broad array of product lines and categories, representing
many different products designed to meet specific customer requirements.
Individual product or service offerings compete on a global, regional and local
level due to the nature of the businesses and products, as well as the
end-markets and customers served. The industry has become increasingly global as
participants focus on establishing and maintaining leadership positions in
relatively narrow market niches. Many of the Company's product lines face the
competitive domestic and international pressures discussed above, including
industry consolidation, pricing pressures and competing technologies. In Pulp
and Paper, for example, the end-markets are consolidating rapidly and some of
the Company's competitors are attempting to enhance their product offerings on a
worldwide basis. Customer stability in Pinova is expected to remain strong due
to the fact that the majority of Pinova's products are unique and have strong
brand recognition. In addition, certain of the Company's businesses are subject
to intense pricing pressures in various product lines, such as fibers in its
hygiene products line. FiberVisions, as a fibers manufacturer for carded
non-woven hygienic applications,

                                       5



faces competition from spunbond (SB) and spunbond/melt blown/spunbond (SMS)
technologies. SB/SMS products may offer strength-driven cost savings compared to
the products of FiberVisions in specific applications; however, FiberVisions
believes that its carded products provide improved softness, uniformity, stretch
and liquid management properties preferred by certain segments of the disposable
diaper and other hygiene products markets. The threat of new producers in the
thermal-bonded hygienic product line is relatively low due to high entry
barriers as the production process involves significant investment in plant and
equipment.

PATENTS AND TRADEMARKS

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

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

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

RESEARCH AND DEVELOPMENT

         The Company is heavily focused on product innovation as one of its key
growth strategies. Research and development efforts are directed toward the
discovery and development of new products and processes, the improvement and
refinement of existing products and processes, the development of new
applications for existing products and cost improvement initiatives. Hercules
spent $42 million on research activities during 2002, as compared to $53 million
in 2001 and $64 million in 2000. The decrease in the amounts spent for research
and development activities is due to business divestitures and initiatives
relating to the redesign of work processes, including more focused programs.

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

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

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

         Aqualon focuses its research and development efforts on market oriented
product development, manufacturing process improvement, and responsive technical
service to customers. New product development is focused on products which
manage the physical properties of water based systems, such as latex paint,
construction mortars, and personal care products, to meet customer demand for
improved performance and efficiency.

         Aqualon has application and development laboratories in Europe, Asia,
and the Americas that provide technical service to customers. At these
laboratories, teams work in a network to develop products, identify new
applications, and solve customer problems.

         Research and development efforts in FiberVisions are primarily focused
on developing new fiber applications. A continued hygiene focus is to improve
fiber strength while enhancing hygiene product properties for loft, softness and
stretch, thereby creating a platform to better compete with SB/SMS products.
Research and development efforts in FiberVisions are focused on four key
platforms: high tenacity for industrial applications; dyeable polypropylene
fibers for apparel and upholstery; wetability for wipes; and shaped fibers for
improved adhesion, wicking, coverage and visual appearance. The industrial and
textile product units are investigating the use of specific fibers for new
applications in the upholstery, wipes, geotextiles and construction
applications.

                                       6



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

         Pinova focuses its research and development efforts on market driven
product development and cost improvement techniques in its production processes.

ENVIRONMENTAL MATTERS

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

EMPLOYEES

         As of December 31, 2002, the Company had 5,095 employees worldwide.
Approximately 2,800 of the worldwide employees were located in the United
States, of which about 23% were represented by various local or national unions.
At December 31, 2001, the Company had 9,665 employees worldwide, including
approximately 3,900 employees involved in the Water Treatment
Business.

INTERNATIONAL OPERATIONS

         Information on net sales and long-lived assets by geographic area for
each of the three years ended December 31, 2002, 2001 and 2000 appears in Note
20 to the Consolidated Financial Statements (See Part II, Item 8). Direct export
sales from the United States to unaffiliated customers were $110 million, $116
million and $129 million for 2002, 2001 and 2000, respectively. The Company's
operations outside the United States are subject to the usual risks and
limitations related to investments in foreign countries, such as fluctuations in
currency values, exchange control regulations, wage and price controls,
employment regulations, effects of foreign investment laws, governmental
instability (including expropriation or confiscation of assets) and other
potentially detrimental domestic and foreign governmental policies affecting
United States companies doing business abroad, including risks related to
terrorism and international hostilities.

ITEM 2.  PROPERTIES

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

Performance Products

         PULP AND PAPER - Beringen, Belgium; Burlington, Ontario, Canada;
         Busnago, Italy; Chicopee, Massachusetts; Franklin, Virginia;
         Hattiesburg, Mississippi; Helsingborg, Sweden; Kalamazoo, Michigan; Kim
         Cheon, Korea; Macon, Georgia; Mexico City, Mexico; Milwaukee,
         Wisconsin; Nantou, Taiwan; Pandaan, Indonesia; Paulinia, Brazil;
         Pendlebury, United Kingdom; Pilar, Argentina; Portland, Oregon;
         Sandarne, Sweden; Savannah, Georgia; Shanghai, China; Sobernheim,
         Germany; Tampere, Finland; Tarragona, Spain; Voreppe, France; and
         Zwijndrecht, The Netherlands.

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

Engineered Materials and Additives

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

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

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

ITEM 3.  LEGAL PROCEEDINGS

ENVIRONMENTAL

         In the ordinary course of its business, the Company is subject to
numerous environmental laws and regulations covering compliance matters or
imposing liability for the costs of, and damages resulting from, cleaning up
sites, past spills,

                                       7



disposals and other releases of hazardous substances. Changes in these laws and
regulations may have a material adverse effect on the Company's financial
position and results of operations. Any failure by the Company to adequately
comply with such laws and regulations could subject the Company to significant
future liabilities.

         Hercules has been identified as a potentially responsible party (PRP)
by U.S. federal and state authorities, or by private parties seeking
contribution, for the cost of environmental investigation and/or cleanup at
numerous sites. The range of the reasonably possible share of costs for the
investigation and cleanup of current and former operating sites, and other
locations where the Company may have a known liability is between $88 million
and $253 million. The actual costs will depend upon numerous factors, including
the number of parties found responsible at each environmental site and their
ability to pay; the actual methods of remediation required or agreed to;
outcomes of negotiations with regulatory authorities; outcomes of litigation;
changes in environmental laws and regulations; technological developments; and
the years of remedial activity required, which could range from 0 to 30.

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

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

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

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

         On February 8, 2000, the District Court issued a final judgment on the
allocation between Hercules and Uniroyal finding Uniroyal liable for 2.6 percent
and Hercules liable for 97.4 percent of the costs at issue. Hercules timely
appealed that judgment. Oral argument on both appeals was held before the Eighth
Circuit on June 12, 2000. On April 10, 2001, the United States Court of Appeals
for the Eighth Circuit issued an opinion in the consolidated appeals described
above. In that opinion, the Appeals Court reversed the District Court's decision
which had held Hercules jointly and severally liable for costs incurred and to
be incurred at the Jacksonville site, and remanded the case back to the District
Court for several determinations, including a determination of whether the harms
at the site giving rise to the government's claims were divisible. The Appeals
Court also vacated the District Court's allocation decision holding Hercules
liable for 97.4 percent of the costs at issue, ordering that these issues be
revisited following further proceedings with respect to divisibility. Finally,
the Appeals Court affirmed the judgment of liability against Uniroyal.

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

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

                                       8



         In 1992, Hercules brought suit against its insurance carriers for past
and future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas, site (see
discussion above) was completed. The jury returned a "Special Verdict Form" with
findings that, in conjunction with the Court's other opinions, were used by the
Court to enter a judgment in August 1999. The judgment determined the amount of
Hercules' recovery for past cleanup expenditures and stated that Hercules is
entitled to similar coverage for costs incurred since September 30, 1997 and in
the future. Hercules has not included any insurance recovery in the estimated
range of costs above. Since entry of the Court's August 1999 order, Hercules has
entered into settlement agreements with several of its insurance carriers and
has recovered certain settlement monies. The terms of those settlements and the
amounts recovered are confidential. On August 15, 2001, the Delaware Supreme
Court issued a decision in Hercules Incorporated v. Aetna Casualty & Surety
Company, et al., Del. Super., C.A. No. 92C-10-105 and 90C-FE-195-1-CV
(consolidated). In its decision, the Delaware Supreme Court affirmed the trial
court in part, reversed the trial court in part and remanded the case for
further proceedings. The specific basis upon which the Delaware Supreme Court
reversed the trial court was the trial court's application of pro rata
allocation to determine the extent of the insurers' liability. Following
settlements with two additional insurers, the terms of which are confidential,
Hercules decided not to pursue this litigation against the remaining defendants.
This matter was dismissed with prejudice on or about February 3, 2003.

         The Allegany Ballistics Laboratory ("ABL") is a government-owned
facility which was operated by Hercules from 1945 to 1995. The United States
Department of the Navy has notified Hercules that the Navy would like to
negotiate with Hercules with respect to certain environmental liabilities which,
the Navy alleges, are attributable to Hercules' past operations at ABL. The Navy
alleges that, pursuant to CERCLA, it has spent a total of $24.8 million and
expects to spend an additional $60 million over the next 10 years. The Company
is currently investigating the Navy's allegations, including the basis of the
Navy's claims, and whether the contracts with the government pursuant to which
the Company operated ABL may insulate the Company from some or all of the
amounts sought. At this time, however, the Company cannot reasonably estimate
its liability, if any, with respect to ABL and, accordingly, has not included
this site in the range of its environmental liabilities reported above.

         At December 31, 2002, the accrued liability for environmental
remediation was $88 million. The extent of liability is evaluated quarterly
based on currently available information, including the progress of remedial
investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules, and the resolution of any of these matters during a specific period
could have a material effect on the quarterly or annual results of that period.
Effective January 1, 2003, the Company is subject to the provisions of SFAS 143
(See "Management's Discussion and Analysis of Financial Condition and Results of
Operations - Recent Accounting Pronouncements").

LITIGATION

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

         Since entering into those agreements, the Company has continued to
receive and settle or otherwise resolve claims on an on-going basis. Between
January 1, 2002 and December 31, 2002, the Company received approximately 11,000
new claims, approximately half of which were included in "consolidated"
complaints naming anywhere from one hundred to thousands of plaintiffs and a
large number of defendants, but providing little information connecting any
specific plaintiff's alleged injuries to any specific defendant's products or
premises. It is the Company's belief that a significant majority of these
"consolidated" claims will be dismissed for no payment. During that same time
period, the Company also received approximately 13,000 other new claims, most of
which were included in "consolidated" complaints, which have either been
dismissed without payment or are in the process of being dismissed without
payment, but with plaintiffs retaining the right to re-file should they be able
to establish exposure to an asbestos-containing product for which the Company
bears liability. We are continuing to evaluate whether the claims experience of
2002, which represents a significant increase over prior years, is an anomaly or
a new trend.

         With respect to total claims pending, as of February 28, 2003, there
were approximately 18,300 unresolved claims, of which approximately 940 were
premises claims. In addition, there were approximately 2,340 unpaid claims which
have been

                                       9



settled or are subject to the terms of a settlement agreement. In addition, as
of February 28, 2003, there were approximately 13,340 claims (including the
13,000 claims noted in the above paragraph) which have been dismissed without
payment or are in the process of being dismissed without payment.

         The Company anticipates that the primary and first level excess
insurance policies referenced above will likely exhaust over the next 2 to 4
months, assuming that the rate of settlements and payments remains relatively
consistent with the Company's past experience. Nonetheless, based on the current
number of claims pending, the amounts the Company anticipates paying to resolve
those claims which are not dismissed or otherwise resolved without payment, and
anticipated future claims, the Company believes that it and its former
subsidiary together have sufficient additional insurance to cover the majority
of its current and estimated future asbestos-related liabilities, as discussed
in the paragraph below.

         The foregoing is based on the Company's assumption that the number of
future claims filed per year and claim resolution payments will vary
considerably from year-to-year and by plaintiff, disease, venue, and other
circumstances, but will, when taken as a whole, remain relatively consistent
with the Company's experience to date and will decline as the population of
potential future claimants expires due to non-asbestos-related causes. It is
also based on the preliminary results of the study discussed below, the
Company's evaluation of potentially available insurance coverage and its review
of the relevant case law. However, the Company recognizes that the number of
future claims filed per year and claim resolution payments could greatly exceed
those reflected by its past experience and contemplated by the study referenced
below, that the Company's belief of the range of its reasonably possible
financial exposure could change as the study referenced below continues, that
its evaluation of potentially available insurance coverage may change depending
upon numerous variables including risks inherent in litigation and the risk that
one or more insurance carriers may refuse or be unable to meet its obligations
to the Company, and that conclusions resulting from its review of relevant case
law may be impacted by future court decisions or changes in the law.

         The Company is seeking defense and indemnity payments or an agreement
to pay from those carriers responsible for excess coverage whose levels of
coverage have been or will soon be reached. Although those excess carriers have
not yet agreed to defend or indemnify it, the Company believes that it is likely
that they will ultimately agree to do so, and that the majority of its estimated
future asbestos-related costs will ultimately be paid or reimbursed by those
carriers. However, if the Company is not able to reach satisfactory agreements
with those carriers prior to exhaustion of the primary and first level excess
insurance policies now covering the majority of its current asbestos-related
claims, then, beginning as early as the second quarter of 2003, the Company
might be required to completely fund these matters while it seeks reimbursement
from its carriers. In order to maximize the likelihood of obtaining insurance
payments for these liabilities, on November 27, 2002, the Company initiated
litigation against its excess insurance carriers in a matter captioned Hercules
Incorporated v. OneBeacon, et al., Civil Action No. 02C-11-237 (SCD), Superior
Court of Delaware, New Castle County. Notwithstanding the filing of this
litigation, the Company is continuing settlement discussions with several of its
key insurers.


         The Company has commissioned a study of its asbestos-related
liabilities. That study, which is in progress and will continue over the next
several quarters, is being conducted by Professor Eric Stallard, who is a
Research Professor of Demographic Studies at a major national university and a
Member of the American Academy of Actuaries. Professor Stallard is a consultant
with broad experience in estimating such liabilities. Based on the initial
findings of that study, the Company estimates that its reasonably possible
financial exposure for these matters ranges from $200 million to $500 million.
Due to inherent uncertainties in estimating the timing and amounts of future
payments, this range does not include the effects of inflation and has not been
discounted for the time value of money. In addition, the range of financial
exposures set forth above does not include estimates for future legal costs. It
is the Company's policy to expense these costs as incurred. As stated above, the
Company presently believes that the majority of this range of financial
exposures will ultimately be funded by insurance proceeds. Cash payments related
to this exposure are expected to be made over an extended number of years and
actual payments, when made, could be for amounts in excess of the range due to
potential future changes in estimates as well as the effects of inflation.


         Due to the dynamic nature of asbestos litigation and the present
uncertainty concerning the participation of its excess insurance carriers, the
Company's estimates are inherently uncertain, and these matters may present
significantly greater financial exposures than presently anticipated. In
addition, the asbestos study referenced in the above paragraph is continuing,
and further analysis combined with new data received in the future could result
in a material modification of the range of reasonably possible financial
exposure set forth above. As a result of all of the foregoing, the Company's
liability with respect to asbestos-related matters could exceed present
estimates and may require a material change in the accrued liability for these
matters within the next twelve months. If the Company's liability does exceed
amounts recorded in the balance sheet, the Company presently believes that the
majority of any additional liability it may reasonably anticipate will be paid
or reimbursed by its insurance carriers.

         The initial findings of the study referenced above identify a range of
the Company's reasonably possible financial exposure for these matters. The
Company is not presently able to specify its best estimate of its liability
within that range. The Company recorded a gross accrual of $225 million for
present and future potential asbestos claims before anticipated insurance
recoveries resulting in a net charge of $65 million related to these matters in
the period ended September 30, 2002. At December 31, 2002, the Company has a
remaining accrual of $216 million for the gross liability. The Company believes
that it is probable that $137 million of the $216 million accrual will be funded
by or recovered from insurance carriers. At December 31, 2002, the consolidated
balance sheet reflects a current insurance receivable of $9 million and a
long-term insurance receivable of $128 million. The Company, in conjunction with
outside advisors, will continue to study its asbestos-

                                       10



related exposures, insurance recovery expectations, and reserves on an on-going
quarterly basis, and make adjustments as appropriate.

         In June 1998, Hercules and David T. Smith Jr., a former Hercules
employee and plant manager at the Brunswick plant, along with Georgia-Pacific
Corporation and AlliedSignal Inc., were sued in Georgia State Court by 423
plaintiffs for alleged personal injuries and property damage. This litigation is
captioned Coley, et al. v. Hercules Incorporated, et al., No. 98 VSO 140933 B
(Fulton County, Georgia). Plaintiffs allege they were damaged by the discharge
of hazardous waste from the companies' plants. On February 11, 2000, the Georgia
State Court dismissed Georgia-Pacific Corporation and AlliedSignal Inc., without
prejudice. In September 2000, David T. Smith Jr., was dismissed by the Georgia
State Court with prejudice. On July 18, 2000, the Company was served with a
complaint in a case captioned Erica Nicole Sullivan, et al. v. Hercules
Incorporated and David T. Smith, Jr., Civil Action File No. 00-1-05463-99 (Cobb
County, Georgia). Based on the allegations contained in the complaint, this
matter is very similar to the Coley litigation, and is brought on behalf of
approximately 700 plaintiffs for alleged personal injury and property
damage arising from the discharge of hazardous waste from Hercules' plant. The
Company has reached an agreement in principle to settle the claims of all but
six of these plaintiffs for an amount which is confidential, but which is not
material to the financial condition of the Company.

         In August 1999, the Company was sued in an action styled as Cape
Composites, Inc. v. Mitsubishi Rayon Co., Ltd., Case No. 99-08260 (U.S. District
Court, Central District of California), one of a series of similar purported
class action lawsuits brought on behalf of purchasers (excluding government
purchasers) of carbon fiber and carbon prepreg in the United States from the
named defendants from January 1, 1993 through January 31, 1999. The lawsuits
were brought following published reports of a Los Angeles federal grand jury
investigation of the carbon fiber and carbon prepreg industries. In these
lawsuits, plaintiffs allege violations of Section 1 of the Sherman Antitrust Act
for alleged price fixing. In September 1999, these lawsuits were consolidated by
the Court into a case captioned Thomas & Thomas Rodmakers v. Newport Adhesives
and Composites, Case No. CV-99-07796-GHK (CTx) (U.S. District Court, Central
District of California), with all related cases ordered dismissed. This lawsuit
is proceeding through discovery and motion practice. On May 2, 2002, the Court
granted plaintiffs' Motion to Certify Class. The Company is named in connection
with its former Composites Products Division, which was sold to Hexcel
Corporation in 1996, and has denied liability and will vigorously defend this
action.

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

         In June 2002, a purported class action was filed in Massachusetts under
the caption Saul M. Ostroff, et al. v. Newport Adhesives, et al., Civil Action
No. 02-2385, Superior Court of Middlesex County. This matter is a purported
class action brought on behalf of consumers who purchased merchandise
manufactured with carbon fiber, and alleges the same types of price fixing
activities alleged in the actions described in the above two paragraphs. In
October 2002, the Company was notified that Horizon Sports Technologies had
"opted out" of the federal antitrust class action described above (Thomas &
Thomas Rodmakers) and filed its own suit against Hercules and the other
defendants in that action (Horizon Sports Technologies, Inc. v. Newport
Adhesives and Composites, Inc., et al., Case No. CV02-8126 FMC (RNEX), U.S.
District Court, Central District of California, Western Division).

         Further, in April 2002, a related "Qui Tam" action was unsealed by the
U.S. District Court for the Southern District of California. That action is
captioned Randall M. Beck, et al. v. Boeing Defense and Space Group, Inc., et
al., (Civil Action No. 99 CV 1557 JM JAH), was filed under seal in 1999, and is
a "False Claims" action brought pursuant to the False Claims Act (31 U.S.C.
Section 729 et seq.). In that action, the relators, in the name of the United
States Government, allege the same price fixing activities which are the subject
of the above-described actions. The relators then allege that those alleged
price fixing activities resulted in inflated prices being charged by the
defendant carbon fiber manufacturers to the defendant defense contractors, who,
in turn, submitted claims for payment to the United States Government under
various government contracts. It is alleged that those claims for payment were
"false claims" because the prices charged for the carbon fiber and carbon
prepreg were "fixed" contrary to the laws of the United States. The Company
denies liability and will vigorously defend each of these actions.

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

         On September 28, 2000, the Company sold its Food Gums Division to CP
Kelco ApS, a joint venture that the Company entered into with Lehman Brothers
Merchant Banking Partners II, L.P. CP Kelco also acquired the biogums

                                       11



business of Pharmacia Corporation (formerly Monsanto Company). In April 2001, CP
Kelco U.S., Inc., a wholly-owned subsidiary of CP Kelco ApS, sued Pharmacia (CP
Kelco U.S., Inc. v. Pharmacia Corporation, U.S. District Court for the District
of Delaware, Case No. 01-240-RRM) alleging federal securities fraud, common law
fraud, breach of warranties and representations, and equitable fraud. In
essence, the lawsuit alleges that Pharmacia misrepresented the value of the
biogums business, resulting in damages to CP Kelco U.S., including the
devaluation of CP Kelco U.S.'s senior debt by the securities markets. The
complaint seeks over $430 million in direct damages, as well as punitive
damages. In June 2001, Pharmacia filed a third-party complaint against the
Company and Lehman. That complaint seeks contribution and indemnification from
the Company and Lehman, jointly and severally, for any damages that may be
awarded to CP Kelco U.S. in its action against Pharmacia. The Company believes
that the third-party lawsuit against it and Lehman is without merit and filed a
Motion for Judgment on the Pleadings, which was granted by the Magistrate Judge
on September 19, 2002. In March 2003, the Magistrate Judge's ruling was adopted
by the District Court judge and the Company was dismissed from this case. The
Company continues to deny any liability to Pharmacia, and should the ruling
dismissing the Company be appealed, the Company will vigorously defend that
appeal.

         On January 31, 2003, the Court granted a Motion for Class Certification
in a lawsuit captioned Douglas C. Smith, Individually and on Behalf of All
Others Similarly Situated v. Hercules Incorporated and Thomas Gossage, CA No.
01C-08-291 WCC, Superior Court of Delaware, New Castle County. This lawsuit,
which was filed on August 31, 2001, on behalf of Mr. Smith and a class of
approximately 130 present and former Hercules employees, seeks payments under
the "Integration Synergies Incentive Compensation Plan" (the "Plan"), a program
put into place by the Company following its acquisition of BetzDearborn Inc. in
October 1998. The goal of the Plan was to provide certain financial incentives
to specific employees who were deemed to have significant impact on the
integration of BetzDearborn Inc. into Hercules Incorporated. The amount to be
paid under the Plan was tied to the successful achievement of "synergies," which
were defined as the annualized reduction of expenses or improvement of profits
realized as a result of the integration of BetzDearborn Inc. into Hercules. The
lawsuit essentially alleges that the payments made under the Plan were not
adequate and that the Company breached the terms of the Plan. The lawsuit seeks
payments of between $25 million and $30 million, although the Company does not
believe that any payments are owed to the class members. In February 2003,
plaintiffs agreed to dismiss Thomas Gossage from the lawsuit. Discovery is
ongoing. The Company denies any liability to the plaintiffs and is vigorously
defending this action.

         At December 31, 2002, the consolidated balance sheet reflects a current
liability of approximately $28 million and a long-term liability of
approximately $193 million for litigation and claims. These amounts represent
management's best estimate of the probable and reasonably estimable losses
related to litigation or claims. The extent of the liability and recovery is
evaluated quarterly. While it is not feasible to predict the outcome of all
pending suits and claims, the ultimate resolution of these matters could have a
material effect upon the financial position of Hercules, and the resolution of
any of the matters during a specific period could have a material effect on the
quarterly or annual operating results for that period.

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

         No matter was submitted to a vote of security holders during the fourth
quarter of 2002 through the solicitations of proxies or otherwise.

EXECUTIVE OFFICERS OF THE REGISTRANT

      The name, age and current position of each executive officer of Hercules
as of February 28, 2003 are listed below. There are no family relationships
among executive officers.



       NAME                   AGE                                  CURRENT POSITION
                                  
William H. Joyce              67        Chairman and Chief Executive Officer
Fred G. Aanonsen              55        Vice President and Controller
Edward V. Carrington          60        Vice President, Human Resources
Richard G. Dahlen             63        Chief Legal Officer
Robert C. Flexon              44        Vice President, Work Processes and Corporate Resources and Development
Israel J. Floyd               56        Corporate Secretary and General Counsel
Bruce W. Jester               51        Vice President, Taxes
Stuart C. Shears              52        Vice President and Treasurer
Brian L. Pahl                 45        Vice President and General Manager, Pulp and Paper Division
Kendall W. Patterson          56        Vice President, SHERA and Manufacturing Excellence
Craig A. Rogerson             46        Vice President and General Manager, FiberVisions and Pinova
Allen A. Spizzo               45        Vice President, Corporate Affairs, Strategic Planning & Corporate Development


                                       12



                                  
Richard J. Sujdak             52        Director, Central Research Services
John Televantos               50        Vice President and General Manager, Aqualon Division




         William H. Joyce joined Hercules as Chief Executive Officer in May 2001
and became Chairman in June 2001. Dr. Joyce had been Chairman, President and
Chief Executive Officer of Union Carbide Corporation since 1996 where he had
been employed since 1957. From 1995 to 1996, Dr. Joyce was President and Chief
Executive Officer and from 1993 to 1995, he was President and Chief Operating
Officer. Prior to that, Dr. Joyce had been Executive Vice President in charge of
operations since 1992. Dr. Joyce holds a B.S. degree in Chemical Engineering
from Pennsylvania State University and an M.B.A. and Ph.D. from New York
University. Dr. Joyce received the National Medal of Technology Award in 1993,
the Plastics Academy's Industry Achievement Award in 1994 and Lifetime
Achievement Award in 1997 and the 2003 Perkin Medal from the Society of Chemical
Industry (American Section). In 1997, he was inducted into the National Academy
of Engineering. Dr. Joyce is a director of CVS Corporation. Dr. Joyce is also a
trustee of the Universities Research Association, Inc. and Co-Chairman of the
Government-University-Industry Research Round Table of the National Academies.
Dr. Joyce was Chairman of the Board of Society of Plastics Industry and on the
Executive Committee of the American Chemical Council.


         Fred G. Aanonsen joined Hercules in July 2001. Prior to joining
Hercules, he spent 25 years at Union Carbide Corporation, where most recently he
had been the Director of Accounting and Financial Processing since 1998 and
Business Director for the Finance SAP Design and Implementation Team from 1995
to 1998. Mr. Aanonsen is a Certified Public Accountant and a member of the
American Institute of Certified Public Accountants, the New York State Society
of Certified Public Accountants and the Financial Executives Institute.

         Edward V. Carrington originally joined Hercules when it acquired
Radiant Color in 1969 and assumed his current position in June 2002. He had been
Vice President, Human Resources and Corporate Resources since June 2001. Prior
to that, he had served in a consulting role since October 2000. From 1997 until
2000, he was Vice President of Buttonwood Cottages, Inc., a vacation resort
complex, and President of Rentals in Paradise, Inc., a vacation home rental
business. From 1992 until his retirement from Hercules in 1997, he was Vice
President, Human Resources. Mr. Carrington is a trustee of Christiana Care.

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

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

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

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

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

         Brian L. Pahl joined Hercules in 1980 and has held his current position
since 2000. He had been Vice President and General Manager, Resins Division
since 1999. Prior to that, he had been Worldwide Business Director, Sizing,
Paper Technology Division since 1998 and Business Director, Strength, Worldwide
since 1996.

         Kendall W. Patterson joined Hercules in 1968 and has held his current
position since 2001. He had been Vice President and General Manager, Resins
Division since 2000. Prior to that, he had been Vice President, Safety, Health
and Environment since 1997.

         Craig A. Rogerson joined Hercules in 1979 and has held his current
position since April 2002. After rejoining Hercules in 2000, he had been Vice
President and General Manager of BetzDearborn since August 2000 and Vice
President of Business Operations for BetzDearborn Division since May 2000. Prior
to that, he was President and CEO of Wacker Silicones Corporation since 1997.

                                       13



         Allen A. Spizzo joined Hercules in 1979 and has held his current
position since July 2002. He had been Vice President, Investor Relations and
Strategic Planning since 2000. After rejoining Hercules in 1997, he became
Director of Corporate Development. Prior to that, he had been Group Vice
President, Metton America Incorporated in Atlanta, GA from 1995 to 1997.

         Richard J. Sujdak joined Hercules in 1998 and has held his current
position since 2000. Following the acquisition of BetzDearborn by Hercules in
1998, he was named senior program manager of the Utilities Groups in Trevose,
which include Boiler, Cooling and Liquid/Solids Separation Technology. Prior to
the acquisition, he had been transferred to the Metals Process group of
BetzDearborn in 1994 as Assistant Vice President of Research, becoming Vice
President of R&D in 1996.

         John Televantos joined Hercules in April 2002 as Vice President and
General Manager, Aqualon Division. He had been Chief Executive Officer and,
prior to that, Chief Operating Officer, of Foamex International in Linwood,
Pennsylvania during the period from June 1999 through December 2001. Prior to
that, he was Vice President, Development Businesses & Research at Lyondell
Chemical Company in Newtown Square, Pennsylvania since 1998.

                                       14



                                     PART II

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

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

         The approximate number of holders of record of its common stock ($25/48
stated value) as of February 28, 2003 was 17,319.

         The following table sets forth, for the periods indicated, the high and
low prices per share of the Company's common stock, as reported on the New York
Stock Exchange:



                                                               High           Low
                                                               ----           ---
                                                                      
2001
First Quarter..............................................   $20.00        $12.15
Second Quarter.............................................   $14.45        $11.00
Third Quarter..............................................   $12.00        $ 6.50
Fourth Quarter.............................................   $10.94        $ 7.43

2002
First Quarter..............................................   $13.70        $ 8.85
Second Quarter.............................................   $13.50        $11.37
Third Quarter..............................................   $12.17        $ 8.45
Fourth Quarter.............................................   $10.50        $ 8.60


         On December 31, 2002, the closing price of the common stock was $8.80.

         The payment of quarterly dividends was suspended in the fourth quarter
of 2000, subject to reconsideration by the Board in its discretion, when
warranted under appropriate circumstances and subject to restrictions in the
indenture governing the Company's 11 1/8% senior notes due 2007 and the senior
credit facility. Quarterly dividends of $0.27 per share were declared and paid
for each of the first two quarters of 2000 and a quarterly dividend of $0.08 per
share was declared and paid for the third quarter 2000. No dividends were paid
in 2001 or 2002.

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

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

         The 11 1/8% senior notes were subject to a registration rights
agreement that required Hercules to file an exchange offer registration
statement with the Securities and Exchange Commission, pursuant to which the
Company offered to exchange all of its $400 million aggregate principal amount
of 11 1/8% senior notes due 2007 ("old notes") for $400 million aggregate
principal amount of 11 1/8% senior notes due 2007 ("new notes"). The form and
terms of the new notes are the same as the form and terms of the old notes
except that, because the issuance of the new notes was registered under the
Securities Act, the new notes do not bear legends restricting their transfer and
are not entitled to certain registration rights. The new notes evidence the same
debt as the old notes and the new notes and the old notes are governed by the
same indenture. Hercules did not receive any proceeds from the exchange offer.
At December 31, 2002, $389.8 million of the old notes had been exchanged for a
like amount of new notes.

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

                                       15



a change of control occurs, each holder of the notes will have the right to
require Hercules to repurchase all or any part of that holder's notes pursuant
to a change of control offer on the terms set forth in the indenture. In the
change of control offer, Hercules is required to offer a change of control
payment in cash equal to 101% of the aggregate principal amount of the notes
repurchased plus accrued and unpaid interest and liquidated damages, if any, on
the notes repurchased, to the date of purchase.

ITEM 6.  SELECTED FINANCIAL DATA

         A summary of the selected financial data for Hercules for the years
ended and as of the end of the years specified is set forth in the table below.
Pursuant to Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Water
Treatment Business has been treated as a discontinued operation as of February
12, 2002. See Note 22 in the Notes to the Consolidated Financial Statements for
a summary of significant divestitures that have occurred in the last three
years.



                                                                      (Dollars and shares in millions, except per share)
                                                                       2002       2001       2000      1999      1998
- ------------------------------------------------------------------------------------------------------------------------
                                                                                                
Net sales                                                            $ 1,705    $ 1,776    $ 2,303   $ 2,463   $ 1,943
Profit from operations                                                   214        181        366       380       174

Net (loss) income from continuing operations before discontinued
operations and cumulative effect of change in accounting principle       (49)      (106)        60       118        (2)
Net (loss) income on discontinued operations, net of tax                (199)        48         38        50        11
Net (loss) income before effect of change in accounting principle       (248)       (58)        98       168         9
Cumulative effect of change in accounting principle, net of tax         (368)         -          -         -         -
Net (loss) income                                                       (616)       (58)        98       168         9
Dividends                                                                  -          -         66       111       104

Per share of common stock
   Basic (loss) earnings per share
    Continuing operations                                              (0.45)     (0.98)      0.56      1.14     (0.01)
    Discontinued operations                                            (1.83)      0.44       0.35      0.49      0.11
    Cumulative effect of change in accounting principle                (3.37)         -          -         -         -
    Net (loss) income                                                  (5.65)     (0.54)      0.91      1.63      0.10
   Diluted (loss) earnings per share
    Continuing operations                                              (0.45)     (0.98)      0.56      1.14     (0.01)
    Discontinued operations                                            (1.83)      0.44       0.35      0.48      0.11
    Cumulative effect of change in accounting principle                (3.37)         -          -         -         -
    Net (loss) income                                                  (5.65)     (0.54)      0.91      1.62      0.10
Dividends declared                                                         -          -       0.62      1.08      1.08

Total assets                                                           2,693      5,003      5,528     5,896     5,833
Long-term debt                                                           738      1,959      2,342     1,777     3,096
Company-obligated preferred securities of subsidiary trusts              624        624        622       992       200


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

         Hercules is a leading manufacturer and marketer of specialty chemicals
and related services for a broad range of business, consumer and industrial
applications. Hercules operates on a global scale, with significant operations
in North America, Europe, Asia and Latin America. The Company's principal
products are chemicals used by the paper industry to increase product
performance and enhance the manufacturing process; water-soluble polymers;
specialty resins; and polypropylene and polyethylene fibers. The Company
operates through two reportable segments and four divisions: Performance
Products (Pulp and Paper and Aqualon) and Engineered Materials and Additives
(FiberVisions and Pinova).

         The following discussion should be read in connection with the
information contained in the Consolidated Financial Statements and Notes
thereto. All references to individual Notes refer to Notes to the Consolidated
Financial Statements.

                                       16



DIVESTITURES, ACQUISITIONS AND OTHER SIGNIFICANT ITEMS

         Effective January 1, 2002, the Company implemented Statement of
Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets"
("SFAS 142"). Under the provisions of this standard, goodwill and intangible
assets with indefinite useful lives are not amortized but instead are reviewed
for impairment at least annually and written down only in periods in which it is
determined that the fair value is less than the recorded value. In connection
with the Company's transitional review, recorded goodwill was determined to be
impaired in the BetzDearborn and FiberVisions reporting units. The Company
recognized after-tax impairment charges of $262 million in the BetzDearborn
reporting unit and $87 million in the FiberVisions reporting unit. In addition,
an after tax impairment charge of $19 million was recognized for the Company's
equity investment in CP Kelco. After recognition of this impairment charge, the
Company's book carrying value in CP Kelco is zero.

         On April 29, 2002, Hercules completed the sale of the Water Treatment
Business to GE Specialty Materials ("GESM"), a unit of General Electric Company.
The sale price was $1.8 billion in cash, resulting in net after-tax proceeds of
approximately $1.7 billion. The Company used the net proceeds to prepay debt
under its senior credit facility and ESOP credit facility (see Notes 5 and 8).
Pursuant to Statement of Financial Accounting Standards No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), the Water
Treatment Business has been treated as a discontinued operation as of February
12, 2002, and accordingly, all financial information has been restated. The loss
from discontinued operations for the year ended December 31, 2002 includes an
after-tax loss on the disposal of the business of $230 million. The Water
Treatment Business had net assets, including goodwill and identifiable
intangibles from the BetzDearborn acquisition, of approximately $2.0 billion at
December 31, 2001. Approximately 3,900 employees transferred to GESM or left the
Company in connection with the sale. Hercules has an agreement with GESM to
distribute and service BetzDearborn's water treatment products to the pulp and
paper industry.

         The Paper Process Chemicals Business, representing approximately
one-third of the business of BetzDearborn Inc., when it was originally acquired
in 1998, was fully integrated into and continues to be reported within Pulp and
Paper.

        Summarized below are the results of operations of the Water Treatment
Business for the years ended December 31, 2002, 2001 and 2000.



                                                      (Dollars in millions)
                                                            December 31,
                                                      2002(1)   2001    2000
                                                      -----    -----   -----
                                                              
Net sales                                             $ 269    $ 844   $ 849
Profit from operations                                   49      106      78
Income before income taxes                               51      104      78
Tax provision                                            20       56      40
                                                      -----    -----   -----
Income from operations                                   31       48      38
Loss from disposal of business, including
  a provision for income taxes of
  $51 million for 2002                                 (230)       -       -
                                                      -----    -----   -----
(Loss) income from discontinued operations            $(199)   $  48   $  38
                                                      =====    =====   =====


(1) Results of operations for the period are through April 28, 2002.

         In June 2001, the Company announced an aggressive and comprehensive
program to improve return on capital and cash flow, streamline organizational
structure, improve work processes, consolidate manufacturing and
non-manufacturing resources and better serve customers. The initial objective
was to achieve fixed cost reductions of $100 million on an annualized basis (as
compared to 2000 results, excluding the Food Gums business and the Resins
Divestitures) by June 2002, which was achieved by December 31, 2001. In the
beginning of 2002, the cost reduction target was increased to $200 million in
annualized fixed cost reductions to be achieved by December 2002 (as compared to
2000 results, excluding the Food Gums business and the Resins Divestitures),
including $75 million for the Water Treatment Business and $125 million for the
other remaining businesses. Subsequent to the sale of the Water Treatment
Business, the Company raised the cost reduction target to be achieved by
December 2002 for the remaining businesses to $150 million in annualized fixed
cost reductions (as compared to 2000 results, excluding the Food Gums business,
the Resins Divestitures and the Water Treatment Business). At the end of 2002,
the Company achieved approximately $160 million in annualized cost reductions,
exceeding the Company's twice upwardly revised cost reduction target.
Approximately 1,330 employees have left or will leave the Company under this
plan. The Company incurred restructuring charges totaling $51 million during the
third

                                       17



and fourth quarters of 2001. Pursuant to the cost reduction and work process
redesign program initiated in 2001 (see Notes 15 and 16), the Company incurred
restructuring charges totaling $25 million during 2002. The plan includes
reductions throughout the Company with the majority of them from support
functions. The Company expects cash outflows in 2003 relating to restructuring
will approximate $50 million and will be funded from general corporate funds.

         On December 20, 2002, the Company completed the refinancing of its
existing senior credit facility with a new senior credit facility. The new
senior credit facility consists of a four year $125 million revolving credit
agreement and a $200 million term B loan due May 2007. In addition, the Company
has the option of borrowing an additional $50 million to $150 million on terms
identical to the term B loan. The availability of the incremental term loan does
not expire until the earlier of December 20, 2005 or the time of repayment of
the $200 million term B loan. In conjunction with the execution of the credit
agreement, $125 million of the proceeds of the term B loan was placed into an
escrow account to pay the principal amount of the 6.625% notes in June 2003. The
remaining proceeds from the refinancing will be used for general corporate
purposes.

         During 2002, the Company recognized $65 million in net charges for
additional asbestos litigation expenses (see Note 18), $44 million for debt
prepayment penalties and the write-off of debt issuance costs associated with
the repayment of debt with the proceeds from the sale of the Water Treatment
Business, $11 million of net environmental expense and $7 million in asset
impairment charges in the Performance Products segment.

        In a series of unrelated transactions, the Company completed the
divestiture of a significant portion of the Pinova Division (the "Resins
Divestitures"). On May 1, 2001, Hercules completed the sale of its hydrocarbon
resins business and select portions of its rosin resins business to a subsidiary
of Eastman Chemical Company, receiving proceeds of approximately $244 million
(the "Eastman Transaction"). On May 31, 2001, Hercules completed the sale of its
peroxy chemicals business to GEO Specialty Chemicals, Inc., receiving proceeds
of approximately $92 million (the "Peroxide Transaction"). Additionally, on May
25, 2001, the Company completed the sale of its interest in Hercules - Sanyo,
Inc., a toner resin joint venture, to Sanam Corporation, a wholly-owned
subsidiary of Sanyo Chemical Industries, Ltd., its joint venture partner,
receiving proceeds of approximately $8 million. The Company realized net gains
from these dispositions of $74 million (see Note 16).

         During 2001, the Company recognized the following additional items: a
pension curtailment gain of $5 million related to the Eastman Transaction, an
additional gain of $5 million as a result of resolving issues relating to a
prior year divestiture, $10 million in net environmental expense, $5 million of
executive severance charges, $5 million in prepayment penalties relating to the
Employee Stock Ownership Plan ("ESOP") credit facility and $3 million in fees
related to the 2001 proxy contest and other matters.

         During 2000, the Company monetized certain non-core assets, completing
the divestitures of its nitrocellulose and Food Gums businesses. In May 2000,
Hercules acquired the paper chemicals business of Quaker Chemical Corporation.
In September 2000, the Company announced the formation of a strategic marketing
alliance with National Starch and Chemical Company for the sale of over 300
million pounds of National Starch's papermaking chemicals starch product line.
These transactions were consistent with the Company's announced strategy to
monetize non-core businesses and grow core businesses.

         In the fourth quarter of 2000, Hercules announced its intention to
pursue a sale or merger of the Company in the belief that, over the long term,
becoming part of a larger enterprise was the best strategic path for the
Company. To that end, the Company had retained Goldman, Sachs & Co. and Credit
Suisse First Boston to assist the Board of Directors in its identification and
evaluation of various alternatives.

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

         During 2000, the Company recognized $66 million in asset impairment
charges and write-offs, primarily in FiberVisions. Restructuring charges of $18
million, which includes the previously noted $4 million related to the
nitrocellulose divestiture, were incurred for 2000 restructuring plans,
primarily relating to severance and termination benefits for approximately 212
employee terminations in its Performance Products segment and corporate
realignment due to the divestitures of its non-core businesses. Offsetting these
restructuring charges was $4 million of reversals relating to prior year plans.
Environmental charges of $8 million were incurred, offset by $11 million in
recoveries of insurance and environmental claims. Severance charges and
compensation expense not associated with restructuring plans of $16 million was
also recognized. Additionally, the Company incurred $5 million of integration
charges, primarily for consulting and other costs associated with the
BetzDearborn acquisition. The asset impairments were triggered by significantly
higher raw material costs and the loss of a facility's major customer (see Note
16).

                                       18



         The above-mentioned items are primarily included in reconciling items
in each of the respective years in the segment footnote disclosure (see Note
20).

CRITICAL ACCOUNTING POLICIES

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

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

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

         Hercules recognizes revenue when the earnings process is complete,
which generally occurs when products are shipped to the customer or services are
performed in accordance with the terms of the agreement, title and risk of loss
have been transferred, collection is probable and pricing is fixed or
determinable. Approximately 12% of the Company's revenues are from consignment
inventory. For consignment inventory, title and risk of loss are transferred
when the earnings process is considered complete, which generally occurs when
the Company's products have been consumed or used in the customer's production
process. Hercules records estimated reductions to revenue for customer returns
and other allowances, including volume-based incentives and pricing adjustments.

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

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

         Aside from goodwill and intangible assets which are tested for
impairment under the guidance provided in SFAS 142, the Company has adopted SFAS
144 and tests other long-lived assets for impairment based on the guidance
provided in SFAS 144. The Company records an impairment loss on its long-lived
assets based on the excess of the carrying amount over fair value, when expected
future undiscounted cash flows are insufficient to recover the carrying amount
of the asset. The fair value represents expected future cash flows from the use
of the assets, discounted at the rate used to evaluate potential investments. If
the Company determines that an impairment loss has occurred, the loss is
recognized in the income statement. Deterioration in future economic conditions
or poor operating results in a business could result in losses or the inability
to recover the carrying value of the asset, thereby possibly requiring an
impairment in the future.

         Effective January 1, 2002, Hercules adopted the provisions of SFAS 142.
Hercules identified the following reporting units: BetzDearborn, Pulp and Paper,
Aqualon, FiberVisions and Pinova. In connection with Hercules' transitional
review, recorded goodwill was determined to be impaired in the BetzDearborn and
FiberVisions reporting units. In the first quarter of 2002, Hercules completed
its transitional impairment review of the identified reporting units and
recognized an after-tax impairment loss of $349 million as a cumulative effect
of a change in accounting principle. In addition, an after-tax impairment loss
of $19 million was recognized in the first quarter of 2002 relating to the
Company's equity investment in CP Kelco, which had an impairment under SFAS 142.
As a result of Hercules' adoption of SFAS 142, the Company will no longer record
approximately $50 million of annual amortization relating to existing goodwill
and intangibles. Pursuant to SFAS 142, the Company is required to perform an
annual assessment of its reporting units for impairment. The annual assessment
was performed as of November 30, 2002 and indicated no additional impairment to
the Company's goodwill was warranted.

                                       19



         Hercules records a valuation allowance to reduce its deferred tax
assets to an amount that is more likely than not to be realized after
consideration of future taxable income and reasonable tax planning strategies.
At December 31, 2002, the Company had gross deferred tax assets of approximately
$602 million for which it has established valuation allowances of approximately
$308 million. In the event that Hercules was to determine that it would not be
able to realize all or part of its deferred tax assets, for which a valuation
allowance has not been established, an adjustment to the deferred
tax asset would be charged to income in the period such determination was made.

         Hercules has recorded restructuring charges for the estimated costs of
employee severance and other exit costs. In the third quarter of 2001, the
Company initiated a comprehensive cost reduction and work process redesign
program to improve return on capital, streamline organizational structure,
improve work processes and consolidate manufacturing and non-manufacturing
resources. The Company has recognized $76 million in charges pursuant to this
initiative since inception, including $68 million for severance and $8 million
for other exit costs. In the event that it is determined that additional
employees must be involuntarily terminated pursuant to work process redesign and
other cost reduction initiatives, additional restructuring reserves would be
required, which would result in an additional charge against earnings. In the
event that the number of employees involuntarily terminated pursuant to
restructuring plans is less than anticipated due to greater than anticipated
voluntary resignations, an adjustment to reduce excess restructuring reserves
would increase income in the period that the determination was made.

         Hercules establishes reserves for environmental matters, asbestos
claims, litigation and other contingencies when it is probable that a liability
has been incurred and the amount of the liability is reasonably estimable. At
December 31, 2002, the Company had accrued $421 million for contingencies in
accordance with Statement of Financial Accounting Standards No. 5, "Accounting
for Contingencies" ("SFAS 5"). The actual costs will depend upon numerous
factors, including the number of parties found responsible at each environmental
site and their ability to pay, the actual methods of remediation required or
agreed to, outcomes of negotiations with regulatory authorities, outcomes of
litigation, changes in environmental laws and regulations, technological
developments, the years of remedial activity required, changes in the
number or financial exposures of claims, lawsuits, settlements or judgments, or
in the ability to reduce such financial exposures by collecting indemnity
payments from insurers. If the contingency is resolved for an amount greater or
less than has been accrued, or Hercules' share of the contingency increases or
decreases, or other assumptions relevant to the development of the estimate were
to change, Hercules would recognize an additional expense or benefit in income
in the period such determination was made.

         The Company provides defined benefit pension and postretirement
welfare benefit plans to employees in the United States who meet eligibility
requirements. Similar plans are provided outside the United States in accordance
with local practice. Pension and other postretirement benefit obligations in the
United States and the related expense (income) are determined based upon
actuarial assumptions regarding mortality, medical inflation rates, discount
rates, long-term return on assets, salary increases, Medicare availability and
other factors. The assets of the U.S. defined benefit plan constitute 85% of the
total defined benefit plan assets applicable to plans sponsored by the Company.
The actual return on U.S. plan assets earned in 2002, and the historical return
on U.S. plan assets earned in 2000 and 2001, was less than the 9.25% expected
long-term return assumption. In addition, yields on long-term corporate bonds
continued to decrease throughout 2002. Pursuant to the Company's annual review
of the actuarial assumptions, the discount rate was lowered to 6.75% at December
31, 2002 and the expected long-term return on U.S. plan assets was lowered to
8.75% effective January 1, 2003. Based on current assumptions, pension and
postretirement benefit plan expenses for the years 2003, 2004 and 2005 are
projected to be approximately $48 million, $69 million and $92 million,
respectively. The projected increase in pension expense of $20 to $30 million
per year over this time frame is due to the unfavorable performance of the
pension investment portfolio over the past three years. As a result of
unfavorable economic conditions, the accumulated benefit obligation ("ABO")
exceeded the fair value of plan assets at December 31, 2002. At December 31,
2002, the ABO of the U.S., United Kingdom and German defined benefit pension
plans, $1,227 million, $55 million and $27 million, respectively, exceeded their
funded benefits. Consequently, the Company was required to recognize an
additional liability equal to the sum of such excess plus the prepaid pension
asset balance, with a corresponding after-tax charge to other comprehensive
income in stockholders' equity. The Company recorded a non-cash, after-tax
charge to other comprehensive income of $354 million at December 31, 2002. As a
result of this charge, the Company is in a negative net worth position at
December 31, 2002. The Company does not believe that this will have any
substantial adverse effect on its operations or liquidity. A 100 basis point
decrease or increase in the discount rate has approximately a plus or minus $160
million impact on the Company's consolidated ABO. At December 31, 2002, the
consolidated projected benefit obligation was $1,528 million, of which $1,309
million is attributable to the U.S. plan. If the U.S. qualified pension plan
performs in accordance with the actuarial assumptions, the Company anticipates
making cash contributions of approximately $40 million per year over the next 6
to 7 years to maintain compliance with ERISA funding requirements. The Company
also contributed $20 million to its non-U.S. pension plans in the fourth quarter
2002 to bring funding to required levels. A recent government mandated change in
minimum funding requirements in the Netherlands may require the Company to make
a special contribution to the Dutch pension plan of 5 million euros in 2003.

                                       20



RESULTS OF OPERATIONS

         The table below reflects Net sales and Profit from operations for
continuing operations for the years ended December 31, 2002, 2001 and 2000.
Substantially all reconciling items have been allocated to the segments. The
reconciling items primarily include corporate expenses. Results of operations
for 2001 and 2000 have been restated to conform to the current year
presentation. In the discussion which follows, all comparisons are with the
previous year unless otherwise stated.



                                               (Dollars in millions)
                                           2002         2001        2000
                                         -------      -------     -------
                                                         
Net sales:
  Performance Products                   $ 1,385      $ 1,351     $ 1,450
  Engineered Materials and Additives         320          425         695
  Food Gums                                    -            -         160
  Reconciling Items                            -            -          (2)
                                         -------      -------     -------
    Consolidated                         $ 1,705      $ 1,776     $ 2,303
                                         =======      =======     =======

Profit from operations:
  Performance Products                   $   238      $   151     $   241
  Engineered Materials and Additives          17           12          (9)
  Food Gums                                    -            -          30
  Reconciling Items                          (41)          18         104
                                         -------      -------     -------
    Consolidated                         $   214      $   181     $   366
                                         =======      =======     =======


2002 vs. 2001

         Net sales were $1,705 million for 2002, a decrease of $71 million, or
4%. Net sales in 2002 were favorably impacted by approximately $16 million
reflecting the positive impact of the weaker dollar. Approximately $113 million
of the decrease is attributable to the businesses comprising the Resins
Divestitures (see Note 22). Volumes declined 6% year over year. Regionally, net
sales declined 6% in North America and 14% in Latin America, remained flat in
Europe and improved 2% in Asia Pacific.

         Profit from operations increased $33 million, or 18%. Profit from
operations in 2002 was favorably impacted by approximately $3 million reflecting
the positive impact of the weaker dollar. Improvement in operating profit
occurred in all businesses despite a 6% decline in volumes. This was principally
due to reductions in the Company's fixed cost structure pursuant to the
comprehensive cost reduction and work process redesign program (see Notes 15 and
16) initiated in 2001. On an annualized basis, approximately $160 million in
cost savings were achieved as of December 31, 2002 (as compared to 2000 results,
excluding the Food Gums business, the Resins Divestitures and the Water
Treatment Business). Impacting 2002 profit from operations were $23 million in
net restructuring charges, $7 million in asset impairment charges and $5
million, net, of other charges. Impacting profit from operations in 2001 were
$74 million of pre-tax gains from the Resins Divestitures and $6 million, net,
of other gains, partially offset by $51 million in restructuring charges
associated with the comprehensive cost reduction and work process redesign
program.

         Performance Products segment revenues were up $34 million, or 3%. Net
sales were favorably impacted by approximately $12 million reflecting the
positive impact of the weaker dollar. Sales improved due to volume improvements
of 6% versus the prior year and favorable product mix, partially offset by
competitive pricing. Profit from operations increased $87 million, or 58%.
Profit from operations primarily benefited from the cost reduction and work
process redesign program commenced in 2001. Profit from operations in 2002
includes asset impairment charges of $7 million associated with the planned
shutdown of plant facilities.

         Pulp and Paper is a large and technically advanced provider of pulp and
paper chemicals and technical paper process solutions. In Pulp and Paper, both
net sales and profit from operations improved year over year. Sales improved due
to volume improvements of 10% versus the prior year partially offset by
competitive pricing and unfavorable product mix. Sales to GE Betz pursuant to a
two-year supply agreement accounted for 2% of the net sales growth. Lower
overhead costs attributable to the cost reduction and work process redesign
program was the primary driver of higher profit from operations. Profit from
operations was negatively impacted by asset impairment charges of $7 million
associated with the shutdown of two plant facilities. The industry in which Pulp
and Paper competes is projected to experience average growth rates of 2% to 3%
through 2004. Demand for process chemicals, retention aids and strength resins
has increased as the quality of pulp in paper

                                       21



products has been reduced. However, the industry has become increasingly
competitive as consolidation continues within the pulp and paper customer base.

         Aqualon is a supplier of products that manage the properties of aqueous
(water-based) systems. Aqualon's products are mostly derived from renewable
natural raw materials, including cellulose and guar, and are used in paints and
coatings, personal care products such as toothpaste and shampoo, oil and gas
well drilling to provide fluid loss control and as a strengthening agent in
mortar and plaster, among other uses. Net sales and profit from operations
improved versus the prior year despite a decrease in volumes of approximately
2%. Sales improved due to favorable product mix partially offset by lower
volumes and competitive pricing. Volume declines are reflective of weak sales to
the oilfield industry. Lower raw material costs and lower overhead costs
attributable to the cost reduction and work process redesign program were the
primary drivers of the improved operating performance. The water-soluble polymer
industry is mature, growing at rates near or slightly higher than GDP. Mergers
in the industry and the withdrawal of marginal producers have improved
profitability.

         Engineered Materials and Additives segment revenues decreased $105
million, or 25%, and profit from operations increased $5 million, or 42%.
Approximately $113 million of the decrease is attributable to the businesses
comprising the Resins Divestitures. In May 2001, Hercules sold its hydrocarbon
resins and select portions of its rosin resins businesses, its peroxy chemicals
business and its interest in a toner resin joint venture (see Note 22). Segment
volumes decreased 24% year over year.

         FiberVisions is a global supplier of synthetic non-woven fibers made
from polypropylene and used primarily in disposable diapers and other hygienic
products. Net sales in FiberVisions improved marginally, largely driven by a
positive rate of exchange effect and 5% higher volumes partially offset by the
contractual customer pass through of lower polypropylene costs and competitive
pricing issues. Operating performance increased by $3 million due to lower
polymer costs and lower overhead costs attributable to the cost reduction and
work process redesign program.

         Pinova offers products that generally are custom made to fit a
particular use in an industry and impart or improve the properties of a variety
of compounded substances. Net sales in Pinova significantly declined in 2002
versus the prior year as a result of the Resins Divestitures (see Note 22).
Volumes were down approximately 65%. Despite declines in revenues and volumes,
operating performance increased. The improvement in profit from operations was a
direct result of hiring a full time sales team to support the business,
replacing the distribution channel used in 2001 following the Resins
Divestitures, as well as a focused effort on cost reduction and work process
redesign.

2001 vs. 2000

         Consolidated net sales were $1,776 million for 2001, a decrease of $527
million, or 23%. Approximately $30 million of this decrease is attributable to
the strength of the U.S. dollar in 2001, principally versus the euro, which
continued to weaken throughout the year. Approximately $219 million of the
decrease is attributable to the businesses involved in the Resins Divestitures
(see Note 22). Approximately $160 million and $23 million of the decrease is
attributable to the divestiture of the Food Gums business in September 2000 and
the divestiture of the nitrocellulose business in June 2000, respectively (see
Note 22). Contributing to the decline was reduced volume in all businesses
versus 2000. Regionally, net sales declined 21% in North America, 25% in Europe,
28% in Asia Pacific and 24% in Latin America. Weak market demand negatively
impacted the Company's sales.

         Consolidated profit from operations decreased $185 million, or 51%. Of
this decrease, $52 million was attributable to business divestitures. Also
impacting 2001 profit from operations were $51 million in restructuring charges
associated with the cost reduction program. Offsetting these charges were $74
million of pre-tax gains from the Resins Divestitures, $6 million, net, of other
gains and $8 million due to foreign currency. Operating profit improvements were
seen in FiberVisions but were completely negated by lower profit from operations
in Pulp and Paper and Aqualon. Pulp and Paper and Aqualon experienced weakness
in the industries they service. Pursuant to the comprehensive cost reduction and
work process redesign program (see Note 16) initiated in the third quarter
of 2001, the Company began reducing its fixed cost structure and saw cost
improvements in fourth quarter operating profit. On an annualized basis,
approximately $38 million in cost savings were achieved as of December 31, 2001
(as compared to 2000 results, excluding the Food Gums business, the Resins
Divestitures and the Water Treatment Business). Profit from operations in 2000
was favorably impacted by a $168 million gain associated with the sale of the
Food Gums business, partially offset by the following charges: a $25 million
loss associated with the divestiture of the nitrocellulose business, $66 million
in asset impairment charges, $10 million in restructuring charges and executive
severance charges not associated with restructuring plans of $16 million.

         Performance Products segment revenues were down $99 million, or 7%. Net
sales were negatively impacted by approximately $27 million reflecting the
negative impact of the stronger dollar. The segment experienced 6% lower volumes
year over year. Continuing weak demand in the global paper industry and the full
year effect of the nitrocellulose divestiture in 2000 primarily drove the
decline in segment revenues. Profit from operations decreased $90 million, or
37%, versus the prior year. The decline in volumes, revenue and profit from
operations all reflect the full year effect of the nitrocellulose divestiture in
2000.

                                       22



         In Pulp and Paper, both net sales and profit from operations declined
year over year. The business continued to be impacted by weak global demand.
Sales and profit from operations were negatively impacted by volume declines of
5% from last year. Higher energy and transportation costs, partially offset by
lower overhead costs and bad debt expenses, contributed to the lower profit from
operations. Pulp and Paper began to see benefits from the cost reduction and
work process redesign program in the fourth quarter with lower overhead costs.
However, the industry has become increasingly competitive as consolidation
continues within the pulp and paper customer base.

         Aqualon's net sales and profit from operations decreased versus the
prior year. Volumes decreased approximately 9%. The decline in volumes, revenue
and profit from operations all reflect the full year effect of the
nitrocellulose divestitures in 2000. Aqualon's results were hampered by the
currency effects of a strong dollar, principally versus the euro, which was
particularly evident in the first half of 2001. Profit from operations was
negatively impacted by volume declines, higher raw material and energy costs,
competitive pricing issues and unfavorable fixed cost absorption at lower
production levels. These negative drivers were partially offset by lower
overhead costs attributable to the cost reduction and work process redesign
program. Volume declines are reflective of weak general economic conditions.

         Engineered Materials and Additives segment revenues decreased $270
million, or 39%, and profit from operations increased $21 million, or 233%. In
May 2001, Hercules sold its hydrocarbon resins and select portions of its rosin
resins businesses, its peroxy chemicals business and its interest in a toner
resin joint venture (see Note 22). Pinova, including the businesses that the
Company sold, had approximately $450 million in net sales in 2000.

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

         Net sales and profit from operations in Pinova significantly declined
in 2001 as a result of the Resins Divestitures (see Note 22). Volumes were down
approximately 60%. Net sales and profit from operations attributable to the
retained business experienced deterioration in 2001. Operating performance was
primarily impacted by unfavorable fixed cost absorption at lower production
levels and weak overall demand, the most significant in the Terpenes product
line.

Interest and Debt Expense and Preferred Security Distributions; Equity Income
(Loss); Provision for Income Taxes

         Interest and debt expense and preferred security distributions of
subsidiary trusts decreased $100 million, or 39%, in 2002 versus 2001 primarily
due to lower outstanding debt balances, reflecting the application of proceeds
from the sale of the Water Treatment Business on April 29, 2002, and 2001 asset
sales, as well as lower interest rates. Interest and debt expense and preferred
security distributions of subsidiary trusts decreased $6 million, or 2%, in 2001
versus 2000.

         Equity income (loss) of affiliated companies in 2002 reflected equity
income from the FiberVisions ES joint venture that FiberVisions formed in
January 2000 with Chisso Polypro Fiber Co., Ltd. The equity losses recorded in
2001 and 2000 were a result of the equity losses relating to CP Kelco.

         Provision for income taxes on continuing operations reflects effective
tax rates of 7% in 2002, (20%) in 2001 and 30% in 2000. The effective tax rate
for 2002 reflects the tax benefit of the pre-tax loss partially offset by the
effect of increases to tax reserves related to anticipated tax assessments and
other provisions. The effective tax rate for 2001 reflects the tax benefit of
the pre-tax loss partially offset by the effect of increases to tax reserves and
the effect of non-deductible goodwill amortization. The 2000 rate was favorably
impacted by the utilization of research and development credits.

FINANCIAL CONDITION

         Liquidity and financial resources: Net cash flow used in operations was
$217 million in 2002, $100 million in 2001 and $32 million in 2000. The change
in operating cash flow in 2002 compared to 2001 primarily results from higher
income tax payments, $97 million in pension contributions and payments related
to the restructuring plans. The increase in cash flow used in operations in 2001
versus 2000 is a result of higher working capital needs. The 2000 net cash flow
from operations reflects the payment of legal settlements, net of insurance
recoveries, and higher working capital requirements.

         Net cash provided by investing activities was $1,659 million in 2002,
$295 million in 2001 and $229 million in 2000. Hercules' significant cash flow
from investing activities in 2002 was due to the sale of the Water Treatment
Business. Cash flow from investing activities in 2001 and 2000 has benefited
from the monetization of certain non-core assets. In May 2001, the Company
completed the sale of its hydrocarbon resins business and select portions of its
rosin resins business to a subsidiary of Eastman Chemical Company, receiving
proceeds of approximately $244 million, and the sale of its peroxy chemicals
business to GEO Specialty Chemicals, Inc., receiving proceeds of approximately
$92 million. In September 2000,

                                       23



the Company sold its Food Gums business to CP Kelco, receiving proceeds of
approximately $395 million. After recording certain selling and tax expenses of
$77 million, the net proceeds of approximately $318 million were applied to
repay term loan tranche C. Capital expenditures were $43 million, $52 million
and $171 million in 2002, 2001 and 2000, respectively. The decrease in capital
expenditures in 2001 was primarily due to the completion of the plant expansion
in Doel, Belgium. Stringent capital spending controls instituted in early 2001
have lowered expenditures in both 2001 and 2002.

         Net cash used in financing activities was $1,332 million, $368 million
and $290 million, respectively, in 2002, 2001 and 2000. The Company has used
cash from business divestitures in 2002, 2001 and 2000 to pay down long-term
debt.

         The Company used the net proceeds of approximately $1.7 billion from
the sale of the Water Treatment Business (see Note 22) to permanently reduce
long-term debt, repaying in full the following borrowings: term loan tranche A,
term loan tranche D, the revolving credit agreement and the ESOP credit
facility. In addition, effective with the consummation of the sale of the Water
Treatment Business and the application of the net proceeds, the revolving credit
agreement was permanently reduced from $900 million to $200 million and the
Canadian revolving credit agreement was cancelled. A portion of the net proceeds
($73 million) from the sale of the Water Treatment Business was used to
collateralize the Company's outstanding letters of credit.

         On December 20, 2002, the Company completed the refinancing of its
existing senior credit facility with a new senior credit facility. The new
senior credit facility consists of a four year $125 million revolving credit
agreement and a $200 million term B loan due May 2007. In addition, the Company
has the option of borrowing an additional $50 million to $150 million on terms
identical to the term B loan. The availability of the incremental term loan does
not expire until the earlier of December 20, 2005 or the repayment of the $200
million term B loan. In conjunction with the execution of the credit agreement,
$125 million of the proceeds of the term B loan was placed into an escrow
account to pay the principal amount of the 6.625% notes in June 2003. The
remaining proceeds from the refinancing will be used for general corporate
purposes. The escrow funds have been recognized as restricted cash on the
Consolidated Balance Sheet. The term B loan bears interest at LIBOR + 3.25%. The
revolving credit agreement bears interest at LIBOR plus an applicable margin,
currently 2.75%, which is determinable based on the Company's leverage ratio.
The new senior credit facility is secured by liens on the Company's assets
(including real, personal and intellectual properties) and is guaranteed by
substantially all of the Company's current and future wholly-owned domestic
subsidiaries. Issuance costs related to the financing are included in deferred
charges and other assets and are being amortized over the term of the loans,
using the effective interest method. In connection with the cancellation of the
original senior credit facility, the letters of credit were reissued under the
new credit facility in the first quarter of 2003 and the cash collateral has
been released to the Company.

         On November 14, 2000, the Company completed a refinancing and
modification of its existing debt, borrowing $375 million under the senior
credit facility (term loan tranche D) and also issuing $400 million of 11 1/8%
senior notes due 2007. The 11 1/8% senior notes are guaranteed by each of
Hercules' current and future wholly owned domestic restricted subsidiaries. The
11 1/8% senior notes were subject to a registration rights agreement that
required Hercules to file a Registration Statement on Form S-4 with the
Securities and Exchange Commission, pursuant to which the Company offered to
exchange all of its $400 million aggregate principal amount of 11 1/8% senior
notes due 2007 ("old notes") for $400 million aggregate principal amount of 11
1/8% senior notes due 2007 ("new notes"). The form and terms of the new notes
are the same as the form and terms of the old notes except that, because the new
notes were registered under the Securities Act, the new notes do not bear
legends restricting their transfer and are not entitled to certain registration
rights. The new notes evidence the same debt as the old notes and the new notes
and the old notes are governed by the same indenture. Hercules did not receive
any proceeds from the exchange offer. As of December 31, 2002, $389.8 million of
the old notes had been exchanged for a like amount of new notes.

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

         The proceeds of the 11 1/8% senior notes were used to repay the
Company's Redeemable Hybrid INcome Overnight Shares (RHINOS) and Floating Rate
Preferred Securities and to reduce the current portion of term loan tranche A.

         As of December 31, 2002, the Company had $125 million available under
the revolving credit agreement and $24 million of short-term lines of credit.

Capital Structure and Commitments

                                       24




         Total capitalization (stockholders' (deficit) equity, company-obligated
preferred securities of subsidiary trusts and debt) decreased to $1.4 billion at
December 31, 2002 from $3.5 billion at December 31, 2001. The ratio of
debt-to-total capitalization increased to 64% at December 31, 2002 from 62% at
December 31, 2001. The current ratio increased to 1.47 at December 31, 2002,
compared to .92 at December 31, 2001. The quick ratio increased to 1.20 at
December 31, 2002 compared to .66 at December 31, 2001.

         On October 4, 2000, Moody's Investors Service, Inc., downgraded the
Company's senior unsecured credit rating to Ba1 with a stable outlook. On
October 19, 2000, Standard & Poor's Ratings Services downgraded the corporate
credit rating to BB+ and placed Hercules on credit watch with "developing"
implications. On November 9, 2000, Moody's Investors Service, Inc., assigned a
Ba2 rating to the 11 1/8% senior notes and Standard & Poor's Ratings Services
assigned a BB- rating to the 11 1/8% senior notes. Both ratings were placed on
credit watch with "developing" implications. On January 23, 2001, Standard &
Poor's Ratings Services downgraded the corporate credit rating to BB. On January
25, 2001, Standard & Poor's Ratings Services assigned a B+ rating to the 11 1/8%
senior notes. On May 5, 2002, Standard and Poor's Rating Services raised the
rating on the 11 1/8% senior notes to BB-. On June 5, 2002, Moody's Investors
Service, Inc. revised the outlook to stable from "developing" and on December 5,
2002, Standard & Poor's Rating Services raised the Company's credit outlook to
positive.

         Quarterly dividends of $0.27 per share were declared and paid in the
first and second quarters of 2000. In August 2000, the Board of Directors
reduced the quarterly dividend payment to $0.08 per share, which was paid in
September 2000 for the third quarter of 2000. On November 13, 2000, the Board of
Directors determined to suspend the payment of the quarterly dividend beginning
with the fourth quarter of 2000, subject to reconsideration of the policy by the
Board, in its discretion, when warranted under appropriate circumstances. In
addition, payment of future dividends is significantly restricted by the
indenture governing the senior notes and the senior credit facility. The annual
dividend was $0.62 per share during 2000.

         Capital expenditures are expected to approximate between $45 and $58
million during 2003. This includes funds for continuing or completing existing
projects and for implementing new projects.

         The Company's contractual commitments as of December 31, 2002 are
summarized as follows:



                                                             (Dollars in millions)
                                                             Payments Due by Period
                                           ----------------------------------------------------------
                                                    Less than 1                               After 5

                                            Total       year     1 - 3 years   4 - 5 years     years
                                           ----------------------------------------------------------
                                                                                
Current and long-term portion of debt      $  882      $  144       $   32        $  600       $  106
Non-cancelable operating leases               167          23           39            29           76
                                           ------      ------       ------        ------       ------
Total contractual cash obligations         $1,049      $  167       $   71        $  629       $  182
                                           ======      ======       ======        ======       ======


         The Company had the following commercial commitments at December 31,
2002: lines of credit of $1 million outstanding and letters of credit of $78
million, both of which may require payments in the future. If required, these
commitments would be funded from general corporate funds.

RISK FACTORS

Indebtedness

         As of December 31, 2002, the Company's total debt was approximately
$883 million, of which 71% is fixed rate indebtedness. Total debt does not
include $624 million of company-obligated preferred securities of subsidiary
trusts, all of which is a fixed rate obligation. The Company's indebtedness has
significant consequences. For example, it could: increase the Company's
vulnerability to economic downturns and competitive pressures; require the
Company to dedicate a substantial portion of its cash flow from operations to
payments on its indebtedness, thereby reducing the availability of its cash flow
to fund working capital, capital expenditures, research and development efforts
and other general corporate purposes; limit the Company's flexibility in
planning for, or reacting to, changes in its business and the industries in
which it operates or in pursuing attractive business opportunities requiring
debt financing; place the Company at a disadvantage to its competitors that have
less debt; and limit the Company's ability to borrow additional funds due to
restrictive covenants.

         The senior credit facility and the indenture governing the 11 1/8%
senior notes due 2007, which together account for a large portion of the
Company's debt, contain numerous restrictive covenants, including, among other
things, covenants that limit the Company's ability to: borrow money and incur
contingent liabilities; make dividend or other restricted payments; use assets
as security in other transactions; enter into transactions with affiliates;
enter into new lines of business; issue and sell stock of restricted
subsidiaries; sell assets or merge with or into other companies and make capital
expenditures. In addition,

                                       25



the senior credit facility requires the Company to meet financial ratios and
tests, including maximum leverage and interest coverage levels. These
restrictions could limit the Company's ability to plan for or react to market
conditions or meet extraordinary capital needs and could otherwise restrict
corporate activities.

         The Company's ability to comply with the covenants and other terms of
the senior credit facility and the indenture governing the senior notes and to
satisfy these and other debt obligations will depend upon the Company's current
and future performance. The Company's performance is affected by general
economic conditions and by financial, competitive, political, business and other
factors, many of which are beyond the Company's control. The Company believes
that the cash generated from its business will be sufficient to enable the
Company to comply with the covenants and other terms of the senior credit
facility and the indenture governing the senior notes and to make debt payments
as they become due.

         The Company and its subsidiaries may incur additional indebtedness in
the future. As of December 31, 2002, the Company had a $325 million senior
credit facility with a syndicate of banks. Under the senior credit facility, the
Company has a $125 million revolving credit agreement, which permits certain
additional borrowings. In addition, the Company has the option to borrow an
additional $50 million to $150 million under the senior credit facility. If new
indebtedness is added to the Company's current indebtedness levels, the risks
described above could increase.

Market Risk

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

         The Company's derivative and other financial instruments subject to
interest rate risk consist substantially of debt instruments and trust preferred
securities. At December 31, 2002 and 2001, net market value of these combined
instruments at December 31, 2002 was a liability of $1.44 and $2.61 billion,
respectively. The sensitivity analysis assumes an instantaneous 100-basis point
move in interest rates from their levels, with all other variables held
constant. A 100-basis point increase in interest rates at December 31, 2002 and
2001 would result in a $60 and $52 million decrease, respectively, in the net
market value of the liability. A 100-basis point decrease in interest rates at
December 31, 2002 and 2001 would result in a $72 and $57 million increase,
respectively, in the net market value of the liability.

         Our financial instruments subject to foreign currency exchange risk
consist of foreign currency forwards and options and represent a net asset
position of $0.2 million at December 31, 2002 and 2001. The following
sensitivity analysis assumes an instantaneous 10% change in foreign currency
exchange rates from year-end levels, with all other variables held constant. A
10% strengthening of the U.S. dollar versus other currencies at December 31,
2002 and 2001 would result in a $0.2 and $2 million increase, respectively, in
the net asset position while a 10% weakening of the dollar versus all currencies
would result in a $0.3 and $2 million decrease, respectively, in the net asset
position resulting in a net liability position.

         Foreign exchange forward and option contracts have been used to hedge
the Company's firm and anticipated foreign currency cash flows. Thus, there is
either an asset or cash flow exposure related to all the financial instruments
in the above sensitivity analysis for which the impact of a movement in exchange
rates would be in the opposite direction and substantially equal to the impact
on the instruments in the analysis. There are presently no significant
restrictions on the remittance of funds generated by the Company's operations
outside the United States.

         The Company has not designated any derivative as a hedge instrument
under Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities" ("SFAS 133") and, accordingly,
changes in the fair value of derivatives are recorded each period in earnings.

Environmental

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

         Environmental remediation expenses are funded from internal sources of
cash. Such expenses are not expected to have a significant effect on the
Company's ongoing liquidity. Environmental cleanup costs, including capital
expenditures for

                                       26



ongoing operations, are a normal, recurring part of operations and are not
significant in relation to total operating costs or cash flows. See Item 3,
Legal Proceedings and Note 10.

Litigation

         Hercules is a defendant in numerous lawsuits that arise out of, and are
incidental to, the conduct of its business. These suits concern issues such as
product liability, contract disputes, labor-related matters, patent
infringement, antitrust proceedings, environmental proceedings, property damage
and personal injury matters. While it is not feasible to predict the outcome of
all pending suits and claims, the ultimate resolution of these matters could
have a material effect upon the financial position of Hercules, and the
resolution of any of the matters during a specific period could have a material
effect on the quarterly or annual operating results for that period. See Item 3,
Legal Proceedings and Note 10.

Pension

         The assets and liabilities associated with the Company's defined
benefit plans are subject to interest rate and market risk. At December 31,
2002, the accumulated pension benefit obligation ("ABO") of the U.S. defined
benefit plan was $1,227 million based on a discount rate of 6.75%. The fair
value of the U.S. defined benefit plan assets at December 31, 2002 was $966
million. The assets of the U.S. defined benefit plan are invested as follows:
$439 million in domestic corporate equity securities, $180 million in
international corporate equity securities, $309 million in fixed income
securities and $38 million in other investments. The Company has used an 8.75%
assumed rate of return on plan assets for the U.S. plans effective January 1,
2003. A 100-basis point decrease or increase in the discount rate has
approximately a plus or minus $130 million impact on the ABO. A 100-basis point
decrease or increase in the assumed rate of return has approximately a plus or
minus $12 million impact on the U.S. pension expense estimated for 2003.


RECENT ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. SFAS 143
establishes accounting standards for the recognition and measurement of legal
obligations associated with the retirement of tangible long-lived assets. The
provisions of SFAS 143 require companies to record an asset and related
liability for the costs associated with the retirement of a tangible long-lived
asset if a legal liability to incur these costs exists. SFAS 143 became
effective for the Company on January 1, 2003. Based on the Company's evaluation
to date, the adoption of SFAS 143 is expected to result in a charge ranging from
$0.25 to $0.30 per diluted share that will be reported as a cumulative effect of
a change in accounting principle. Approximately 75% of this cumulative effect
charge relates to a former operating site in Kenvil, New Jersey. This site
comprises approximately 1,100 acres of property in close proximity to the New
York City metropolitan area. The value of this property is estimated to
significantly exceed the asset retirement obligation recorded in accordance with
SFAS 143.

         In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
to FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). The Company
elected to early adopt the provisions of SFAS 145 related to the rescission of
SFAS 4, "Reporting Gains and Losses from the Extinguishment of Debt" ("SFAS 4").
Accordingly, the prepayment penalties and the write-off of debt issuance costs
relating to the April 2002 debt repayment (see Note 5) are reported in net loss
from continuing operations. Under SFAS 4, the majority of these costs would have
been reported as an extraordinary loss in the Consolidated Statement of
Operations.

         In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs in a Restructuring)". SFAS 146 defines the timing of the recognition of
costs associated with exit or disposal activities, the types of costs that may
be recognized and the methodology for calculating the fair value of such costs.
The provisions of SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe this
statement will have a material effect on its financial statements.

         On December 15, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). SFAS 148 amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") by
requiring, among other provisions,

                                       27




enhanced disclosure regarding stock-based compensation in the Summary of
Significant Accounting Policies. The Company adopted the enhanced disclosure
provisions of SFAS 148 as of December 31, 2002.

         In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. As required, the Company
has adopted the disclosure requirements of FIN 45 as of December 31, 2002 (see
Note 10). The Company will apply the initial recognition and measurement
provisions on a prospective basis effective January 1, 2003. FIN 45 modifies
existing disclosure requirements for most guarantees and requires that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair value of the obligation it assumes under that guarantee.
The Company is in the process of evaluating the recognition and measurement
provisions of FIN 45 and absent any unforeseen events, management does not
expect that the adoption of these provisions will have a significant impact on
the Company's financial condition, liquidity or results of operations.

         In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Certain Variable Interest Entities" ("FIN 46") (VIEs), which
is an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements" ("ARB 51"). FIN 46 addresses the application of ARB 51 to
VIEs, and generally would require that assets, liabilities and results of the
activity of a VIE be consolidated into the financial statements of the
enterprise that is considered the primary beneficiary. The Company currently has
two joint-venture VIEs that are presently accounted for using the equity method
of accounting. These entities serve as strategic global marketers of the
Company's bicomponent fibers. The assets and liabilities of these entities are
not consolidated within the Company's financial statements. As of December 31,
2002, the fair value of the assets in these joint ventures was approximately $5
million and the fair values of the associated liabilities and non-controlling
interests were approximately $4 million. The Company is in the process of
reviewing the provisions of FIN 46. There are no assets of the Company that
serve as collateral for the VIEs and the creditors of the VIEs have no recourse
to the general credit of the Company.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

                                       28



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

                 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND

                          REQUIRED SUPPLEMENTARY DATA

                             HERCULES INCORPORATED



                                                                                                                         Page
                                                                                                                         ----
                                                                                                                      
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Accountants..................................................................................       30
Consolidated Statement of Operations for the Years Ended December 31, 2002, 2001 and 2000..........................       31
Consolidated Balance Sheet as of December 31, 2002 and 2001........................................................       32
Consolidated Statement of Cash Flow for the Years Ended December 31, 2002, 2001 and 2000...........................       33
Consolidated Statement of Stockholders' (Deficit) Equity for the Years Ended December 31, 2002, 2001 and 2000......       34
Consolidated Statement of Comprehensive Loss for the Years Ended December 31, 2002, 2001 and 2000..................       35
Summary of Significant Accounting Policies and Notes to Consolidated Financial Statements..........................       36

SUPPLEMENTARY DATA
Summary of Quarterly Results (Unaudited)...........................................................................       77
Principal Consolidated Subsidiaries of Registrant..................................................................       78


                                       29



                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Shareholders and Board of Directors
of Hercules Incorporated:

In our opinion, the financial statements listed in the accompanying index
present fairly, in all material respects, the financial position of Hercules
Incorporated and its subsidiaries at December 31, 2002 and 2001, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2002 in conformity with accounting principles
generally accepted in the United States of America. In addition, in our opinion,
the financial statement schedule listed in the index appearing under Item
15(a)(2) on page 84 presents fairly, in all material respects, the information
set forth therein when read in conjunction with the related consolidated
financial statements. These financial statements and the financial statement
schedule are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements and the financial
statement schedule based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.

As discussed in Note 3 to the consolidated financial statements, the Company
changed its accounting for goodwill and indefinite-lived intangible assets
effective January 1, 2002, with the adoption of Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets." Also, as
disclosed in Note 22 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" on January 1, 2002.

/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 26, 2003

                                       30



HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF OPERATIONS



                                                                           (Dollars in millions, except per share)
                                                                                   2002       2001      2000
                                                                                 -------    -------    -------
                                                                                              
Net sales                                                                        $ 1,705    $ 1,776    $ 2,303
Cost of sales                                                                      1,041      1,133      1,451
Selling, general and administrative expenses                                         353        401        444
Research and development                                                              42         53         64
Goodwill and intangible asset amortization (Note 3)                                    9         24         24
Other operating expense (income), net (Note 16)                                       46        (16)       (46)
                                                                                 -------    -------    -------
Profit from operations                                                               214        181        366

Interest and debt expense (Note 17)                                                   96        196        164
Preferred security distributions of subsidiary trusts                                 58         58         96
Other expense, net (Note 18)                                                         115          8         18
                                                                                 -------    -------    -------
(Loss) income before income taxes and equity income (loss)                           (55)       (81)        88
(Benefit) provision for income taxes (Note 6)                                         (4)        16         26
                                                                                 -------    -------    -------
(Loss) income before equity income (loss)                                            (51)       (97)        62
Equity income (loss) of affiliated companies, net of tax                               2         (9)        (2)
                                                                                 -------    -------    -------
Net (loss) income from continuing operations before discontinued
     operations and cumulative effect of change in accounting principle              (49)      (106)        60

Net (loss) income on discontinued operations, net of tax (Note 22)                  (199)        48         38
                                                                                 -------    -------    -------
Net (loss) income before cumulative effect of change in accounting principle        (248)       (58)        98

Cumulative effect of change in accounting principle, net of tax (Note 3)            (368)         -          -
                                                                                 -------    -------    -------
Net (loss) income                                                                $  (616)   $   (58)   $    98
                                                                                 =======    =======    =======
(Loss) earnings per share (Note 19)

Basic (loss) earnings per share
     Continuing operations                                                       $ (0.45)   $ (0.98)   $  0.56
     Discontinued operations                                                     $ (1.83)   $  0.44    $  0.35
     Cumulative effect of change in accounting principle                         $ (3.37)   $     -    $     -
     Net (loss) income                                                           $ (5.65)   $ (0.54)   $  0.91
     Weighted average number of shares (millions)                                  109.1      108.2      107.2

Diluted (loss) earnings per share
     Continuing operations                                                       $ (0.45)   $ (0.98)   $  0.56
     Discontinued operations                                                     $ (1.83)   $  0.44    $  0.35
     Cumulative effect of change in accounting principle                         $ (3.37)   $     -    $     -
     Net (loss) income                                                           $ (5.65)   $ (0.54)   $  0.91
     Weighted average number of shares (millions)                                  109.1      108.2      107.9


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

                                       31



HERCULES INCORPORATED
CONSOLIDATED BALANCE SHEET



                                                                             (Dollars in millions)
                                                                                  December 31,
                                                                               2002        2001
                                                                              -------    -------
                                                                                   
ASSETS
Current assets
  Cash and cash equivalents                                                   $   209    $    76
  Restricted cash (Note 5)                                                        125          -
  Accounts and notes receivable, net (Note 1)                                     360        506
  Inventories (Note 2)                                                            167        233
  Deferred income taxes (Note 6)                                                   46         27
                                                                              -------    -------
  Total current assets                                                            907        842
Property, plant and equipment, net (Note 14)                                      663        903
Intangible assets, net (Note 3)                                                   198        615
Goodwill, net (Note 3)                                                            468      1,897
Prepaid pension (Note 7)                                                            -        203
Deferred income taxes (Note 6)                                                     15          -
Deferred charges and other assets (Note 14)                                       442        543
                                                                              -------    -------
  Total assets                                                                $ 2,693    $ 5,003
                                                                              =======    =======
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
Current liabilities
  Accounts payable                                                            $   176    $   203
  Short-term debt (Note 4)                                                        145        251
  Accrued expenses (Note 14)                                                      295        463
                                                                              -------    -------
  Total current liabilities                                                       616        917
Long-term debt (Note 5)                                                           738      1,959
Deferred income taxes (Note 6)                                                     80        370
Pension liability (Note 7)                                                        278          -
Other postretirement benefits (Note 7)                                            103        110
Deferred credits and other liabilities (Note 14)                                  377        311
                                                                              -------    -------
  Total liabilities                                                             2,192      3,667
Commitments and contingencies (Note 10)                                             -          -
Company-obligated preferred securities of subsidiary trusts (Note 11)             624        624
Stockholders' (deficit) equity
  Series preferred stock (Note 12)                                                  -          -
  Common stock, $25/48 par value (Note 13)                                         83         83
     (shares issued: 2002 - 159,984,444; 2001 - 159,984,444)
  Additional paid-in capital                                                      682        697
  Unearned compensation (Note 8)                                                  (93)      (104)
  Accumulated other comprehensive losses                                         (454)      (218)
  Retained earnings                                                             1,483      2,099
                                                                              -------    -------
                                                                                1,701      2,557
Reacquired stock, at cost (shares: 2002 - 50,615,487; 2001 - 51,196,972)        1,824      1,845
                                                                              -------    -------
  Total stockholders' (deficit) equity                                           (123)       712
                                                                              -------    -------
  Total liabilities and stockholders' (deficit) equity                        $ 2,693    $ 5,003
                                                                              =======    =======


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

                                       32



HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF CASH FLOW



                                                                                   (Dollars in millions)
                                                                                 2002       2001       2000
                                                                               -------    -------    -------
                                                                                            
CASH FLOW FROM OPERATING ACTIVITIES:
Net (loss) income                                                              $  (616)   $   (58)   $    98
Net loss (income) from discontinued operations                                     199        (48)       (38)
Adjustments to reconcile net (loss) income to net cash used in operations:
Depreciation                                                                        71         77        105
Amortization                                                                        29         57         57
Gain on disposals                                                                    -        (77)      (142)
Impairment charges                                                                 368          3          -
Noncash charges (credits)                                                           64         69        105
Accruals and deferrals of cash receipts and payments:
  Affiliates' earnings in excess of dividends received                              (1)         9          2
  Accounts receivable                                                               (7)        65         (1)
  Inventories                                                                       (5)         6        (23)
  Accounts payable and accrued expenses                                           (234)      (107)      (110)
  Deferred taxes                                                                   (15)       (51)         2
  Noncurrent assets and liabilities                                                (70)       (45)       (87)
                                                                               -------    -------    -------
       Net cash used in continuing operations                                     (217)      (100)       (32)
                                                                               -------    -------    -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures                                                               (43)       (52)      (171)
Proceeds of investment and fixed asset disposals                                 1,816        356        418
Increase in restricted cash                                                       (125)         -          -
Acquisitions, net of cash acquired                                                   -          -         (6)
Other, net                                                                          11         (9)       (12)
                                                                               -------    -------    -------
       Net cash provided by investing activities from continuing operations      1,659        295        229
                                                                               -------    -------    -------
CASH FLOW FROM FINANCING ACTIVITIES:
Long-term debt proceeds                                                            450        349      1,889
Long-term debt payments                                                         (1,776)      (626)    (1,790)
Change in short-term debt                                                           (8)      (107)        92
Payment of debt issuance costs and underwriting fees                                (5)         -        (28)
Repayment of subsidiary trust preferred securities                                   -          -       (370)
Common stock issued                                                                  7         17         13
Common stock reacquired                                                              -         (1)        (2)
Dividends paid                                                                       -          -        (94)
                                                                               -------    -------    -------
       Net cash used in financing activities                                    (1,332)      (368)      (290)
                                                                               -------    -------    -------
Effect of exchange rate changes on cash                                             (2)        (3)        (2)
                                                                               -------    -------    -------
Net cash flow from discontinued operations (Note 22)                                25        198         86
Net increase (decrease) in cash and cash equivalents                               133         22         (9)
Cash and cash equivalents at beginning of year                                      76         54         63
                                                                               -------    -------    -------
Cash and cash equivalents at end of year                                       $   209    $    76    $    54
                                                                               =======    =======    =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
  Interest (net of amount capitalized)                                         $    96    $   157    $   164
  Preferred security distributions of subsidiary trusts                             57         61         85
  Income taxes, net of refunds received                                            142         37         29
Noncash investing and financing activities:
  Acquisition of minority interest                                                   -          -        (11)
  Incentive and other employee benefit stock plan issuances                         13         12          8


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

                                       33




HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' (DEFICIT) EQUITY


                                                                       (Dollars in millions)
                                                                                                 Accumulated
                                                                                       Unearned     Other
                                                                   Common    Paid-in    Compen-   Comprehen-
                                                                    Stock    Capital    sation    sive Loss
- -------------------------------------------------------------------------------------------------------------
                                                                                      
Balances at January 1, 2000                                        $    83   $   757    $  (123)   $   (44)
  (Common shares: issued, 159,976,730; reacquired, 53,587,365)
Net income                                                               -         -          -          -
Common dividends, $0.62 per common share                                 -         -          -          -
Foreign currency translation adjustment                                  -         -          -        (99)
Impact of allocation of shares held by ESOP                              -         -          8          -
Purchase of common stock, 174,547 shares                                 -         -          -          -
Issuance of common stock:
  Incentive plans, net, 1,319,519 shares, from reacquired stock          -       (31)         -          -
  Conversion of notes and debentures, 7,714 shares                       -         -          -          -
- -------------------------------------------------------------------------------------------------------------
Balances at December 31, 2000                                      $    83   $   726    $  (115)   $  (143)
  (Common shares: issued, 159,984,444; reacquired, 52,442,393)
Net loss                                                                 -         -          -          -
Foreign currency translation adjustment                                  -         -          -        (69)
Impact of allocation of shares held by ESOP                              -         -         11          -
Additional minimum pension liability, net of tax                         -         -          -         (6)
Purchase of common stock, 66,470 shares                                  -         -          -          -
Issuances of common stock:
  Incentive plans, net, 1,311,891 shares, from reacquired stock          -       (29)         -          -
- -------------------------------------------------------------------------------------------------------------
Balances at December 31, 2001                                      $    83   $   697    $  (104)   $  (218)
  (Common shares: issued, 159,984,444; reacquired, 51,196,972)
Net loss                                                                 -         -          -          -
Foreign currency translation adjustment                                  -         -          -         15
Impact of allocation of shares held by ESOP                              -         -         11          -
Additional minimum pension liability, net of tax                         -         -          -       (354)
Reclassification adjustment relating to disposal of business             -         -          -        103
Purchase of common stock, 16,960 shares                                  -         -          -          -
Issuances of common stock:
  Incentive plans, net, 598,445 shares, from reacquired stock            -       (15)         -          -
- -------------------------------------------------------------------------------------------------------------
Balances at December 31, 2002                                      $    83   $   682    $   (93)   $  (454)
  (Common shares: issued, 159,984,444; reacquired, 50,615,487)






                                                                      (Dollars in millions)
                                                                  Retained    Reacquired
                                                                  Earnings      Stock      Total
- -------------------------------------------------------------------------------------------------
                                                                                 
Balances at January 1, 2000                                       $ 2,125      $(1,935)   $   863
  (Common shares: issued, 159,976,730; reacquired, 53,587,365)
Net income                                                             98            -         98
Common dividends, $0.62 per common share                              (66)           -        (66)
Foreign currency translation adjustment                                 -            -        (99)
Impact of allocation of shares held by ESOP                             -            -          8
Purchase of common stock, 174,547 shares                                -           (5)        (5)
Issuance of common stock:
  Incentive plans, net, 1,319,519 shares, from reacquired stock         -           48         17
  Conversion of notes and debentures, 7,714 shares                      -            -          -
- -------------------------------------------------------------------------------------------------
Balances at December 31, 2000                                     $ 2,157      $(1,892)   $   816
  (Common shares: issued, 159,984,444; reacquired, 52,442,393)
Net loss                                                              (58)           -        (58)
Foreign currency translation adjustment                                 -            -        (69)
Impact of allocation of shares held by ESOP                             -            -         11
Additional minimum pension liability, net of tax                        -            -         (6)
Purchase of common stock, 66,470 shares                                 -           (1)        (1)
Issuances of common stock:
  Incentive plans, net, 1,311,891 shares, from reacquired stock         -           48         19
- -------------------------------------------------------------------------------------------------
Balances at December 31, 2001                                     $ 2,099      $(1,845)   $   712
  (Common shares: issued, 159,984,444; reacquired, 51,196,972)
Net loss                                                             (616)           -       (616)
Foreign currency translation adjustment                                 -            -         15
Impact of allocation of shares held by ESOP                             -            -         11
Additional minimum pension liability, net of tax                        -            -       (354)
Reclassification adjustment relating to disposal of business            -            -        103
Purchase of common stock, 16,960 shares                                 -            -          -
Issuances of common stock:
  Incentive plans, net, 598,445 shares, from reacquired stock           -           21          6
- -------------------------------------------------------------------------------------------------
Balances at December 31, 2002                                     $ 1,483      $(1,824)   $  (123)
  (Common shares: issued, 159,984,444; reacquired, 50,615,487)



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

                                       34



HERCULES INCORPORATED
CONSOLIDATED STATEMENT OF COMPREHENSIVE LOSS



                                                                    (Dollars in millions)
                                                                   Year Ended December 31,
                                                                  2002       2001       2000
                                                                 -----      -----      -----
                                                                              
Net (loss) income                                                $(616)     $ (58)     $  98
Foreign currency translation                                        15        (69)       (99)
Reclassification adjustment relating to disposal of business       103          -          -
Additional minimum pension liability, net of tax                  (354)        (6)         -
                                                                 -----      -----      -----
Comprehensive loss                                               $(852)     $(133)     $  (1)
                                                                 =====      =====      =====


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

                                       35



HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION

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

USE OF ESTIMATES

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

REVENUE RECOGNITION

         The Company recognizes revenue when the earnings process is complete.
This generally occurs when products are shipped to the customer or services are
performed in accordance with terms of the agreement, title and risk of loss have
been transferred, collectibility is probable and pricing is fixed or
determinable. Approximately 12% of the Company's revenues are from consignment
inventory. For consignment inventory, title and risk of loss are transferred
when the earnings process is considered complete, which generally occurs when
the Company's products have been consumed or used in the customer's production
process. Accruals are made for sales returns and other allowances based on the
Company's experience. The corresponding shipping and handling costs are included
in cost of sales.

RESEARCH AND DEVELOPMENT EXPENDITURES

         Research and development expenditures are expensed as incurred.

ENVIRONMENTAL EXPENDITURES

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

CASH AND CASH EQUIVALENTS

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

INVENTORIES

         Inventories are stated at the lower of cost or market. A portion of
domestic inventories are valued on the last-in, first-out (LIFO) method. Foreign
and certain domestic inventories, which in the aggregate represented 84% and
66%, respectively, of total inventories at December 31, 2002 and 2001, are
valued principally on the average-cost method. Elements of costs in inventories
include raw materials, direct labor and manufacturing overhead.

PROPERTY AND DEPRECIATION

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

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

GOODWILL AND OTHER INTANGIBLE ASSETS

         Pursuant to Statement of Financial Accounting Standards No. 142,
"Goodwill and Other Intangible Assets" ("SFAS 142"), beginning January 1, 2002,
goodwill is not amortized but is tested for impairment at least annually with
any necessary adjustment charged to expense. The Company has selected November
30 as the date for performing the annual impairment test. Prior to January 1,
2002, goodwill and other intangible assets have been amortized on a
straight-line basis over the

                                       36



HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

estimated future periods to be benefited, generally 40 years for goodwill,
customer relationships and trademarks and tradenames and 5 to 15 years for other
intangible assets. Intangible assets with finite lives are amortized over their
useful lives.

INVESTMENTS

         Investments in affiliated companies with a 20% or greater ownership
interest in which the Company has significant influence are accounted for using
the equity method of accounting. Accordingly, these investments are included in
deferred charges and other assets on the Company's balance sheet and the income
or loss from these investments is included in equity (loss) income of affiliated
companies in the Company's statement of income.

         Investments in affiliated companies in which the Company does not have
a controlling interest, or an ownership and voting interest so large as to exert
significant influence, are accounted for using the cost method of accounting.
Accordingly, these investments are included in deferred charges and other assets
on the Company's balance sheet.

         Other investments include non-current marketable securities whose value
approximates market value.

LONG-LIVED ASSETS

         The Company reviews its long-lived assets, including other intangibles,
for impairment on an exception basis whenever events or changes in circumstances
indicate carrying amounts of the assets may not be recoverable through
undiscounted future cash flows. If an impairment loss has occurred based on
expected future cash flows (undiscounted), the loss is recognized in the income
statement. The amount of the impairment loss is the excess of the carrying
amount of the impaired asset over the fair value of the asset. The fair value
represents expected future cash flows from the use of the assets, discounted at
the rate used to evaluate potential investments. The Company reviews its
long-lived assets under Statement of Financial Accounting Standards No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144").

INCOME TAXES

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

FOREIGN CURRENCY TRANSLATION

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

DERIVATIVE INSTRUMENTS AND HEDGING

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

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

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

                                       37



HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

STOCK-BASED COMPENSATION

         Compensation costs attributable to stock option and similar plans are
recognized based on any excess of the quoted market price of the stock on the
date of grant over the amount the employee is required to pay to acquire the
stock (the intrinsic-value method under Accounting Principles Board Opinion 25
("APB 25")). Such amount, if any, is accrued over the related vesting period, as
appropriate. Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" ("SFAS 123") and the related amendments in
Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure" ("SFAS 148") require companies
electing to continue to use the intrinsic-value method to make pro forma
disclosures of net income and earnings per share as if the fair-value-based
method of accounting had been applied.

         Pursuant to the disclosure requirements of SFAS 123, as amended by SFAS
148, the following table presents the pro forma effect on net (loss) income and
(loss) earnings per share assuming the Company had applied the fair value
recognition provisions of SFAS 123 to stock-based employee compensation.



                                                    (Dollars in millions, except per share)
                                                             Year Ended December 31,
                                                          2002         2001       2000
                                                        --------     --------   --------

                                                                       
Net (loss) income, as reported                          $   (616)    $   (58)    $   98
Deduct: Total stock-based employee compensation
  expense determined under the fair value based
  method for all awards, net of tax*                          12          20         24
                                                        --------     -------     ------
Pro forma net (loss) income                             $   (628)    $   (78)    $   74
                                                        ========     =======     ======

(Loss) earnings per share:

  Basic - as reported                                   $  (5.65)    $ (0.54)    $ 0.91
                                                        --------     -------     ------
  Basic - pro forma                                     $  (5.76)    $ (0.73)    $ 0.69
                                                        --------     -------     ------

  Diluted - as reported                                 $  (5.65)    $ (0.54)    $ 0.91
                                                        --------     -------     ------
  Diluted - pro forma                                   $  (5.76)    $ (0.73)    $ 0.69
                                                        --------     -------     ------


* For information regarding the weighted-average assumptions that would be used
  in estimating fair value for 2002, 2001 and 2000, see Note 9 of the Notes to
  Consolidated Financial Statements.

COMPUTER SOFTWARE COSTS

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

RECENT ACCOUNTING PRONOUNCEMENTS

         In June 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations" ("SFAS 143"). SFAS 143 is effective for financial
statements issued for fiscal years beginning after June 15, 2002. SFAS 143
establishes accounting standards for the recognition and measurement of legal
obligations associated with the retirement of tangible long-lived assets. The
provisions of SFAS 143 require companies to record an asset and related
liability for the costs associated with the retirement of a tangible long-lived
asset if a legal liability to incur these costs exists. SFAS 143 became
effective for the Company on January 1, 2003. Based on the Company's evaluation
to date, the adoption of SFAS 143 is expected to result in a charge ranging from
$0.25 to $0.30 per diluted share that will be reported as a cumulative effect of
a change in accounting principle.

         In April 2002, the FASB issued Statement of Financial Accounting
Standards No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment
to FASB Statement No. 13, and Technical Corrections" ("SFAS 145"). The Company
elected to early adopt the provisions of SFAS 145 related to the rescission of
SFAS 4, "Reporting Gains and Losses from the Extinguishment of Debt" ("SFAS 4").
Accordingly, the prepayment penalties and the write-off of debt issuance costs

                                       38



HERCULES INCORPORATED
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

relating to the April 2002 debt repayment (see Note 5) are reported in net loss
from continuing operations. Under SFAS 4, the majority of these costs would have
been reported as an extraordinary loss in the Consolidated Statement of
Operations. The adoption of SFAS 145 did not impact the classification of prior
year amounts.

         In June 2002, the FASB issued Statement of Financial Accounting
Standards No. 146, "Accounting for Costs Associated with Exit or Disposal
Activities" ("SFAS 146"). SFAS 146 addresses financial accounting and reporting
for costs associated with exit or disposal activities and nullifies Emerging
Issues Task Force Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs in a Restructuring)". SFAS 146 defines the timing of the recognition of
costs associated with exit or disposal activities, the types of costs that may
be recognized and the methodology for calculating the fair value of such costs.
The provisions of SFAS 146 are effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not believe this
statement will have a material effect on its financial statements.

         On December 15, 2002, the FASB issued Statement of Financial Accounting
Standards No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS 148"). SFAS 148 amends Statement of Financial Accounting
Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123") by
requiring, among other provisions, enhanced disclosure regarding stock-based
compensation in the Summary of Significant Accounting Policies. The Company
adopted the enhanced disclosure provisions of SFAS 148 as of December 31, 2002.

         In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The initial
recognition and measurement provisions of FIN 45 apply on a prospective basis to
guarantees issued or modified after December 31, 2002. As required, the Company
has adopted the disclosure requirements of FIN 45 as of December 31, 2002 (see
Note 10). The Company will apply the initial recognition and measurement
provisions on a prospective basis effective January 1, 2003. FIN 45 modifies
existing disclosure requirements for most guarantees and requires that at the
time a company issues a guarantee, the company must recognize an initial
liability for the fair value of the obligation it assumes under that guarantee.
The Company is in the process of evaluating the recognition and measurement
provisions of FIN 45 and absent any unforeseen events, management does not
expect that the adoption of these provisions will have a significant impact on
the Company's financial condition, liquidity or results of operations.

         In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Certain Variable Interest Entities" ("FIN 46") (VIEs), which
is an interpretation of Accounting Research Bulletin No. 51, "Consolidated
Financial Statements" ("ARB 51"). FIN 46 addresses the application of ARB 51 to
VIEs, and generally would require that assets, liabilities and results of the
activity of a VIE be consolidated into the financial statements of the
enterprise that is considered the primary beneficiary. The Company currently has
two joint-venture VIEs that are presently accounted for using the equity method
of accounting. These entities serve as strategic global marketers of the
Company's bicomponent fibers. The assets and liabilities of these entities are
not consolidated within the Company's financial statements. As of December 31,
2002, the fair value of the assets in these joint ventures was approximately $5
million and the fair values of the associated liabilities and non-controlling
interests were approximately $4 million. The Company is in the process of
reviewing the provisions of FIN 46. There are no assets of the Company that
serve as collateral for the VIEs and the creditors of the VIEs have no recourse
to the general credit of the Company.

RECLASSIFICATIONS

         Certain amounts in the 2001 and 2000 consolidated financial statements
and notes have been reclassified to conform to the 2002 presentation.

                                       39



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.       ACCOUNTS AND NOTES RECEIVABLE, NET

         Accounts and notes receivable, net, consists of:



                                           (Dollars in millions)
                                             2002        2001
                                             ----        ----
                                                   
Trade                                        $312        $463
Other                                          60          67
                                             ----        ----
Total                                         372         530
Less allowance for doubtful accounts           12          24
                                             ----        ----
                                             $360        $506
                                             ====        ====


2.       INVENTORIES

         The components of inventories are:



                                           (Dollars in millions)
                                             2002        2001
                                             ----        ----
                                                   
Finished products                            $ 87        $127
Raw materials and work-in-process              59          85
Supplies                                       21          21
                                             ----        ----
                                             $167        $233
                                             ====        ====


         Inventories valued on the LIFO method were lower than if valued under
the average-cost method, which approximates current cost, by $20 million at
December 31, 2002 and 2001. The average-cost value of inventories subject to
LIFO was $46 and $100 million at December 31, 2002 and 2001, respectively.

3.       GOODWILL AND OTHER INTANGIBLE ASSETS

         Effective January 1, 2002, the Company adopted SFAS 142. Under SFAS
142, goodwill and intangible assets with indefinite useful lives are not
amortized but instead are reviewed for impairment at least annually and written
down only in periods in which it is determined that the fair value is less than
the recorded value. SFAS 142 also requires the transitional impairment review
for goodwill, as well as an annual impairment review, to be performed on a
reporting unit basis. The Company identified the following reporting units:
BetzDearborn, Pulp and Paper, Aqualon, FiberVisions and Pinova (formerly Rosin
and Terpenes). In connection with the Company's transitional review, recorded
goodwill was determined to be impaired in the BetzDearborn and the FiberVisions
reporting units. In the first quarter of 2002, the Company completed its
transitional impairment review of identified reporting units and recognized
after-tax impairment losses of $262 million in the BetzDearborn reporting unit
and $87 million in the FiberVisions reporting unit as a cumulative effect of a
change in accounting principle.

         In addition, an after-tax impairment loss of $19 million was recognized
in the first quarter of 2002 relating to the Company's equity investment in CP
Kelco, which had an impairment under SFAS 142. After recognition of this
impairment, the carrying value for the Company's investment in CP Kelco is zero.

         The following table reflects the effect of the adoption of SFAS 142 on
net loss and net loss per share as if SFAS 142 had been in effect for the
periods presented.

                                       40



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                                      (Dollars in millions, except per share)

                                                                                            Year Ended
                                                                                           December 31,         2000          2000
                                                                                  2002           2001           BASIC        DILUTED
                                                                                --------       --------       --------      --------
                                                                                                                
Net (loss) income before cumulative effect of change in accounting
principle:
  As reported                                                                   $   (248)      $    (58)      $     98      $     98
  Goodwill amortization                                                                -             50             54            54
                                                                                --------       --------       --------      --------
Adjusted net (loss) income before cumulative effect of change in accounting
principle                                                                       $   (248)      $     (8)      $    152      $    152
                                                                                ========       ========       ========      ========
Basic and diluted net (loss) earnings per share before cumulative effect of
change in accounting principle:
  As reported                                                                   $  (2.28)      $  (0.54)      $   0.91      $   0.91
  Goodwill amortization                                                                -           0.47           0.51          0.50
                                                                                --------       --------       --------      --------
Adjusted basic and diluted (loss) earnings per share before cumulative effect
of change in accounting principle                                               $  (2.28)      $  (0.07)      $   1.42      $   1.41
                                                                                ========       ========       ========      ========
Net (loss) income:
  As reported                                                                   $   (616)      $    (58)      $     98      $     98
  Goodwill amortization                                                                -             50             54            54
                                                                                --------       --------       --------      --------
Adjusted net (loss) income                                                      $   (616)      $     (8)      $    152      $    152
                                                                                ========       ========       ========      ========
Basic and diluted net (loss) earnings per share:
  As reported                                                                   $  (5.65)      $  (0.54)      $   0.91      $   0.91
  Goodwill amortization                                                                -           0.47           0.51          0.50
                                                                                --------       --------       --------      --------
Adjusted basic and diluted (loss) earnings per share                            $  (5.65)      $  (0.07)      $   1.42      $   1.41
                                                                                ========       ========       ========      ========


         Accumulated amortization for goodwill upon adoption of SFAS 142 was
$185 million. The following table shows changes in the carrying amount of
goodwill for the year ended December 31, 2002, by operating segment.



                                                                                         (Dollars in millions)
                                                                                             Engineered
                                                                               Performance    Materials
                                                                                Products    & Additives      Total
                                                                               -----------  -----------     --------
                                                                                                   
Balance at January 1, 2002                                                      $ 1,725       $   172       $ 1,897
Discontinued operations
  BetzDearborn                                                                     (923)            -          (923)
                                                                                -------       -------       -------
Total discontinued operations                                                      (923)            -          (923)
                                                                                -------       -------       -------
Impairment losses
  BetzDearborn, discontinued operations                                            (179)            -          (179)
  BetzDearborn, cumulative effect                                                  (267)            -          (267)
  FiberVisions, cumulative effect                                                     -           (87)          (87)
                                                                                -------       -------       -------
Total impairment losses                                                            (446)          (87)         (533)
                                                                                -------       -------       -------
Foreign currency translation                                                         27             -            27
                                                                                -------       -------       -------
Balance at December 31, 2002                                                    $   383       $    85       $   468
                                                                                =======       =======       =======


                                       41



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The following table provides information regarding the Company's other
intangible assets with finite lives:



                                                     (Dollars in millions)
                                    Customer       Trademarks         Other
                                  Relationships   & Tradenames     Intangibles       Total
                                  -------------   ------------     -----------       -----
                                                                         
Gross Carrying Amount
- ---------------------
Balance, December 31, 2001            $330            $250            $140            $720
Balance, December 31, 2002              89              70              95             254

Accumulated Amortization
- ------------------------
Balance, December 31, 2001            $ 28            $ 20            $ 57            $105
Balance, December 31, 2002              11               7              38              56


         Total amortization expense for the years ended December 31, 2002, 2001
and 2000 for other intangible assets was $11 million, $26 million and $26
million, respectively, of which $9 million was included in income from
continuing operations for each of the years ended December 31, 2002, 2001 and
2000. Total goodwill amortization expense for the years ended December 31, 2001
and 2000 was $50 million and $54 million, respectively, of which $15 million was
included in income from continuing operations for each of the years ended
December 31, 2001 and 2000. Estimated amortization expense is $9 million for
2003 and 2004 and $8 million from 2005 through 2008.

4.       SHORT-TERM DEBT

         A summary of short-term debt follows:



                                            (Dollars in millions)
                                             2002          2001
                                             ----          ----
                                                    
Banks                                        $  1         $  9
Current maturities of long-term debt          144          242
                                             ----         ----
                                             $145         $251
                                             ====         ====


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

         At December 31, 2002, Hercules had $24 million of unused short-term
lines of credit that may be drawn as needed, with interest at a negotiated
spread over lenders' cost of funds. Weighted-average interest rates on
short-term borrowings at December 31, 2002 and 2001 were 2.67% and 6.97%,
respectively.

5.       LONG-TERM DEBT

         A summary of long-term debt follows:

                                       42



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                     (Dollars in millions)
                                                                       2002         2001
                                                                     -------      -------
                                                                            
6.60% notes due 2027 (a)                                             $   100      $   100
6.625% notes due 2003 (b)                                                125          125
11.125% senior notes due 2007 (c)                                        400          400
8% convertible subordinated debentures due 2010 (d)                        3            3
Term loan tranche A due in varying amounts through 2003 (e)                -          543
Term loan tranche D due 2005 (e)                                           -          372
Revolving credit agreement due 2003 (e)                                    -          516
ESOP debt (f)                                                              -           84
Term notes at various rates from 4.07% to 8.56% due in varying
  amounts through 2006 (g)                                                50           52
Term B loan due 2007 (h)                                                 200            -
Other                                                                      4            6
                                                                     -------      -------
                                                                     $   882      $ 2,201
Current maturities of long-term debt                                    (144)        (242)
                                                                     -------      -------
                                                                     $   738      $ 1,959
                                                                     =======      =======


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

(b)      Par value of $125 million issued June 1993. In conjunction with the
         execution of the credit agreement on December 20, 2002 (see footnote
         (h) below), $125 million of the proceeds of the term B loan were placed
         into an escrow account to pay the principal amount upon maturity in
         June 2003.

(c)      The senior notes accrue interest at 11 1/8% per annum, payable
         semi-annually. The senior notes are guaranteed by each of Hercules'
         current and future wholly-owned domestic restricted subsidiaries. At
         any time prior to November 15, 2003, Hercules may on any one or more
         occasions redeem up to 35% of the aggregate principal amount of the
         senior notes issued at a redemption price of 111.125% of the principal
         amount, plus accrued and unpaid interest and liquidated damages, if
         any, to the redemption date, with the net cash proceeds of one or more
         public equity offerings; provided that (i) at least 65% of the
         aggregate principal amount of the senior notes issued under the
         indenture remains outstanding immediately after the occurrence of such
         redemption (excluding notes held by Hercules and its subsidiaries); and
         (ii) the redemption occurs within 45 days of the date of the closing of
         such public equity offering. Except as described above, the senior
         notes will not be redeemable at Hercules' option prior to maturity.
         Hercules is not required to make mandatory redemption or sinking fund
         payments with respect to the senior notes. If a change of control
         occurs, each holder of the notes will have the right to require
         Hercules to repurchase all or any part of that Holder's notes pursuant
         to a change of control offer on the terms set forth in the indenture.
         In the change of control offer, Hercules will offer a change of control
         payment in cash equal to 101% of the aggregate principal amount of the
         notes repurchased plus accrued and unpaid interest and liquidated
         damages, if any, on the notes repurchased, to the date of purchase. The
         notes were subject to a registration rights agreement that required
         Hercules to file a Registration Statement on Form S-4 with the
         Securities and Exchange Commission, pursuant to which the Company
         offered to exchange all of its $400 million aggregate principal amount
         of 11 1/8% senior notes due 2007 ("old notes") for $400 million
         aggregate principal amount of 11 1/8% senior notes due 2007 ("new
         notes"). The form and terms of the new notes are the same as the form
         and terms of the old notes except that, because the issuance of the new
         notes was registered under the Securities Act, the new notes do not
         bear legends restricting their transfer and are not entitled to certain
         registration rights. The new notes evidence the same debt as the old
         notes and the new notes and the old notes are governed by the same
         indenture. Hercules did not receive any proceeds from the exchange
         offer. As of December 31, 2002, $389.8 million of the old notes had
         been exchanged for a like amount of new notes.

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

(e)      The BetzDearborn acquisition was financed with borrowings under a
         $3,650 million senior credit facility with a syndicate of banks and was
         consummated on October 5, 1998. The syndication included three tranches
         of varying maturity term loans totaling $2,750 million and a $900
         million revolving credit agreement. The Company used the

                                       43



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         net proceeds of approximately $1.7 billion from the sale of the Water
         Treatment Business (see Note 22) to permanently reduce long-term debt,
         repaying in full the following borrowings: term loan tranche A, term
         loan tranche D, the revolving credit agreement and the ESOP credit
         facility. In addition, effective with the consummation of the sale of
         the Water Treatment Business and the application of the net proceeds,
         the revolving credit agreement was permanently reduced from $900
         million to $200 million and the Canadian revolving credit agreement was
         cancelled. On December 20, 2002, the Company completed a refinancing
         with a new senior credit facility consisting of a $125 million
         revolving credit agreement and a $200 million term loan (see footnote
         (h) below). The refinancing resulted in the complete cancellation of
         the existing senior credit facility.

         A portion of the net proceeds ($73 million) from the sale of the Water
         Treatment Business was used to collateralize the Company's outstanding
         letters of credit. In connection with the cancellation of the senior
         credit facility, the letters of credit were reissued under the new
         credit agreement.

         Issuance costs related to the original financing were included in
         deferred charges and other assets and were being amortized over the
         term of the loans, using the effective interest method. The Company
         recognized $20 million for the write-off of debt issuance costs
         associated with the repayment of the senior credit facility.

(f)      In 1998, the Company assumed a $94 million loan related to the
         BetzDearborn ESOP Trust. The loan and guarantee had a maturity of June
         2009. On April 29, 2002, the Company used the net proceeds of
         approximately $1.7 billion from the sale of the Water Treatment
         Business (see Note 22) to permanently reduce long-term debt, repaying
         in full the following borrowings: term loan tranche A, term loan
         tranche D, the revolving credit agreement and the ESOP credit facility.
         The Company recognized $24 million for debt prepayment penalties
         associated with the repayment of the ESOP credit facility (see Note 8).

(g)      Debt assumed in conjunction with the acquisition of FiberVisions
         L.L.C., net of repayments through December 31, 2002 and 2001.

(h)      On December 20, 2002, the Company completed the refinancing of its
         existing senior credit facility with a new senior credit facility. The
         new senior credit facility consists of a four year $125 million
         revolving credit agreement and a $200 million term B loan due May 2007.
         In addition, the Company has the option of borrowing an additional $50
         million to $150 million on terms identical to term B loan. The
         incremental term loan will remain available until the earlier of
         December 20, 2005 or the repayment of the $200 million term B loan. In
         conjunction with the execution of the credit agreement, $125 million of
         the proceeds of the term B loan was placed into an escrow account to
         pay the principal amount of the 6.625% notes in June 2003. The escrow
         funds have been recognized as restricted cash on the Consolidated
         Balance Sheet. The term B loan bears interest at LIBOR + 3.25% (4.66%
         at December 31, 2002). The revolving credit agreement bears interest at
         LIBOR plus an applicable margin, currently 2.75%, which is determinable
         based on the Company's leverage ratio. Interest rates are reset for
         one, two, three or six month periods at the Company's option.

         The new senior credit facility is secured by liens on the Company's
         assets (including real, personal and intellectual properties) and is
         guaranteed by substantially all of the Company's current and future
         wholly-owned domestic subsidiaries. Issuance costs related to the
         financing are included in deferred charges and other assets and are
         being amortized over the term of the loans, using the effective
         interest method.

         As of December 31, 2002, the entire $125 million revolver was available
         for use.

         The Company's new senior credit facility requires quarterly compliance
         with certain financial covenants, including a debt/EBITDA ratio
         ("leverage ratio") and an interest coverage ratio and establishes
         limitations on the permitted amount of annual capital expenditures. At
         December 31, 2002, the Company was in compliance with all of its debt
         covenants.

         Long-term debt maturities in 2003 are $144 million, of which $125
million was held in an escrow account to pay the 6.625% notes due in June 2003.
Long-term debt maturities are $16 million in 2004, $16 million in 2005, $7
million in 2006, $593 million in 2007 and $106 million thereafter.

6.       INCOME TAXES

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

                                       44



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                             (Dollars in millions)
                                         2002        2001        2000
                                        -----       -----       -----
                                                       
Domestic                                $(212)      $(144)      $ (69)
Foreign                                   157          63         157
                                        -----       -----       -----
                                        $ (55)      $ (81)      $  88
                                        =====       =====       =====


A summary of the components of the tax provision from continuing
operations follows:



                                             (Dollars in millions)
                                         2002        2001        2000
                                        -----       -----       -----
                                                       
Currently payable
  U.S. federal                          $(40)        $ 26        $(12)
  Foreign                                 17           32          58
  State                                    2           22           4
Deferred
  Domestic                                 9          (55)        (22)
  Foreign                                  8           (9)         (2)
                                        ----         ----        ----
                                        $ (4)        $ 16        $ 26
                                        ====         ====        ====


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



                                                  (Dollars in millions)
                                                     2002        2001
                                                    -----       -----
                                                          
Depreciation                                        $ 109       $ 146
Prepaid pension                                         6          89
Investments                                           129         105
Goodwill                                               54         249
Accrued expenses                                        6           -
Other                                                  15          90
                                                    -----       -----
Gross deferred tax liabilities                      $ 319       $ 679
                                                    -----       -----
Postretirement benefits other than pensions         $ (60)      $ (59)
Prepaid pension                                       (96)          -
Inventory                                              (6)         (9)
Goodwill                                               (8)          -
Accrued expenses                                     (135)       (191)
Loss carryforwards                                   (289)        (69)
Other                                                  (8)        (83)
                                                    -----       -----
Gross deferred tax assets                            (602)       (411)
                                                    -----       -----
Valuation allowance                                   308          75
                                                    -----       -----
                                                    $  25       $ 343
                                                    =====       =====


                                       45



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The provision for income taxes attributable to items other than continuing
operations is shown below:



                                                                           (Dollars in millions)
                                                                        2002       2001        2000
                                                                        -----      ----        ----
                                                                                      
Provision on income from discontinued operations                        $ 20       $ 56        $ 40
Provision on loss on disposal of discontinued operations                  51          -           -
Cumulative effect of change in accounting principle                       (4)         -           -


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



                                                                        2002           2001           2000
                                                                        ----           ----           ----
                                                                                             
U.S. statutory income tax rate                                           35%            35%            35%
Goodwill amortization                                                     -            (11)             6
Valuation allowances                                                     (2)           (11)             4
Research and development credits                                          -              -            (11)
Tax rate differences on subsidiary earnings                               8             13             (9)
Incremental tax on cash repatriations from non-US subsidiaries           (4)            (6)             1
State taxes                                                              (4)            (4)             1
Reserves                                                                (20)           (37)             1
Other                                                                    (6)             1              2
                                                                        ---            ---            ---
Effective tax rate                                                        7%           (20%)           30%
                                                                        ===            ===            ===


         Loss carryforwards include both net operating loss carryforwards and
capital loss carryforwards. At December 31, 2002, the tax effect of such
carryforwards approximated $289 million. Of this amount, $228 million are
domestic capital loss carryforwards that expire in 2007 for which full valuation
allowances have been established. State net operating loss carryforwards
approximate $44 million, with expiration dates ranging from 2003 to 2017, for
which full valuation allowances have been established. Foreign net operating
loss carryforwards approximate $17 million, with expiration dates ranging from
2003 to 2012, most of which are offset by valuation allowances.

         The Company provides taxes on undistributed earnings of subsidiaries
and affiliates to the extent such earnings are planned to be remitted and not
permanently reinvested. The undistributed earnings of subsidiaries and
affiliates on which no provision for foreign withholding or U.S. income taxes
has been made amounted to approximately $158 million and $227 million at
December 31, 2002 and 2001, respectively. U.S. and foreign income taxes that
would be payable if such earnings were distributed may be lower than the amount
computed at the U.S. statutory rate because of the availability of tax credits.

7.       PENSION AND OTHER POSTRETIREMENT BENEFITS

         The Company provides a defined benefit pension and postretirement
benefit plans to employees. Assets of the defined benefit plan are invested in
domestic and international corporate equity securities (including $5 million of
Company stock), domestic and international fixed income securities (including
governments, agencies, mortgages, asset backed, corporates) and various
derivative and money market securities. The assets of the U.S. defined benefit
plan constitute 85% of the total defined benefit plan assets applicable to plans
sponsored by the Company. The U.S. defined benefit plan assets are invested as
follows: $439 million in domestic corporate equity securities, $180 million in
international corporate equity securities, $309 million in fixed income
securities and $38 million in other investments. The following chart lists
benefit obligations, plan assets and funded status of the plans.

                                       46



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                                                 (Dollars in millions)
                                                                   Pension Benefits       Other Postretirement Benefits
                                                               ----------------------     -----------------------------
                                                                 2002           2001           2002           2001
                                                               --------       --------       --------       --------
                                                                                                
CHANGE IN BENEFIT OBLIGATION
 Benefit obligation at January 1                               $ 1,495        $ 1,483        $   230        $   191
 Service cost                                                       18             26              1              1
 Interest cost                                                      99            105             15             15
 Amendments                                                          1              6            (26)             -
 Plan participant contribution                                       -              1              -              -
 Transition obligation amortization                                  -             (1)            (5)             -
 Acquisition/divestiture                                           (92)           (45)             -              -
 Translation difference                                             28            (10)            (1)            (2)
 Actuarial loss                                                     77             51             17             50
 Special termination benefits                                        4             15              -              -
 Benefits paid                                                    (102)          (136)           (23)           (25)
                                                               -------        -------        -------        -------
Benefit obligation at December 31                              $ 1,528        $ 1,495        $   208        $   230
                                                               =======        =======        =======        =======
CHANGE IN PLAN ASSETS
 Fair value of plan assets at January 1                        $ 1,286        $ 1,574        $     1        $     3
 Actual return on plan assets                                     (112)           (95)             -              -
 Acquisition/divestiture                                           (52)           (53)             -              -
 Company contributions                                              97              5              -              -
 Translation difference                                             21            (10)             -              -
 Plan participant contributions                                      1              1              -              -
 Benefits paid from plan assets                                   (102)          (136)             -             (2)
                                                               -------        -------        -------        -------
Fair value of plan assets at December 31                       $ 1,139        $ 1,286        $     1        $     1
                                                               =======        =======        =======        =======
Funded status of the plans                                     $  (389)       $  (208)       $  (208)       $  (229)
Unrecognized actuarial loss (gain)                                 660            387            120            112
Unrecognized prior service cost (benefit)                           29             33            (39)           (17)
Unrecognized net transition obligation                               1              1              1              1
                                                               -------        -------        -------        -------
Net amount recognized                                          $   301        $   213        $  (126)       $  (133)
                                                               =======        =======        =======        =======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:

Prepaid benefit cost                                           $   362        $   256        $     -        $     -
Accrued benefit liability                                          (61)           (43)          (103)          (110)
Amount included in accrued expenses                                  -              -            (23)           (23)
Additional minimum liability                                      (579)           (10)             -              -
Intangible asset                                                    26              -              -              -
Accumulated other comprehensive income                             553             10              -              -
                                                               -------        -------        -------        -------
Net amount recognized                                          $   301        $   213        $  (126)       $  (133)
                                                               =======        =======        =======        =======
WEIGHTED-AVERAGE ASSUMPTIONS AS OF DECEMBER 31

Discount rate                                                     6.55%          6.95%          6.55%          6.95%
Expected return on plan assets                                    8.59%          8.56%          8.59%          8.56%
Rate of compensation increase                                     4.32%          4.24%          4.32%          4.24%


                                       47



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS




Net Periodic Benefit (Credit) Cost            Pension Benefits         Other Postretirement Benefits
                                         --------------------------    -----------------------------
                                           2002     2001      2000        2002      2001      2000
                                         --------  -------   -------     -------   -------   -------
                                                                           
Service cost                             $    18   $   26    $   26      $    1    $    1    $    1
Interest cost                                 99      105       105          15        15        14
Return on plan assets (expected)            (126)    (141)     (142)         (1)        -        (1)
Amortization and deferrals                     6        5         3           -        (1)       (2)
Plan participant contributions                (1)       -         -           -         -         -
Special termination benefits                   8        2         4           -         -         -
Actuarial loss recognized                      2        -         -           -         -         -
Amortization of transition asset               -        2       (11)          -         -         -
                                         -------   ------    ------      ------    ------    ------
Benefit cost (credit)                    $     6   $   (1)   $  (15)     $   15    $   15    $   12
                                         =======   ======    ======      ======    ======    ======


         At December 31, 2002, the accumulated benefit obligation ("ABO") of the
U.S., United Kingdom and German defined benefit pension plans, $1,227 million,
$55 million and $27 million, respectively, exceeded their funded benefits. Since
the plans were in an under-funded status at December 31, 2002, the Company
recorded an additional minimum liability ("AML") of $569 million during 2002, of
which $542 million related to the U.S. plan, $25 million related to the UK plan
and $2 million related to the German plan. The impact of the AML was partially
offset by an intangible asset (equal to the unrecognized prior service cost) of
$26 million and deferred taxes of $189 million. The remaining $354 million was
recognized in equity as a reduction in accumulated other comprehensive income.
The accrued liability related to the U.S. plan at December 31, 2002 is
approximately $209 million. At December 31, 2002, the consolidated projected
benefit obligation was $1,528 million, of which $1,309 million is attributable
to the U.S. plan.

Other Postretirement Benefits

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

         The assumed health care cost trend rate was 10% for the year ended
December 31, 2002. The assumed health care cost trend rate was 7% for the year
ended December 31, 2001 and 8% for the year ended December 31, 2000. The assumed
health care cost trend rate will be 10% in 2003, decreasing to 4.5% by 2007 and
for all subsequent years.

         A one-percentage point increase or decrease in the assumed health care
cost trend rate would increase or decrease the postretirement benefit obligation
by $6 million or $5.5 million, respectively, and would not have a material
effect on aggregate service and interest cost components.

8.       EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP")

         At December 31, 2001, the ESOP trust had long-term debt with third
parties of $75 million ("ESOP credit facility"), which was guaranteed by the
Company. The fair value, included in long-term debt, was $84 million at December
31, 2001. In December 2001, the ESOP trust entered into a loan agreement with
the Company which permitted the trust to borrow up to $86 million from the
Company. Concurrent with and conditioned upon the loan agreement, the trust
borrowed $11 million from the Company which was outstanding at December 31,
2001. Borrowings under the loan agreement recorded on the trust's books, the
corresponding receivable recorded on the Company's books, interest expense and
interest income are eliminated in consolidation.

         Effective March 1, 2002, the BetzDearborn 401(k) plan was merged into
the Hercules Incorporated Savings and Investment Plan ("SIP Plan"). On April
29, 2002, the Company used a portion of the proceeds from the sale of the Water
Treatment Business (see Notes 5 and 22) to fully prepay the ESOP credit
facility. Concurrent with the prepayment of the ESOP credit facility, the trust
borrowed $75 million from the Company under the loan agreement. At December 31,
2002, the ESOP trust had $76 million in long-term debt outstanding under the
loan agreement; the Company has an offsetting receivable.

                                       48



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

The Company recognized $24 million in prepayment penalties as a result of the
prepayment of the ESOP credit facility (see Note 18).

         Under the provisions of the SIP Plan, employees may invest 1% to 15% of
eligible compensation. The Company's matching contributions, made in the form of
Hercules' common stock contributed through the ESOP, are equal to 50% of the
first 6% of employee contributions and vest immediately. The Company's matching
contributions are included in ESOP expense. The Company's contributions and
dividends, if any, on the shares held by the trust are used to repay the trust
borrowings under the loan agreement. Shares are allocated to participants as the
principal and interest are paid. The Company's common stock dividends were
suspended during the fourth quarter of 2000. The unallocated shares held by the
trust are reflected in unearned compensation as a reduction in stockholders'
equity on the balance sheet for $93 million and $104 million at December 31,
2002 and 2001, respectively.



                                        2002           2001
                                     ----------     ----------
                                              
Allocated                            1,530,314      2,075,687
Unallocated                          2,869,338      3,228,690
                                     ---------      ---------
Total shares held by ESOP            4,399,652      5,304,377
                                     =========      =========


         The ESOP expense is calculated using the shares-allocated method, which
takes into account the net interest incurred on the debt of $6 million and $8
million, respectively, for 2002 and 2001. Net ESOP expense is comprised of the
following elements:



                                                                 (Dollars in millions)
                                                                2002     2001     2000
                                                                ----     ----     ----
                                                                         
ESOP expense                                                    $ 14     $ 19     $ 13
Common stock dividends (charged to retained earnings)              -        -       (3)
                                                                ----     ----     ----
Net ESOP expense                                                $ 14     $ 19     $ 10
                                                                ----     ----     ----
ESOP contributions                                              $ 14     $ 15     $ 10
                                                                ====     ====     ====


9.       LONG-TERM INCENTIVE COMPENSATION PLANS

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

         In 1995, Hercules changed the structure of the long-term incentive
compensation plans to place a greater emphasis on shareholder value creation
through grants of regular stock options, performance-accelerated stock options
and Cash Value Awards (performance-based awards denominated in cash and payable
in shares of common or restricted stock, subject to the same restrictions as
restricted stock). Restricted stock and other market-based units are awarded
with respect to certain programs. The number of awarded shares outstanding was
351,937, 189,704 and 491,488 at December 31, 2002, 2001 and 2000, respectively.

         At December 31, 2002, under the Company's incentive compensation plans,
2,203,206 shares of common stock were available for grant as stock awards or
stock option awards. Stock awards are limited to approximately 15% of the total
authorizations. Regular stock options are granted at the market price on the
date of grant and are exercisable at various periods from one to five years
after date of grant. Performance-accelerated stock options are also granted at
the market price on the date of grant and are normally exercisable at nine and
one-half years. Exercisability may be accelerated based upon the achievement of
predetermined performance goals. Both regular and performance-accelerated stock
options expire 10 years after the date of grant.

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

                                       49



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         The Company applies APB Opinion 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for the stock option
plans. The cost of stock awards and other market-based units, which are charged
to income over the restriction or performance period, amounted to $1 million for
2002, $2 million for 2001 and $1 million for 2000.

         Below is a summary of outstanding stock option grants under the
incentive compensation plans during 2000, 2001 and 2002:



                                             Regular                           Performance-Accelerated
                                 ---------------------------------          -----------------------------
                                 Number of        Weighted-average          Number of    Weighted-average
                                   Shares              Price                 Shares            Price
                                 ---------------------------------          -----------------------------
                                                                             
December 31, 1999                 7,977,558           $  37.92              5,935,841        $  44.39
Granted                           3,418,275           $  16.75                187,500        $  14.06
Exercised                           (28,500)          $  11.83                      -               -
Forfeited                          (217,405)          $  34.30                (38,916)       $  42.31
- ---------------------------------------------------------------------------------------------------------
December 31, 2000                11,149,928           $  31.57              6,084,425        $  43.47
Granted                           2,806,525           $  11.58                      -               -
Exercised                           (44,400)          $  15.01               (187,500)       $  14.06
Forfeited                          (663,255)          $  25.89               (129,600)       $  43.61
- ---------------------------------------------------------------------------------------------------------
December 31, 2001                13,248,798           $  27.51              5,767,325        $  44.42
Granted                           2,031,699           $  11.88                      -               -
Exercised                            (4,275)          $  11.28                      -               -
Forfeited                        (2,068,588)          $  26.91               (578,400)       $  49.00
- ---------------------------------------------------------------------------------------------------------
December 31, 2002                13,207,634           $  25.21              5,188,925        $  43.91


         The weighted-average fair value of regular stock options granted during
2000, 2001 and 2002 using the Black-Scholes option pricing model was $7.19,
$5.90 and $5.09, respectively. The weighted-average fair value of
performance-accelerated stock options granted during 2000 using the
Black-Scholes option pricing model was $5.86. There were no
performance-accelerated stock options granted during 2001 or 2002.

         Following is a summary of regular stock options exercisable at December
31, 2000, 2001 and 2002, and their respective weighted-average share prices:



                            Number of        Weighted-average
Options Exercisable          Shares           Exercise Price
- -------------------         ---------        ----------------
                                       
 December 31, 2000          6,386,147            $  38.35
 December 31, 2001          9,471,983            $  33.04
 December 31, 2002          9,150,134            $  31.05


         At December 31, 2000, 2001 and 2002, respectively, there were no
performance-accelerated stock options exercisable. Following is a summary of
stock options outstanding at December 31, 2002:

                                       50



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                             Outstanding Options                         Exercisable Options
                                           -----------------------------------------------------     ----------------------------
                                               Number         Weighted-average      Weighted-          Number         Weighted
                                           Outstanding at        Remaining           average         Exercisable      average
                                             12/31/2002      Contractual Life     Exercise Price      12/31/2002   Exercise Price
                                           -----------------------------------------------------     ----------------------------
                                                                                                    
Regular Stock Options
$ 8.50 - $ 11.75                              1,537,625            8.70              $ 11.20            827,740       $ 11.21
$ 11.76 -$ 15.00                              3,230,649            8.95              $ 11.98             62,539       $ 13.15
$ 15.01 -$ 22.50                              1,976,825            7.16              $ 17.16          1,797,320       $ 17.16
$ 22.51 -$ 33.75                              1,825,700            5.31              $ 25.86          1,825,700       $ 25.86
$ 33.76 -$ 40.00                              3,014,660            5.17              $ 38.33          3,014,660       $ 38.33
$ 40.01 -$ 60.00                              1,622,175            4.05              $ 49.56          1,622,175       $ 49.56
                                             ----------                                               ---------
                                             13,207,634                                               9,150,134
                                             ==========                                               =========

Performance-Accelerated Stock Options
$ 24.00 - $ 36.00                               639,225            5.99              $ 31.73                  -             -
$ 36.01 - $ 45.01                             1,315,822            5.57              $ 38.34                  -             -
$ 45.01 - $ 50.00                             2,679,353            3.94              $ 47.10                  -             -
$ 50.01 - $ 61.00                               554,525            3.07              $ 55.74                  -             -
                                             ----------                                               ---------
                                              5,188,925                                                       -
                                             ==========                                               =========


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

         The Company's Employee Stock Purchase Plan was originally a qualified
non-compensatory plan, which allowed eligible employees to acquire shares of
common stock through systematic payroll deductions. The plan was converted to a
non-qualified employee stock purchase plan in 2001 and the shares are funded
from treasury stock. The plan consists of three-month subscription periods,
beginning July 1 of each year. The purchase price is 85% of the fair market
value of the common stock on either the first or last day of that subscription
period, whichever is lower. Purchases may range from 2% to 15% of an employee's
base salary each pay period, subject to certain limitations. Shares issued at
December 31, 2001 under the qualified plan were 1,758,081. Currently, there are
no shares of Hercules common stock registered for offer and sale under the
qualified plan. The shares issued under the non-qualified plan totaled 653,312
at December 31, 2002. The Company applies APB Opinion 25 and related
interpretations in accounting for its Employee Stock Purchase Plan. Accordingly,
no compensation cost has been recognized for the qualified Employee Stock
Purchase Plan. The 15% discount on the purchase price of the common stock has
been recognized as compensation expense for the non-qualified Employee Stock
Purchase Plan.

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

         The following weighted-average assumptions would be used in estimating
fair value for 2002, 2001 and 2000:

                                       51



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                    Performance        Employee Stock
                               Regular Plan       Accelerated Plan     Purchase Plan
                               ------------       ----------------     --------------
                                                              
2002 Assumptions

Dividend yield                     0.00%                   -                0.00%
Risk-free interest rate            4.97%                   -                1.65%
Expected life                      6 yrs.                  -                3 mos.
Expected volatility               34.60%                   -               41.97%

2001 Assumptions

Dividend yield                     0.00%                   -                0.00%
Risk-free interest rate            5.15%                   -                3.80%
Expected life                      8 yrs.                  -                3 mos.
Expected volatility               35.54%                   -               54.09%

2000 Assumptions

Dividend yield                     0.00%                0.00%               0.00%
Risk-free interest rate            6.32%                6.18%               5.77%
Expected life                      6 yrs.               5 yrs.              3 mos.
Expected volatility               35.49%               35.57%              50.13%


         The pro forma effect on net (loss) income and (loss) earnings per
share, assuming the Company had applied the fair value recognition provisions of
SFAS 123, is presented in the Summary of Significant Accounting Policies.

10.      COMMITMENTS AND CONTINGENCIES

GUARANTEES

         In November 2002, the FASB issued FASB Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others" ("FIN 45"). The Company has
adopted the disclosure requirements of FIN 45 as of December 31, 2002.
Disclosure about each group of similar guarantees are provided below:

INDEMNIFICATIONS

         In connection with the sale of the Company assets and businesses, the
Company has indemnified respective buyers against certain liabilities that may
arise in connection with the sales transactions and business activities prior to
the ultimate closing of the sale. The term of these indemnifications typically
pertain to environmental, tax, employee and/or product related matters. If the
indemnified party were to incur a liability or have a liability increase as a
result of a successful claim, pursuant to the terms of the indemnification, the
Company would be required to reimburse the buyer. These indemnifications are
generally subject to threshold amounts, specified claim periods and other
restrictions. The carrying amount recorded for all indemnifications as of
December 31, 2002 is $112 million. Although it is reasonably possible that
future payments may exceed amounts accrued, due to the nature of indemnified
items, it is not possible to make a reasonable estimate of the maximum potential
loss or range of loss. Generally there are no specific recourse provisions.
Approximately $1 million in cash is held in escrow or collateral.

         In addition, the Company provides certain indemnifications in the
ordinary course of business such as product, patent and performance warranties
in connection with the manufacture, distribution and sale of its products and
services. Due to the nature of these indemnities, it is not possible to make a
reasonable estimate of the maximum potential loss or range of loss.

DEBT OBLIGATIONS

         The Company has directly guaranteed various debt obligations under
agreements with third parties related to subsidiaries and affiliates, and/or
other unaffiliated companies. At December 31, 2002, the Company had directly
guaranteed principal $23 million of such obligations. This represents the
maximum amount of potential future payments that the Company could be required
to make under the guarantees.

         Directly guaranteed obligations include approximately $7 million of
outstanding obligations which are recorded as debt in the Company's Consolidated
Financial Statements. Existing guarantees for subsidiaries and affiliates arose
from

                                       52



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

liquidity needs in normal operations. The Company would be required to perform
on these guarantees in the event of default by the guaranteed party.

INTERCOMPANY GUARANTEES

         The Company and its subsidiaries have intercompany guarantees between
and among themselves which aggregate approximately $150 million as of December
2002. These guarantees relate to intercompany loans used to facilitate normal
business transactions such as the sale and purchase of products. All of the $150
million has been eliminated from the Company's consolidated financial
statements.

LEASES

         Hercules has operating leases (including office space, transportation
and data processing equipment) expiring at various dates. Rental expense was $34
million in 2002, $56 million in 2001 and $57 million in 2000.

         At December 31, 2002, minimum rental payments under non-cancelable
leases aggregated $204 million with subleases of $37 million. A significant
portion of these payments relates to a long-term operating lease for corporate
office facilities. The net minimum payments over the next five years are $23
million in 2003, $21 million in 2004, $18 million in 2005, $15 million in 2006,
$14 million in 2007 and $76 million thereafter.

ENVIRONMENTAL

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

         Hercules has been identified as a potentially responsible party (PRP)
by U.S. federal and state authorities, or by private parties seeking
contribution, for the cost of environmental investigation and/or cleanup at
numerous sites. The range of the reasonably possible share of costs for the
investigation and cleanup of current and former operating sites, and other
locations where the Company may have a known liability is between $88 million
and $253 million. The actual costs will depend upon numerous factors, including
the number of parties found responsible at each environmental site and their
ability to pay; the actual methods of remediation required or agreed to;
outcomes of negotiations with regulatory authorities; outcomes of litigation;
changes in environmental laws and regulations; technological developments; and
the years of remedial activity required, which could range from 0 to 30.

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

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

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

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

                                       53



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Court on September 13, 1999. Both Hercules and Uniroyal timely appealed that
judgment to the United States Court of Appeals for the Eighth Circuit.

         On February 8, 2000, the District Court issued a final judgment on the
allocation between Hercules and Uniroyal finding Uniroyal liable for 2.6 percent
and Hercules liable for 97.4 percent of the costs at issue. Hercules timely
appealed that judgment. Oral argument on both appeals was held before the Eighth
Circuit on June 12, 2000. On April 10, 2001, the United States Court of Appeals
for the Eighth Circuit issued an opinion in the consolidated appeals described
above. In that opinion, the Appeals Court reversed the District Court's decision
which had held Hercules jointly and severally liable for costs incurred and to
be incurred at the Jacksonville site, and remanded the case back to the District
Court for several determinations, including a determination of whether the harms
at the site giving rise to the government's claims were divisible. The Appeals
Court also vacated the District Court's allocation decision holding Hercules
liable for 97.4 percent of the costs at issue, ordering that these issues be
revisited following further proceedings with respect to divisibility. Finally,
the Appeals Court affirmed the judgment of liability against Uniroyal.

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

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

         In 1992, Hercules brought suit against its insurance carriers for past
and future costs for cleanup of certain environmental sites. In April 1998, the
trial regarding insurance recovery for the Jacksonville, Arkansas, site (see
discussion above) was completed. The jury returned a "Special Verdict Form" with
findings that, in conjunction with the Court's other opinions, were used by the
Court to enter a judgment in August 1999. The judgment determined the amount of
Hercules' recovery for past cleanup expenditures and stated that Hercules is
entitled to similar coverage for costs incurred since September 30, 1997 and in
the future. Hercules has not included any insurance recovery in the estimated
range of costs above. Since entry of the Court's August 1999 order, Hercules has
entered into settlement agreements with several of its insurance carriers and
has recovered certain settlement monies. The terms of those settlements and the
amounts recovered are confidential. On August 15, 2001, the Delaware Supreme
Court issued a decision in Hercules Incorporated v. Aetna Casualty & Surety
Company, et al., Del. Super., C.A. No. 92C-10-105 and 90C-FE-195-1-CV
(consolidated). In its decision, the Delaware Supreme Court affirmed the trial
court in part, reversed the trial court in part and remanded the case for
further proceedings. The specific basis upon which the Delaware Supreme Court
reversed the trial court was the trial court's application of pro rata
allocation to determine the extent of the insurers' liability. Following
settlements with two additional insurers, the terms of which are confidential,
Hercules decided not to pursue this litigation against the remaining defendants.
This matter was dismissed with prejudice on or about February 3, 2003.

         The Allegany Ballistics Laboratory ("ABL") is a government-owned
facility which was operated by Hercules from 1945 to 1995. The United States
Department of the Navy has notified Hercules that the Navy would like to
negotiate with Hercules with respect to certain environmental liabilities which,
the Navy alleges, are attributable to Hercules' past operations at ABL. The Navy
alleges that, pursuant to CERCLA, it has spent a total of $24.8 million and
expects to spend an additional $60 million over the next 10 years. The Company
is currently investigating the Navy's allegations, including the basis of the
Navy's claims, and whether the contracts with the government pursuant to which
the Company operated ABL may insulate the Company from some or all of the
amounts sought. At this time, however, the Company cannot reasonably estimate
its liability, if any, with respect to ABL and, accordingly, has not included
this site in the range of its environmental liabilities reported above.

         At December 31, 2002, the accrued liability for environmental
remediation was $88 million. The extent of liability is evaluated quarterly
based on currently available information, including the progress of remedial
investigations at each site and the current status of negotiations with
regulatory authorities regarding the method and extent of apportionment of costs
among other PRPs. While it is not feasible to predict the outcome of all pending
suits and claims, the ultimate resolution of these environmental matters could
have a material effect upon the results of operations and the financial position
of Hercules, and the resolution of any of these matters during a specific period
could have a material effect on the quarterly or annual results of that period.
Effective January 1, 2003, the Company is subject to the provisions of SFAS 143.

LITIGATION

         The Company is a defendant in numerous asbestos-related personal injury
lawsuits and claims which typically arise from alleged exposure to asbestos
fibers from resin encapsulated pipe and tank products which were sold by one of
the

                                       54



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

         Since entering into those agreements, the Company has continued to
receive and settle or otherwise resolve claims on an on-going basis. Between
January 1, 2002 and December 31, 2002, the Company received approximately 11,000
new claims, approximately half of which were included in "consolidated"
complaints naming anywhere from one hundred to thousands of plaintiffs and a
large number of defendants, but providing little information connecting any
specific plaintiff's alleged injuries to any specific defendant's products or
premises. It is the Company's belief that a significant majority of these
"consolidated" claims will be dismissed for no payment. During that same time
period, the Company also received approximately 13,000 other new claims, most of
which were included in "consolidated" complaints, which have either been
dismissed without payment or are in the process of being dismissed without
payment, but with plaintiffs retaining the right to re-file should they be able
to establish exposure to an asbestos-containing product for which the Company
bears liability. We are continuing to evaluate whether the claims experience of
2002, which represents a significant increase over prior years, is an anomaly or
a new trend.

         With respect to total claims pending, as of February 28, 2003, there
were approximately 18,300 unresolved claims, of which approximately 940 were
premises claims. In addition, there were approximately 2,340 unpaid claims which
have been settled or are subject to the terms of a settlement agreement. In
addition, as of February 28, 2003, there were approximately 13,340 claims
(including the 13,000 claims noted in the above paragraph) which have been
dismissed without payment or are in the process of being dismissed without
payment.

         The Company anticipates that the primary and first level excess
insurance policies referenced above will likely exhaust over the next 2 to 4
months, assuming that the rate of settlements and payments remains relatively
consistent with the Company's past experience. Nonetheless, based on the current
number of claims pending, the amounts the Company anticipates paying to resolve
those claims which are not dismissed or otherwise resolved without payment, and
anticipated future claims, the Company believes that it and its former
subsidiary together have sufficient additional insurance to cover the majority
of its current and estimated future asbestos-related liabilities, as discussed
in the paragraph below.

         The foregoing is based on the Company's assumption that the number of
future claims filed per year and claim resolution payments will vary
considerably from year-to-year and by plaintiff, disease, venue, and other
circumstances, but will, when taken as a whole, remain relatively consistent
with the Company's experience to date and will decline as the population of
potential future claimants expires due to non-asbestos-related causes. It is
also based on the preliminary results of the study discussed below, the
Company's evaluation of potentially available insurance coverage and its review
of the relevant case law. However, the Company recognizes that the number of
future claims filed per year and claim resolution payments could greatly exceed
those reflected by its past experience and contemplated by the study referenced
below, that the Company's belief of the range of its reasonably possible
financial exposure could change as the study referenced below continues, that
its evaluation of potentially available insurance coverage may change depending
upon numerous variables including risks inherent in litigation and the risk that
one or more insurance carriers may refuse or be unable to meet its obligations
to the Company, and that conclusions resulting from its review of relevant case
law may be impacted by future court decisions or changes in the law.

         The Company is seeking defense and indemnity payments or an agreement
to pay from those carriers responsible for excess coverage whose levels of
coverage have been or will soon be reached. Although those excess carriers have
not yet agreed to defend or indemnify it, the Company believes that it is likely
that they will ultimately agree to do so, and that the majority of its estimated
future asbestos-related costs will ultimately be paid or reimbursed by those
carriers. However, if the Company is not able to reach satisfactory agreements
with those carriers prior to exhaustion of the primary and first level excess
insurance policies now covering the majority of its current asbestos-related
claims, then, beginning as early as the second quarter of 2003, the Company
might be required to completely fund these matters while it seeks reimbursement
from its carriers. In order to maximize the likelihood of obtaining insurance
payments for these liabilities, on November 27, 2002, the Company initiated
litigation against its excess insurance carriers in a matter captioned Hercules
Incorporated v. OneBeacon, et al., Civil Action No. 02C-11-237 (SCD), Superior
Court of Delaware, New Castle County. Notwithstanding the filing of this
litigation, the Company is continuing settlement discussions with several of its
key insurers.

         The Company has commissioned a study of its asbestos-related
liabilities. That study, which is in progress and will continue over the next
several quarters, is being conducted by Professor Eric Stallard, who is a
Research Professor of Demographic Studies at a major national university and a
Member of the American Academy of Actuaries. Professor Stallard is a consultant
with broad experience in estimating such

                                       55



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

liabilities. Based on the initial findings of that study, the Company estimates
that its reasonably possible financial exposure for these matters ranges from
$200 million to $500 million. Due to inherent uncertainties in estimating the
timing and amounts of future payments, this range does not include the effects
of inflation and has not been discounted for the time value of money. In
addition, the range of financial exposures set forth above does not include
estimates for future legal costs. It is the Company's policy to expense these
costs as incurred. As stated above, the Company presently believes that the
majority of this range of financial exposures will ultimately be funded by
insurance proceeds. Cash payments related to this exposure are expected to be
made over an extended number of years and actual payments, when made, could be
for amounts in excess of the range due to potential future changes in estimates
as well as the effects of inflation.

         Due to the dynamic nature of asbestos litigation and the present
uncertainty concerning the participation of its excess insurance carriers, the
Company's estimates are inherently uncertain, and these matters may present
significantly greater financial exposures than presently anticipated. In
addition, the asbestos study referenced in the above paragraph is continuing,
and further analysis combined with new data received in the future could result
in a material modification of the range of reasonably possible financial
exposure set forth above. As a result of all of the foregoing, the Company's
liability with respect to asbestos-related matters could exceed present
estimates and may require a material change in the accrued liability for these
matters within the next twelve months. If the Company's liability does exceed
amounts recorded in the balance sheet, the Company presently believes that the
majority of any additional liability it may reasonably anticipate will be paid
or reimbursed by its insurance carriers.

         The initial findings of the study referenced above identify a range of
the Company's reasonably possible financial exposure for these matters. The
Company is not presently able to specify its best estimate of its liability
within that range. The Company recorded a gross accrual of $225 million for
present and future potential asbestos claims before anticipated insurance
recoveries resulting in a net charge of $65 million related to these matters in
the period ended September 30, 2002. At December 31, 2002, the Company has a
remaining accrual of $216 million for the gross liability. The Company believes
that it is probable that $137 million of the $216 million accrual will be funded
by or recovered from insurance carriers. At December 31, 2002, the consolidated
balance sheet reflects a current insurance receivable of $9 million and a
long-term insurance receivable of $128 million. The Company, in conjunction with
outside advisors, will continue to study its asbestos-related exposures,
insurance recovery expectations, and reserves on an on-going quarterly basis,
and make adjustments as appropriate.

         In June 1998, Hercules and David T. Smith Jr., a former Hercules
employee and plant manager at the Brunswick plant, along with Georgia-Pacific
Corporation and AlliedSignal Inc., were sued in Georgia State Court by 423
plaintiffs for alleged personal injuries and property damage. This litigation is
captioned Coley, et al. v. Hercules Incorporated, et al., No. 98 VSO 140933 B
(Fulton County, Georgia). Plaintiffs allege they were damaged by the discharge
of hazardous waste from the companies' plants. On February 11, 2000, the Georgia
State Court dismissed Georgia-Pacific Corporation and AlliedSignal Inc., without
prejudice. In September 2000, David T. Smith Jr., was dismissed by the Georgia
State Court with prejudice. On July 18, 2000, the Company was served with a
complaint in a case captioned Erica Nicole Sullivan, et al. v. Hercules
Incorporated and David T. Smith, Jr., Civil Action File No. 00-1-05463-99 (Cobb
County, Georgia). Based on the allegations contained in the complaint, this
matter is very similar to the Coley litigation, and is brought on behalf of
approximately 700 plaintiffs for alleged personal injury and property damage
arising from the discharge of hazardous waste from Hercules' plant. The Company
has reached an agreement in principle to settle the claims of all but six of
these plaintiffs for an amount which is confidential, but which is not material
to the financial condition of the Company.

         In August 1999, the Company was sued in an action styled as Cape
Composites, Inc. v. Mitsubishi Rayon Co., Ltd., Case No. 99-08260 (U.S. District
Court, Central District of California), one of a series of similar purported
class action lawsuits brought on behalf of purchasers (excluding government
purchasers) of carbon fiber and carbon prepreg in the United States from the
named defendants from January 1, 1993 through January 31, 1999. The lawsuits
were brought following published reports of a Los Angeles federal grand jury
investigation of the carbon fiber and carbon prepreg industries. In these
lawsuits, plaintiffs allege violations of Section 1 of the Sherman Antitrust Act
for alleged price fixing. In September 1999, these lawsuits were consolidated by
the Court into a case captioned Thomas & Thomas Rodmakers v. Newport Adhesives
and Composites, Case No. CV-99-07796-GHK (CTx) (U.S. District Court, Central
District of California), with all related cases ordered dismissed. This lawsuit
is proceeding through discovery and motion practice. On May 2, 2002, the Court
granted plaintiffs' Motion to Certify Class. The Company is named in connection
with its former Composites Products Division, which was sold to Hexcel
Corporation in 1996, and has denied liability and will vigorously defend this
action.

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

         In June 2002, a purported class action was filed in Massachusetts under
the caption Saul M. Ostroff, et al. v. Newport Adhesives, et al., Civil Action
No. 02-2385, Superior Court of Middlesex County. This matter is a purported
class action

                                       56



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

brought on behalf of consumers who purchased merchandise manufactured with
carbon fiber, and alleges the same types of price fixing activities alleged in
the actions described in the above two paragraphs. In October 2002, the Company
was notified that Horizon Sports Technologies had "opted out" of the federal
antitrust class action described above (Thomas & Thomas Rodmakers) and filed its
own suit against Hercules and the other defendants in that action (Horizon
Sports Technologies, Inc. v. Newport Adhesives and Composites, Inc., et al.,
Case No. CV02-8126 FMC (RNEX), U.S. District Court, Central District of
California, Western Division).

         Further, in April 2002, a related "Qui Tam" action was unsealed by the
U.S. District Court for the Southern District of California. That action is
captioned Randall M. Beck, et al. v. Boeing Defense and Space Group, Inc., et
al., (Civil Action No. 99 CV 1557 JM JAH), was filed under seal in 1999, and is
a "False Claims" action brought pursuant to the False Claims Act (31 U.S.C.
Section 729 et seq.). In that action, the relators, in the name of the United
States Government, allege the same price fixing activities which are the subject
of the above-described actions. The relators then allege that those alleged
price fixing activities resulted in inflated prices being charged by the
defendant carbon fiber manufacturers to the defendant defense contractors, who,
in turn, submitted claims for payment to the United States Government under
various government contracts. It is alleged that those claims for payment were
"false claims" because the prices charged for the carbon fiber and carbon
prepreg were "fixed" contrary to the laws of the United States. The Company
denies liability and will vigorously defend each of these actions.

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

         On September 28, 2000, the Company sold its Food Gums Division to CP
Kelco ApS, a joint venture that the Company entered into with Lehman Brothers
Merchant Banking Partners II, L.P. CP Kelco also acquired the biogums business
of Pharmacia Corporation (formerly Monsanto Company). In April 2001, CP Kelco
U.S., Inc., a wholly owned subsidiary of CP Kelco ApS, sued Pharmacia (CP Kelco
U.S., Inc. v. Pharmacia Corporation, U.S. District Court for the District of
Delaware, Case No. 01-240-RRM) alleging federal securities fraud, common law
fraud, breach of warranties and representations, and equitable fraud. In
essence, the lawsuit alleges that Pharmacia misrepresented the value of the
biogums business, resulting in damages to CP Kelco U.S., including the
devaluation of CP Kelco U.S.'s senior debt by the securities markets. The
complaint seeks over $430 million in direct damages, as well as punitive
damages. In June 2001, Pharmacia filed a third-party complaint against the
Company and Lehman. That complaint seeks contribution and indemnification from
the Company and Lehman, jointly and severally, for any damages that may be
awarded to CP Kelco U.S. in its action against Pharmacia. The Company believes
that the third-party lawsuit against it and Lehman is without merit and filed a
Motion for Judgment on the Pleadings, which was granted by the Magistrate Judge
on September 19, 2002. In March 2003, the Magistrate Judge's ruling was adopted
by the District Court judge and the Company was dismissed from this case. The
Company continues to deny any liability to Pharmacia, and should the ruling
dismissing the Company be appealed, the Company will vigorously defend that
appeal.

         On January 31, 2003, the Court granted a Motion for Class Certification
in a lawsuit captioned Douglas C. Smith, Individually and on Behalf of All
Others Similarly Situated v. Hercules Incorporated and Thomas Gossage, CA No.
01C-08-291 WCC, Superior Court of Delaware, New Castle County. This lawsuit,
which was filed on August 31, 2001, on behalf of Mr. Smith and a class of
approximately 130 present and former Hercules employees, seeks payments under
the "Integration Synergies Incentive Compensation Plan" (the "Plan"), a program
put into place by the Company following its acquisition of BetzDearborn Inc. in
October 1998. The goal of the Plan was to provide certain financial incentives
to specific employees who were deemed to have significant impact on the
integration of BetzDearborn Inc. into Hercules Incorporated. The amount to be
paid under the Plan was tied to the successful achievement of "synergies," which
were defined as the annualized reduction of expenses or improvement of profits
realized as a result of the integration of BetzDearborn Inc. into Hercules. The
lawsuit essentially alleges that the payments made under the Plan were not
adequate and that the Company breached the terms of the Plan. The lawsuit seeks
payments of between $25 million and $30 million, although the Company does not
believe that any payments are owed to the class members. In February 2003,
plaintiffs agreed to dismiss Thomas Gossage from the lawsuit. Discovery is
ongoing. The Company denies any liability to the plaintiffs and is vigorously
defending this action.

         At December 31, 2002, the consolidated balance sheet reflects a current
liability of approximately $28 million and a long-term liability of
approximately $193 million for litigation and claims. These amounts represent
management's best estimate of the probable and reasonably estimable losses
related to litigation or claims. The extent of the liability and recovery is
evaluated quarterly. While it is not feasible to predict the outcome of all
pending suits and claims, the ultimate resolution of these matters could have a
material effect upon the financial position of Hercules, and the resolution of
any of the matters during a specific period could have a material effect on the
quarterly or annual operating results for that period.

                                       57



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Other

         At December 31, 2002, Hercules had $78 million in letters of credit
outstanding.

11.      COMPANY-OBLIGATED PREFERRED SECURITIES OF SUBSIDIARY TRUSTS

Redeemable Hybrid INcome Overnight Shares

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

Trust Originated Preferred Securities

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

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

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

CRESTS Units

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

         The Company pays interest on the debentures, and Trust II pays
distributions on its preferred securities quarterly at an annual rate of 6 1/2%
of the scheduled liquidation amount of $1,000 per debenture and/or preferred
security until the scheduled maturity date and redemption date of June 30, 2029,
unless there is a reset and remarketing event. The Company guarantees the
obligations of Trust II on the preferred securities. Trust II must redeem the
preferred securities when the debentures are redeemed or repaid at maturity. As
of December 31, 2002, no warrants had been exercised.

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

Floating Rate Preferred Securities

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

12.      SERIES PREFERRED STOCK

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

13.      COMMON STOCK

                                       58



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Hercules common stock has a stated value of $25/48, and 300,000,000
shares are authorized for issuance. At December 31, 2002, a total of 28,981,141
shares were reserved for issuance for the following purposes: 8,164 shares for
sales to the Savings Plan Trustee; 18,396,559 shares for the exercise of awards
under the Stock Option Plan; 2,203,206 shares for awards under incentive
compensation plans; 176,492 shares for conversion of debentures and notes; and
8,196,720 shares for exercise of the warrant component of the CRESTS Units.

         For the Company's stock repurchase program, from its start in 1991
through year-end 2002, the Board authorized the repurchase of up to 74,650,000
shares of Company common stock. Of that total, 6,150,000 shares were intended to
satisfy requirements of various employee benefit programs. During this period, a
total of 66,875,462 shares of common stock were purchased in the open market at
an average price of $37.26 per share.

14.      ADDITIONAL BALANCE SHEET DETAIL



                                                      (Dollars in millions)
                                                      2002            2001
                                                     ------         -------
                                                              
Property, plant and equipment
     Land                                            $   21         $    34
     Buildings and equipment                          1,873           2,133
     Construction in progress                            31              67
                                                     ------         -------
     Total                                            1,925           2,234
     Accumulated depreciation and amortization       (1,262)         (1,331)
                                                     ------         -------
     Property, plant and equipment, net              $  663         $   903
                                                     ======         =======




                                                      (Dollars in millions)
                                                      2002            2001
                                                     ------          -------
                                                               
Deferred charges and other assets
     Insurance receivables                           $  128          $    51
     Tax deposits                                        95               98
     Capitalized software                                86              119
     Investments                                          7               43
     Other                                              126              232
                                                     ------          -------
                                                     $  442          $   543
                                                     ======          =======




                                                      (Dollars in millions)
                                                      2002             2001
                                                     -------          ------
                                                                
Accrued expenses
     Compensation and benefits                       $    48          $   73
     Income taxes payable                                 25             105
     Current deferred income taxes                         6               -
     Restructuring liability                              22              43
     Interest payable                                     10              15
     Current portion of postretirement benefits           23              23
     Current portion of legal accrual                     28              50
     Current portion of environmental accrual             27              15
     Other                                               106             139
                                                     -------          ------
                                                     $   295          $  463
                                                     =======          ======


                                       59




HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                (Dollars in millions)
                                                2002            2001
                                               ------          ------
                                                         
Deferred credits and other liabilities
     Legal and environmental reserves          $  254          $   97
     Deferred rent                                 51              54
     Other reserves                                72             160
                                               ------          ------
                                               $  377          $  311
                                               ======          ======


15.      RESTRUCTURING

         The consolidated balance sheet reflects liabilities for employee
severance benefits and other exit costs of $22 million and $43 million at
December 31, 2002 and 2001, respectively. During 2001, management authorized and
committed to a plan to reduce the workforce as part of the comprehensive cost
reduction and work process redesign program. The Company incurred restructuring
charges of $51 million, which includes charges of $46 million for employee
termination benefits and $5 million for exit costs related to facility closures.
During 2002, the estimate for severance benefits and other exit costs related to
facility closures and contract terminations increased $22 million and $3
million, respectively. Under this plan, approximately 1,330 employees have left
or will leave the Company, of which 1,214 employees were terminated pursuant to
this plan through December 31, 2002. Approximately 400 employees were terminated
during the year ended December 31, 2002. The plan includes reductions throughout
the Company with the majority of them from support functions.

         The restructuring liabilities also include amounts relating to the 1998
plan initiated upon the acquisition of BetzDearborn and additional plans that
the Company committed to in 2000 relating to the restructuring of the
BetzDearborn and Pulp and Paper Divisions and corporate realignment due to the
divestiture of non-core businesses. The total number of employee terminations
relating to the 1998 plan is 889. The total number of employee terminations
relating to the 2000 plan is 212. Actions under the 1998 and 2000 plans are
complete.

         Cash payments during 2002 and 2001 included $39 million and $25
million, respectively, for severance benefits and other exit costs. Severance
benefits paid during the current year represent the continuing benefit streams
of previously terminated employees as well as those terminated in the current
year. During 2002 and 2001, the Company completed assessments of the remaining
expenditures for the 1998 BetzDearborn plan and the 2000 plans. As a result of
these assessments, the estimates for severance benefits and other exit costs
were lowered by $5 million and $17 million in 2002 and 2001, respectively, with
corresponding reductions to goodwill of $3 million and $10 million,
respectively, and to expense of $2 million and $7 million, respectively. The
lower than planned severance benefits are the result of higher than anticipated
attrition, with voluntary resignations not requiring the payment of termination
benefits. A reconciliation of activity with respect to the liabilities
established for these plans is as follows:



                                                                      (Dollars in millions)
                                                                       2002             2001
                                                                   ------------       --------
                                                                                
Balance at beginning of year                                        $       43        $     34
     Additional termination benefits and other exit costs                   25              51
     Cash payments                                                         (39)            (25)
     Reversals against goodwill                                             (3)            (10)
     Reversals against earnings                                             (2)             (7)
     Transferred with discontinued operations                               (2)              -
                                                                    ----------        --------
Balance at end of year                                              $       22        $     43
                                                                    ==========        ========


         The balance at the end of the period represents severance benefits and
other exit costs of which $20 million pertains to the 2001 restructuring plan
and $2 million pertains to the continuing benefit payment streams of the 1998
BetzDearborn plan.

16.      OTHER OPERATING EXPENSE (INCOME), NET

         Other operating expense (income), net, in 2002 includes $11 million of
net environmental expense and additional restructuring charges of $25 million
associated with the comprehensive cost reduction and work process redesign
program

                                       60



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

announced in September 2001 (see Note 15). Partially offsetting these
restructuring charges was $2 million of reversals pertaining to prior year
plans. Additionally, the Company recognized $7 million in asset impairment
charges in the Performance Products segment. As a result of resolving issues
relating to prior year business divestitures, an additional loss of $2 million
was recognized. Miscellaneous expenses of $3 million were also incurred during
the year.

         Other operating expense (income), net, in 2001 includes $74 million in
net gains from the sale of the Company's hydrocarbon resins business, select
portions of its rosin resins business, its peroxy chemicals business and its 50%
interest in Hercules-Sanyo, Inc. In addition, a pension curtailment gain of $5
million was recognized related to the divestiture of the Company's hydrocarbon
resins business and select portions of its rosins resins business. As a result
of resolving issues relating to a prior year business divestiture, an additional
gain of $5 million was recognized. The Company incurred $51 million in
restructuring charges associated with the comprehensive cost reduction and work
process redesign program (see Note 15). Partially offsetting these restructuring
charges was $5 million of reversals pertaining to prior year plans. In addition,
the Company recognized $10 million in net environmental expense, $5 million of
executive severance charges, $5 million in pre-payment penalties relating to the
ESOP credit facility, $3 million in fees related to the 2001 proxy contest and
other matters and $1 million of income for other miscellaneous items.

         Other operating expense (income), net, in 2000 includes a gain of $168
million from the sale of the Food Gums business. On September 28, 2000, the
Company sold its Food Gums business to CP Kelco, a joint venture with Lehman
Brothers Merchant Banking Partners II, L.P., which contributed approximately
$300 million in equity. The Company received approximately $395 million in cash
proceeds, recorded certain selling and tax expenses of approximately $77 million
and retained a 28% equity position in CP Kelco. CP Kelco simultaneously acquired
the Kelco biogums business of Pharmacia Corporation (formerly Monsanto
Corporation). Partially offsetting the gain from the sale of the Food Gums
business is $66 million of charges for asset impairments and write-offs,
primarily in the FiberVisions business. Restructuring charges of $14 million (an
additional $4 million is included in the loss related to the nitrocellulose
divestiture below) were incurred for 2000 plans, primarily relating to severance
and termination benefits for approximately 212 employee terminations in its
Performance Products segment and corporate realignment due to the divestitures
of its non-core businesses (Food Gums, Resins and nitrocellulose). Offsetting
these restructuring charges was $4 million of reversals relating to prior year
plans. Environmental charges of $8 million were incurred, offset by $11 million
in recoveries of insurance for environmental claims. Additionally, the Company
incurred a loss of $25 million, including $4 million for severance and
termination benefits (see Note 15), associated with the sale of the
nitrocellulose business, and $5 million associated with the integration of the
BetzDearborn acquisition. Also reflected in 2000 are $16 million of severance
benefits and compensation expense not associated with restructuring plans and
expenses of $3 million for other miscellaneous items. The asset impairments were
triggered by significantly higher raw material costs and the loss of a
facility's major customer.

17.      INTEREST AND DEBT EXPENSE

         Interest and debt costs are summarized as follows:



                                       (Dollars in millions)
                                    2002        2001       2000
                                   ------      ------     ------
                                                 
Costs incurred                     $   97      $ 199      $  175
Amount capitalized                      1          3          11
                                   ------      ------     ------
Amount expensed                    $   96      $ 196      $  164
                                   ======      ======     ======


18.      OTHER EXPENSE, NET

         Other expense, net, consists of the following:

                                       61



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                            (Dollars in millions)
                                          2002        2001       2000
                                         ------      ------     ------
                                                       
Net (gains) losses on dispositions       $  (3)      $  (3)     $   1
Legal settlements and accruals, net         71          16         10
Debt extinguishment                         44           -          -
Exchange and translation                    (2)         (6)        (1)
Other, net                                   5           1          8
                                         -----       -----      -----
                                         $ 115       $   8      $  18
                                         =====       =====      =====


         Net (gains) losses on dispositions include a $3 million gain from the
sale of the corporate jet, hangar and artwork in 2002, a $3 million gain from
the sale of the country club in 2001 and a loss of $1 million from the sale of
non-operating real estate and other investments in 2000. Legal settlements and
accruals, net, in all years primarily represent certain other legal expenses and
settlements associated with former operations of the Company. In 2002, the
Company recognized $65 million in net charges for additional estimated asbestos
litigation exposures (see Note 10). Additionally, the Company recognized $44
million for debt prepayment penalties and the write-off of debt issuance costs
associated with the repayment of debt with the proceeds from the sale of the
Water Treatment Business (see Notes 5 and 22).

19.      (LOSS) EARNINGS PER SHARE

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



                                                                   (Dollars in millions, except per share)
                                                    2002                           2001                           2000
                                         -------------------------       -------------------------      -------------------------
                                                                                        (Loss)
                                                         Loss per         (Loss)      earnings per                   Earnings per
                                            Loss          share           income          share          Income         share
                                         ---------      ----------       --------     ------------      --------     ------------
                                                                                                   
BASIC:
Continuing operations                    $    (49)      $   (0.45)       $  (106)      $   (0.98)        $   60        $  0.56
Discontinued operations                      (199)          (1.83)            48            0.44             38           0.35
Cumulative effect of change
  in accounting principle                    (368)          (3.37)             -               -              -              -
                                         --------       ---------        -------       ---------         ------        -------
Net (loss) income                            (616)          (5.65)           (58)          (0.54)            98           0.91

Weighted average number
   of basic shares (millions)               109.1                          108.2                          107.2

DILUTED:
Continuing operations                    $    (49)      $   (0.45)       $  (106)      $   (0.98)        $   60        $  0.56
Discontinued operations                      (199)          (1.83)            48            0.44             38           0.35
Cumulative effect of change
  in accounting principle                    (368)          (3.37)             -               -              -              -
                                         --------       ---------        -------       ---------         ------        -------
Net (loss) income                            (616)          (5.65)           (58)          (0.54)            98           0.91

Weighted average number
   of diluted shares (millions)             109.1 (a)                      108.2 (a)                      107.9 (a)


(a)  For the years ended December 31, 2002, 2001 and 2000, the Company had
     approximately 0.2 million convertible subordinated debentures. For the year
     ended December 31, 2000, the Company had approximately 0.5 million
     anti-dilutive stock options. However, the common stock shares into which
     these debentures are convertible have not been included in the dilutive
     share calculations for the years 2002 and 2001 because the impact of their
     inclusion would be anti-dilutive. The dilutive effect of the convertible
     debentures was included in the calculation for the year 2000.

20.      OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA

         In 1998, Hercules adopted Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). SFAS 131 established new standards for reporting information about
operating segments in annual financial statements and required selected
information about

                                       62



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

operating segments in interim financial reports. It also established standards
for related disclosure about products and services, geographic area and major
customers. Subsequent to the sale of the Water Treatment Business, the Company
realigned its reportable segments. In compliance with SFAS 131, the Company has
identified two reportable segments.

         Performance Products (Pulp and Paper and Aqualon): Products and
services in Pulp and Paper are designed to enhance customers' profitability by
improving production yields and overall product quality, and to better enable
customers to meet their environmental objectives and regulatory requirements.

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

         The products in Aqualon are principally derived from natural resources
and are sold as key raw materials to other manufacturers. Principal products and
markets include water-soluble polymers and solvent-soluble polymers, used as
thickeners, emulsifiers and stabilizers for water-based paints, oil and gas
exploration, building materials, and personal care products and producers of
inks and aviation fluids.

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

         Prior to September 28, 2000, the Company owned the Food Gums Division,
which was sold to CP Kelco, a joint venture the Company entered into with Lehman
Brothers Merchant Banking Partners II, L.P.

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

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

GEOGRAPHIC REPORTING

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

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

         Intersegment sales are eliminated in consolidation.

                                       63



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



                                                         (Dollars in millions)
- -----------------------------------------------------------------------------------------------------------------------------------
                                                                          ENGINEERED
                                                         PERFORMANCE     MATERIALS AND                  RECONCILING
                INDUSTRY SEGMENTS                          PRODUCTS        ADDITIVES      FOOD GUMS        ITEMS       CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------------------------------
                       2002
                                                                                                        
Net sales                                                 $ 1,385            $ 320          $   -        $    -          $ 1,705
Profit (loss) from operations                                 238               17              -           (41)(c)          214
Interest and debt expense                                                                                                     96
Preferred security distributions of subsidiary trusts                                                                         58
Other expense, net                                                                                                           115
                                                                                                                         -------
Loss before income taxes and equity income (loss)                                                                            (55)
                                                                                                                         -------
Capital employed (a)                                        1,085              114              -           185 (b)        1,384
Capital expenditures                                           31                9              -             3               43
Depreciation and amortization                                  72               18              -            10              100

- ---------------------------------------------------------------------------------------------------------------------------------
                       2001
Net sales                                                 $ 1,351            $ 425          $   -        $    -          $ 1,776
Profit (loss) from operations                                 151               12              -            18 (d)          181
Interest and debt expense                                                                                                    196
Preferred security distributions of subsidiary trusts                                                                         58
Other expense, net                                                                                                             8
                                                                                                                         -------
Loss before income taxes and equity income (loss)                                                                            (81)
                                                                                                                         -------
Capital employed (a)                                          479              116              -         2,697 (b)        3,292
Capital expenditures                                           35               10              -             7               52
Depreciation and amortization                                  80               32              -            22              134

- ---------------------------------------------------------------------------------------------------------------------------------
                       2000
Net sales                                                 $ 1,450            $ 695          $ 160        $   (2)         $ 2,303
Profit (loss) from operations                                 241               (9)            30           104 (e)          366
Interest and debt expense                                                                                                    164
Preferred security distributions of subsidiary trusts                                                                         96
Other expense, net                                                                                                            18
                                                                                                                         -------
Income before income taxes and equity income (loss)                                                                           88
                                                                                                                         -------
Capital employed (a)                                          491              308              -         2,885 (b)        3,684
Capital expenditures                                           68               36             31            36              171
Depreciation and amortization                                  83               39              8            32              162


                                       64



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



- -------------------------------------------------------------------------------------------------------------------
                                            UNITED
GEOGRAPHIC AREAS                            STATES        EUROPE          AMERICAS(f)    ASIA PACIFIC        TOTAL
- -------------------------------------------------------------------------------------------------------------------
                                                                                             
2002
Net Sales (g)                              $    870       $  586            $  89            $ 160          $ 1,705
Long-lived assets (h)                           711          460              118               40            1,329

2001
Net Sales (g)                              $    928       $  587            $ 104            $ 157          $ 1,776
Long-lived assets (h)                         2,253          684              347               95            3,379

2000
Net Sales (g)                              $  1,167       $  782            $ 136            $ 218          $ 2,303
Long-lived assets (h)                         2,410          797              382              125            3,714


         (a)  Represents total segment assets net of operating liabilities. The
              2001 and 2000 figures do not include the capital employed by the
              divested Water Treatment Business.

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

         (c)  Includes net environmental charges, restructuring charges relating
              to the 2001 cost reduction program (see Note 15) and additional
              loss recognition relating to prior year business divestitures.
              Partially offsetting these charges were restructuring reversals
              pertaining to prior year plans (see Note 15).

         (d)  Includes environmental charges, legal and insurance expenses,
              pre-payment penalties relating to the ESOP credit facility (see
              Note 8) and restructuring charges relating to the 2001 cost
              reduction program (see Note 15). Partially offsetting these
              charges were net gains from the sale of the hydrocarbon resins
              business, select portions of the rosins resins business and the
              peroxy chemicals business, restructuring reversals pertaining to
              prior year plans, a pension curtailment gain and an additional
              gain recognition relating to a prior year business divestiture.

         (e)  Includes integration expenses, restructuring charges,
              environmental charges, a loss on the sale of the nitrocellulose
              business offset by a gain on the sale of Food Gums business,
              insurance recoveries and restructuring reversals (see Note 15).

         (f)  Excluding operations in the United States of America.

         (g)  Excludes sales of the divested Water Treatment Business.

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

21.      DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

         The Company enters into forward-exchange contracts and currency options
to reduce currency exposure.

Notional Amounts and Credit Exposure of Derivatives

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

Interest Rate Risk Management

         The aggregate notional principal amount for interest rate swaps at the
end of 2001 was $20 million. These swaps acted as a hedge against the Company's
interest rate exposure on its outstanding variable rate debt. There were no
interest rate swap agreements at the end of 2002. During 2001, the Company used
interest rate swap agreements to manage interest costs and risks associated with
changing rates.


                                       65



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



                                                          (Dollars in millions)
                                                          2002             2001
                                                          ----             ----
                                                                     
Pay fixed on swaps notional amount (at year-end)          $  -             $ 20
Average pay rate                                             -              6.2%
Average receive rate                                         -              4.4%


Foreign Exchange Risk Management

         The Company has selectively used foreign currency forward contracts and
currency swaps to offset the effects of exchange rate changes on reported
earnings, cash flow and net asset positions. The primary exposures are
denominated in the Euro, Swedish kroner and British pound sterling. Some of the
contracts involved the exchange of two foreign currencies, according to local
needs in foreign subsidiaries. The term of the currency derivatives is rarely
more than three months. At December 31, 2002 and 2001, the Company had
outstanding forward-exchange contracts to purchase foreign currencies
aggregating $18 million and $8 million and to sell foreign currencies
aggregating $19 million and $24 million, respectively. Non-U.S. dollar
cross-currency trades aggregated $238 million and $222 million at December 31,
2002 and 2001, respectively. The foreign exchange contracts outstanding at
December 31, 2002 matured on or before March 1, 2003.

Fair Values

         The following table presents the carrying amounts and fair values of
the Company's financial instruments at December 31, 2002 and 2001:



                                                                                      (Dollars in millions)
                                                                               2002                           2001
                                                                    Carrying                       Carrying
                                                                     Amount        Fair Value       Amount        Fair Value
                                                                    -------------------------      -------------------------
                                                                                                      
Investment securities (available for sale)                           $   2           $   2          $    11         $    12
Long-term debt                                                        (738)           (777)          (1,959)         (1,948)
Company-obligated preferred securities of subsidiary trusts           (624)           (517)            (624)           (408)
Foreign exchange contracts                                               -               -                -               -
Interest rate swap contracts                                             -               -                -              (1)


Fair values of derivative contracts are indicative of cash that would
have been required had settlement been made at December 31, 2002 and 2001.

Basis of Valuation

- -    Investment securities: Quoted market prices.

- -    Long-term debt: Present value of expected cash flows related to existing
     borrowings discounted at rates currently available to the Company for
     long-term borrowings with similar terms and remaining maturities.

- -    Company obligated preferred securities of subsidiary trusts: Year-end
     interest rates and Company common stock price.

- -    Foreign exchange contracts: Year-end exchange rates.

- -    Currency swaps: Year-end interest and exchange rates.

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

22.      DIVESTITURES

         On April 29, 2002, Hercules completed the sale of the Water Treatment
Business to GESM, a unit of General Electric Company. The sale price was $1.8
billion in cash, resulting in net after tax proceeds of approximately $1.7
billion. The Company used the net proceeds to prepay debt under its senior
credit facility and ESOP credit facility (see Notes 5 and 8). Pursuant to SFAS
144 (as adopted on January 1, 2002), the Water Treatment Business has been
treated as a discontinued operation as of February 12, 2002, and accordingly,
all financial information has been restated. The loss from discontinued
operations for the year ended December 31, 2002 includes an after-tax loss on
the disposal of the business of $230 million.

         The Paper Process Chemicals Business, representing approximately
one-third of the business of BetzDearborn Inc., when it was originally acquired
in 1998, was fully integrated into and continues to be reported within Pulp and
Paper.

                                       66

c
HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

         Summarized below are the results of operations and cash flows of the
Water Treatment Business for the years ended December 31, 2002, 2001 and 2000.



                                                                              (Dollars in millions)
                                                                                    Year Ended
                                                                                    December 31,
                                                                       --------------------------------------
                                                                       2002(1)          2001            2000
                                                                       --------------------------------------
                                                                                              
Net Sales                                                              $  269          $  844          $  849
Profit from operations                                                     49             106              78
Income before income taxes                                                 51             104              78
Tax provision                                                              20              56              40
                                                                       --------------------------------------
Income from operations                                                     31              48              38
Loss from disposal of business, including a provision
  for income taxes of $51 million for 2002                               (230)              -               -
                                                                       --------------------------------------
(Loss) income from discontinued operations                             $ (199)         $   48          $   38
                                                                       ======================================


(1) Results of operations for the period are through April 28, 2002.

Cash Flow From Discontinued Operations



                                                                              (Dollars in millions)
                                                                       --------------------------------------
                                                                       2002             2001            2000
                                                                       --------------------------------------
                                                                                              
Net cash provided by operations                                          $28             $209            $102
Capital expenditures                                                      (3)             (11)            (16)
                                                                       --------------------------------------
Net cash flow from discontinued operations                               $25             $198             $86
                                                                       ======================================


         The major classes of assets and liabilities included in the
consolidated balance sheet at the time of disposal were as follows:



                                            (Dollars in millions)

                                                                               
Assets
Accounts receivables, net                   $  161           Liabilities
Inventory                                       76           Accounts payable             $ 55
Fixed assets                                   217           Accrued expenses               35
Goodwill and other intangible assets         1,419           Other liabilities             178
Other assets                                    19                                        ----
                                            ------                                        $268
                                            $1,892                                        ====
                                            ======



         On May 1, 2001, the Company completed the sale of its hydrocarbon
resins business and select portions of its rosin resins business to a subsidiary
of Eastman Chemical Company, receiving proceeds of approximately $244 million.
On May 31, 2001, the Company completed the sale of its peroxy chemicals business
to GEO Specialty Chemicals, Inc., receiving proceeds of approximately $92
million. Additionally, on May 25, 2001, the Company completed the sale of its
interest in Hercules-Sanyo, Inc., a toner resin joint venture, to Sanam
Corporation, a wholly owned subsidiary of Sanyo Chemicals Industries, Ltd., the
Company's joint venture partner, receiving proceeds of approximately $8 million.

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

23.      CONDENSED CONSOLIDATING FINANCIAL INFORMATION OF GUARANTOR SUBSIDIARIES

         The 11 1/8% senior notes due 2007 issued on November 14, 2000 are
guaranteed by each of the Company's current and future wholly owned domestic
restricted subsidiaries. The new senior credit facility entered into in December
2002 also provides for a guarantee by each guarantor subsidiary. The guarantees
by each guarantor subsidiary are full and unconditional and joint and several.
The indenture under which the Company's 6.60% notes due 2027 and 6.625% notes
due 2003 were issued requires such notes to be guaranteed or secured on the same
basis as any other subsequently issued debt that is guaranteed or secured. As a
result, at December 31, 2002, the following wholly-owned domestic restricted
subsidiaries fully and unconditionally and jointly and severally guarantee the
new senior credit facility, the 6.60% notes due 2027, the 6.625% notes due 2003
and the 11 1/8% notes due 2007.

Aqualon Company                          Hercules Euro Holdings, L.L.C.
Athens Holding Inc.                      Hercules Finance Company
Covington Holdings, Inc.                 Hercules Flavor, Inc.
East Bay Realty Services, Inc.           Hercules Hydrocarbon Holdings, Inc.
FiberVisions Incorporated                Hercules International Limited
FiberVisions Products, Inc.              Hercules International Limited, L.L.C.
FiberVisions, L.L.C.                     Hercules Paper Holdings, Inc.
FiberVisions L.P.                        Hercules Shared Services Corp.
Hercules Country Club, Inc.              HISPAN Corporation
Hercules Credit, Inc.                    WSP, Inc.

                                       67


HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

                                       68



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Statement of Operations
Twelve Months Ended December 31, 2002



                                                                                      (Dollars in millions)
                                                          --------------------------------------------------------------------------
                                                                      Unconsolidated
                                                          -------------------------------------------
                                                                        Guarantor       Non-Guarantor  Eliminations &
                                                          Parent       Subsidiaries      Subsidiaries   Adjustments   Consolidated
                                                          --------------------------------------------------------------------------
                                                                                                       
Net sales                                                 $  536          $ 423             $ 890         $ (144)         $ 1,705
Cost of sales                                                334            294               557           (144)           1,041
Selling, general, and administrative expenses                 99             73               181              -              353
Research and development                                      19             17                 6              -               42
Goodwill and intangible asset amortization                     5              3                 1              -                9
Other operating (income) expense, net                        (11)            31                26              -               46
                                                          ------          -----             -----         ------          -------
Profit (loss) from operations                                 90              5               119              -              214

Interest and debt expense (income), net                      212            (75)              (41)             -               96
Preferred security distributions of subsidiary trusts          -              -                58              -               58
Other (expense) income, net                                 (120)             -                 4              1             (115)
                                                          ------          -----             -----         ------          -------

(Loss) income before income taxes and equity income
  (loss)                                                    (242)            80               106              1              (55)

(Benefit) provision for income taxes                         (60)            35                21              -               (4)
Equity income (loss) of affiliated companies                   -              2                 -              -                2
Equity income (loss) from consolidated subsidiaries          133           (115)                5            (23)               -
                                                          ------          -----             -----         ------          -------
Net (loss) income from continuing operations                 (49)           (68)               90            (22)             (49)

Net (loss) income on discontinued operations, net
  of tax                                                    (199)            18                12            (30)            (199)

Net (loss) income before cumulative effect of change
  in accounting principle                                   (248)           (50)              102            (52)            (248)

Cumulative effect of change in accounting principle,
  net of tax                                                (368)             -                 -              -             (368)
                                                          ------          -----             -----         ------          -------

Net (loss) income                                         $ (616)         $ (50)            $ 102         $  (52)         $  (616)
                                                          ======          =====             =====         ======          =======


                                       69



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Statement of Operations
Twelve Months Ended December 31, 2001



                                                                                      (Dollars in millions)
                                                          --------------------------------------------------------------------------
                                                                      Unconsolidated
                                                          -------------------------------------------
                                                                        Guarantor       Non-Guarantor  Eliminations &
                                                          Parent       Subsidiaries      Subsidiaries   Adjustments    Consolidated
                                                          --------------------------------------------------------------------------
                                                                                                        
Net sales                                                 $  587          $ 565             $ 888         $ (264)         $ 1,776
Cost of sales                                                381            442               574           (264)           1,133
Selling, general, and administrative expenses                 80            118               203              -              401
Research and development                                      29             16                 8              -               53
Goodwill and intangible asset amortization                     3             11                10              -               24
Other operating (income) expense, net                        (60)            34                10              -              (16)
                                                          ------          -----             -----         ------          -------

Profit (loss) from operations                                154            (56)               83              -              181

Interest and debt expense (income), net                      334           (108)              (30)             -              196
Preferred security distributions of subsidiary trusts          -              -                58              -               58
Other (expense) income, net                                  (13)            11                (6)             -               (8)
                                                          ------          -----             -----         ------          -------

(Loss) income before income taxes and equity income
  (loss)                                                    (193)            63                49              -              (81)

(Benefit) provision for income taxes                         (26)            28                14              -               16

Equity income (loss) of affiliated companies                   -              1               (10)             -               (9)
Equity income (loss) from consolidated subsidiaries           61            (10)                1            (52)               -
                                                          ------          -----             -----         ------          -------
Net (loss) income before continuing operations              (106)            26                26            (52)            (106)

Net income (loss) from discontinued operations, net
  of tax                                                      48             16                32            (48)              48
Net (loss) income before cumulative effect of change
  in accounting principle                                    (58)            42                58           (100)             (58)
Cumulative effect of change in accounting principle,
  net of tax                                                   -              -                 -              -                -
                                                          ------          -----             -----         ------          -------
Net (loss) income                                         $  (58)         $  42             $  58         $ (100)         $   (58)
                                                          ======          =====             =====         ======          =======


                                       70



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Statement of Operations
Twelve Months Ended December 31, 2000



                                                                                      (Dollars in millions)
                                                          --------------------------------------------------------------------------
                                                                      Unconsolidated
                                                          -------------------------------------------
                                                                        Guarantor       Non-Guarantor  Eliminations &
                                                           Parent      Subsidiaries      Subsidiaries   Adjustments    Consolidated
                                                          --------------------------------------------------------------------------
                                                                                                        
Net sales                                                 $  715          $ 915            $1,360         $ (687)         $ 2,303
Cost of sales                                                492            725               927           (693)           1,451
Selling, general, and administrative expenses                 88            144               212              -              444
Research and development                                      33             20                11              -               64
Goodwill and intangible asset amortization                     7              6                11              -               24
Other operating expenses (income), net                        38             92              (176)             -              (46)
                                                          ------          -----            ------         ------          -------

Profit (loss) from operations                                 57            (72)              375              6              366

Interest and debt expense (income), net                      283           (129)               10              -              164
Preferred security distributions of subsidiary trusts          -              -                96              -               96
Other (expense) income, net                                  (21)           (15)               18              -              (18)
                                                          ------          -----            ------         ------          -------
(Loss) income before income taxes and equity income
  (loss)                                                    (247)            42               287              6               88

(Benefit) provision for income taxes                         (90)            25                89              2               26
Equity loss of affiliated companies                            -              -                (2)             -               (2)
Equity income (loss) from consolidated subsidiaries          217             65                 3           (285)               -
                                                          ------          -----            ------         ------          -------
Net income (loss) from continuing operations                  60             82               199           (281)              60

Net income (loss) on discontinued operations, net of
  tax                                                         38             25                13            (38)              38

Net income (loss) before cumulative effect of change
  in accounting principle                                     98            107               212           (319)              98

Cumulative effect of change in accounting principle,
  net of tax                                                   -              -                 -              -                -
                                                          ------          -----            ------         ------          -------
Net income (loss)                                           $ 98          $ 107            $  212         $ (319)         $    98
                                                          ======          =====            ======         ======          =======


                                       71



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Balance Sheet
December 31, 2002



                                                                                      (Dollars in millions)
                                                          --------------------------------------------------------------------------
                                                                      Unconsolidated`
                                                          ------------------------------------------
                                                                        Guarantor       Non-Guarantor  Eliminations &
                                                          Parent       Subsidiaries     Subsidiaries     Adjustments   Consolidated
                                                          --------------------------------------------------------------------------
                                                                                                        
ASSETS
Current assets
 Cash and cash equivalents                                $  131          $    7           $    71        $     -         $   209
 Restricted cash                                             125               -                 -              -             125
 Accounts and notes receivable, net                           87              55               218              -             360
 Intercompany receivable                                      80              23                27           (130)              -
 Inventories                                                  46              53                79            (11)            167
 Deferred income taxes                                        28              22                (4)             -              46
                                                          ------          ------           -------        -------         -------
 Total current assets                                        497             160               391           (141)            907

Property, plant and equipment, net                           177             162               324              -             663

Investments in subsidiaries and advances, net              2,351              67                51         (2,469)              -
Goodwill and other intangible assets, net                    234              91               341              -             666
Long-term deferred income taxes                                -               -                15              -              15
Deferred charges and other assets                            373              13                56              -             442
                                                          ------          ------           -------        -------         -------
 Total assets                                             $3,632          $  493           $ 1,178        $(2,610)        $ 2,693
                                                          ======          ======           =======        =======         =======

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
 Accounts payable                                           $ 55          $   18           $   103        $     -         $   176
 Accrued expenses                                            113             113                69              -             295
 Intercompany payable                                         11              76                43           (130)              -
 Short-term debt                                             126               -                19              -             145
                                                          ------          ------           -------        -------         -------
 Total current liabilities                                   305             207               234           (130)            616

Long-term debt                                               701               -                37              -             738
Deferred income taxes                                       (105)            116                69              -              80
Other postretirement benefits and other liabilities          631              74                53              -             758
Company-obligated preferred securities of
 subsidiary trusts                                             -               -               624              -             624
Intercompany notes payable (receivable)                    2,223          (1,039)           (1,184)             -               -
Stockholders' equity                                        (123)          1,135             1,345         (2,480)           (123)
                                                          ------          ------           -------        -------         -------
 Total liabilities and stockholders' equity               $3,632          $  493           $ 1,178        $(2,610)        $ 2,693
                                                          ======          ======           =======        =======         =======


                                       72



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Balance Sheet
December 31, 2001



                                                                                      (Dollars in millions)
                                                          --------------------------------------------------------------------------
                                                                      Unconsolidated
                                                          ------------------------------------------
                                                                        Guarantor       Non-Guarantor  Eliminations &
                                                          Parent       Subsidiaries     Subsidiaries     Adjustments   Consolidated
                                                          --------------------------------------------------------------------------
                                                                                                        
ASSETS
Current assets
 Cash and cash equivalents                                $    8         $    12           $    56         $     -        $    76
 Accounts and notes receivable, net                          103             134               269               -            506
 Intercompany receivable                                      87              60                66            (213)             -
 Inventories                                                  45              89               109             (10)           233
 Deferred income taxes                                         7              16                 4               -             27
                                                          ------         -------           -------         -------        -------
 Total current assets                                        250             311               504            (223)           842
Property, plant and equipment, net                           186             327               390               -            903
Investments in subsidiaries and advances, net              4,546           1,485                51          (6,082)             -
Goodwill and other intangible assets, net                     69           1,631               812               -          2,512
Deferred charges and other assets                            608              36               102               -            746
                                                          ------         -------           -------         -------        -------
 Total assets                                             $5,659         $ 3,790           $ 1,859         $(6,305)       $ 5,003
                                                          ======         =======           =======         =======        =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
 Accounts payable                                         $   50         $    44           $   109         $     -        $   203
 Accrued expenses                                            154             207               102               -            463
 Intercompany payable                                        104              21                88            (213)             -
 Short-term debt                                             230               5                16               -            251
                                                          ------         -------           -------         -------        -------
 Total current liabilities                                   538             277               315            (213)           917
Long-term debt                                             1,832              79                48               -          1,959
Deferred income taxes                                        (37)            351                56               -            370
Other postretirement benefits and other liabilities          242             140                39               -            421
Company-obligated preferred securities of                                                                                       -
 subsidiary trusts                                             -               -               624               -            624
Intercompany notes payable (receivable)                    2,372          (1,209)           (1,154)             (9)             -
Stockholders' equity                                         712           4,152             1,931          (6,083)           712
                                                          ------         -------           -------         -------        -------
 Total liabilities and stockholders' equity               $5,659         $ 3,790           $ 1,859         $(6,305)       $ 5,003
                                                          ======         =======           =======         =======        =======


                                       73



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Statement of Cash Flows
Twelve Months Ended December 31, 2002



                                                                                      (Dollars in millions)
                                                          --------------------------------------------------------------------------
                                                                      Unconsolidated
                                                          ------------------------------------------
                                                                        Guarantor       Non-Guarantor  Eliminations &
                                                          Parent       Subsidiaries     Subsidiaries    Adjustments     Consolidated
                                                          --------------------------------------------------------------------------
                                                                                                         
NET CASH (USED IN) PROVIDED BY OPERATIONS                 $  (342)       $  (142)          $   353         $   (86)       $  (217)

CASH FLOW FROM INVESTING ACTIVITIES:
 Capital expenditures                                         (17)            (8)              (18)              -            (43)
 Proceeds of investment and fixed asset disposals           1,813              2                 1               -          1,816
 Increase in restricted cash                                 (125)             -                 -               -           (125)
 Other, net                                                    11              -                 -               -             11
                                                          -------        -------           -------         -------        -------

 Net cash provided by (used in) investing activities        1,682             (6)              (17)              -          1,659
                                                          -------        -------           -------         -------        -------

CASH FLOW FROM FINANCING ACTIVITIES:
 Long-term debt proceeds                                      450              -                 -               -            450
 Long-term debt repayments                                 (1,680)           (83)              (13)              -         (1,776)
 Change in short-term debt                                     (4)             -                (4)              -             (8)
 Payment of debt issuance costs and underwriting fees          (5)             -                 -               -             (5)
 Change in intercompany, noncurrent                            15            221              (285)             49              -
 Common stock issued                                            7              -                 -               -              7
 Dividends paid                                                 -              -               (37)             37              -
                                                          -------        -------           -------         -------        -------

 Net cash (used in) provided by financing activities       (1,217)           138              (339)             86         (1,332)
                                                          -------        -------           -------         -------        -------

Net cash flow provided by discontinued operations               -              5                20               -             25

Effect of exchange rate changes on cash                         -              -                (2)              -             (2)

Net increase (decrease) in cash and cash equivalents          123             (5)               15               -            133
Cash and cash equivalents at beginning of period                8             12                56               -             76
                                                          -------        -------           -------         -------        -------
Cash and cash equivalents at end of period                $   131        $     7           $    71         $     -        $   209
                                                          =======        =======           =======         =======        =======


                                       74



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Statement of Cash Flows
Twelve Months Ended December 31, 2001



                                                                                      (Dollars in millions)
                                                          --------------------------------------------------------------------------
                                                                      Unconsolidated
                                                          ------------------------------------------
                                                                        Guarantor       Non-Guarantor  Eliminations &
                                                          Parent       Subsidiaries     Subsidiaries    Adjustments    Consolidated
                                                          --------------------------------------------------------------------------
                                                                                                        
NET CASH (USED IN) PROVIDED BY OPERATIONS                 $  (444)       $   278           $    84         $   (18)       $  (100)

CASH FLOW FROM INVESTING ACTIVITIES:
 Capital expenditures                                         (11)           (15)              (26)              -            (52)
 Proceeds of investment and fixed asset disposals             229              5               122               -            356
 Other, net                                                     -              -                (9)              -             (9)
                                                          -------        -------           -------         -------        -------

 Net cash provided by (used in) investing activities          218            (10)               87               -            295
                                                          -------        -------           -------         -------        -------
CASH FLOW FROM FINANCING ACTIVITIES:
 Long-term debt proceeds                                      347              -                 2               -            349
 Long-term debt repayments                                   (585)           (16)              (25)              -           (626)
 Change in short-term debt                                      -              -              (107)              -           (107)
 Change in intercompany, noncurrent                           455           (379)              (76)              -              -
 Common stock issued                                           17              -                 -               -             17
 Common stock reacquired                                       (1)             -                 -               -             (1)
 Dividends paid                                                 -              -               (18)             18              -
                                                          -------        -------           -------         -------        -------

 Net cash provided by (used in) financing activities          233           (395)             (224)             18           (368)
                                                          -------        -------           -------         -------        -------

Net cash flow provided by discontinued operations               -            132                66               -            198

Effect of exchange rate changes on cash                         -              -                (3)              -             (3)

Net increase in cash and cash equivalents                       7              5                10               -             22
Cash and cash equivalents at beginning of period                1              7                46               -             54
                                                          -------        -------           -------         -------        -------
Cash and cash equivalents at end of period                $     8        $    12           $    56         $     -        $    76
                                                          =======        =======           =======         =======        =======


                                       75



HERCULES INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Condensed Consolidating Statement of Cash Flows
Twelve Months Ended December 31, 2000



                                                                                      (Dollars in millions)
                                                          --------------------------------------------------------------------------
                                                                      Unconsolidated
                                                          ------------------------------------------
                                                                        Guarantor       Non-Guarantor  Eliminations &
                                                          Parent       Subsidiaries     Subsidiaries    Adjustments     Consolidated
                                                          --------------------------------------------------------------------------
                                                                                                         
NET CASH (USED IN) PROVIDED BY OPERATIONS                 $   (87)       $  (127)          $   231         $   (49)       $   (32)

CASH FLOW FROM INVESTING ACTIVITIES:
 Capital expenditures                                         (37)           (31)             (103)              -           (171)
 Proceeds of investment and fixed asset disposals               -             14               404               -            418
 Acquisitions, net of cash acquired                            (6)             -                 -               -             (6)
 Other, net                                                   (19)            (1)                8               -            (12)
                                                          -------        -------           -------         -------        -------

 Net cash (used in) provided by investing activities          (62)           (18)              309               -            229
                                                          -------        -------           -------         -------        -------

CASH FLOW FROM FINANCING ACTIVITIES:
 Long-term debt proceeds                                    1,858             27                 4               -          1,889
 Long-term debt repayments                                 (1,756)           (27)               (7)              -         (1,790)
 Change in short-term debt                                      -              -                92               -             92
 Payment of debt issuance costs and underwriting fees         (28)             -                 -               -            (28)
 Repayment of subsidiary trust preferred securities             -              -              (370)              -           (370)
 Change in intercompany, noncurrent                           157             29              (186)              -              -
 Common stock issued                                           13              -                 -               -             13
 Common stock reacquired                                       (2)             -                 -               -             (2)
 Dividends paid                                               (94)             -               (49)             49            (94)
                                                          -------        -------           -------         -------        -------

 Net cash provided by (used in) financing activities          148             29              (516)             49           (290)
                                                          -------        -------           -------         -------        -------

Net cash flow provided by (used in) discontinued
  operations                                                    -            100               (14)              -             86

Effect of exchange rate changes on cash                         -              -                (2)              -             (2)
                                                          -------        -------           -------         -------        -------

Net (decrease) increase in cash and cash equivalents           (1)           (16)                8               -             (9)

Cash and cash equivalents at beginning of period                2             23                38               -             63
                                                          -------        -------           -------         -------        -------

Cash and cash equivalents at end of period                $     1        $     7           $    46         $     -        $    54
                                                          =======        =======           =======         =======        =======


                                       76



HERCULES INCORPORATED
SUMMARY OF QUARTERLY RESULTS (UNAUDITED)



                                                                             (Dollars in millions, except per share)
                                                                   1st Quarter            2nd Quarter           3rd Quarter
                                                               2002        2001        2002        2001         2002        2001
                                                               ----        ----        ----        ----         ----        ----
                                                                                                         
Net sales                                                    $   402     $   498     $   437      $  459       $   443     $   422
Cost of sales                                                    243         326         267         294           273         264
Selling, general and administrative expenses                      88         101          84         107            86          94
Research and development                                          10          15          11          14            11          12
Goodwill and intangible asset amortization                         2           7           3           6             2           6
Other operating expense (income), net                              5           3          19         (65)           11          43
                                                             ---------------------------------------------------------------------

Profit from operations                                            54          46          53         103            60           3

Interest and debt expense                                         36          55          25          53            17          46
Preferred security distributions of subsidiary trusts             15          15          14          14            15          15
Other expense (income), net                                        4           2          45          (4)           67           6
                                                             ---------------------------------------------------------------------

(Loss) income before income taxes and equity (loss) income        (1)        (26)        (31)         40           (39)        (64)
Provision (benefit) for income taxes                               2         (10)         (9)         25            (4)         12
                                                             ---------------------------------------------------------------------

Loss before equity (loss) income                                  (3)        (16)        (22)         15           (35)        (76)
Equity (loss) income of affiliated companies, net of tax           -          (3)          1          (1)            -          (6)
                                                             ---------------------------------------------------------------------
Net (loss) income from continuing operations before
  discontinued operations and cumulative effect of change
   in accounting principle                                        (3)        (19)        (21)         14           (35)        (82)

Net (loss) income on discontinued operations, net of tax        (209)          9          10           9             -          11
                                                             ---------------------------------------------------------------------

Net (loss) income before cumulative effect of change
          in accounting principle                               (212)        (10)        (11)         23           (35)        (71)

Cumulative effect of change in accounting principle, net
  of tax                                                        (368)          -           -           -             -           -
                                                             ---------------------------------------------------------------------
Net (loss) income                                            $  (580)    $   (10)    $   (11)     $   23       $   (35)    $   (71)
                                                             =====================================================================

(Loss) earnings per share

Basic (loss) earnings per share
     Continuing operations                                   $ (0.03)    $ (0.17)    $ (0.19)     $ 0.13       $ (0.32)    $ (0.76)
     Discontinued operations                                 $ (1.92)    $  0.08     $  0.09      $ 0.08       $     -     $  0.10
     Cumulative effect of change in accounting principle     $ (3.37)    $     -     $     -      $    -       $     -     $     -
     Net (loss) income                                       $ (5.32)    $ (0.09)    $ (0.10)     $ 0.21       $ (0.32)    $ (0.66)

Diluted (loss) earnings per share
     Continuing operations                                   $ (0.03)    $ (0.17)    $ (0.19)     $ 0.13       $ (0.32)    $ (0.76)
     Discontinued operations                                 $ (1.92)    $  0.08     $  0.09      $ 0.08       $     -     $  0.10
     Cumulative effect of change in accounting principle     $ (3.37)    $     -     $     -      $    -       $     -     $     -
     Net (loss) income                                       $ (5.32)    $ (0.09)    $ (0.10)     $ 0.21       $ (0.32)    $ (0.66)




                                                                 4th Quarter                 Year
                                                               2002        2001        2002         2001
                                                               ----        ----        ----         ----
                                                                                      
Net sales                                                    $   423     $   397     $ 1,705      $ 1,776
Cost of sales                                                    258         249       1,041        1,133
Selling, general and administrative expenses                      95          99         353          401
Research and development                                          10          12          42           53
Goodwill and intangible asset amortization                         2           5           9           24
Other operating expense (income), net                             11           3          46          (16)
                                                             --------------------------------------------

Profit from operations                                            47          29         214          181

Interest and debt expense                                         18          42          96          196
Preferred security distributions of subsidiary trusts             14          14          58           58
Other expense (income), net                                       (1)          4         115            8
                                                             --------------------------------------------

(Loss) income before income taxes and equity (loss) income        16         (31)        (55)         (81)
Provision (benefit) for income taxes                               7         (11)         (4)          16
                                                             --------------------------------------------

Loss before equity (loss) income                                   9         (20)        (51)         (97)
Equity (loss) income of affiliated companies, net of tax           1           1           2           (9)
                                                             --------------------------------------------
Net (loss) income from continuing operations before
  discontinued operations and cumulative effect of change
   in accounting principle                                        10         (19)        (49)        (106)

Net (loss) income on discontinued operations, net of tax           -          19        (199)          48
                                                             --------------------------------------------

Net (loss) income before cumulative effect of change
          in accounting principle                                 10           -        (248)         (58)

Cumulative effect of change in accounting principle, net
  of tax                                                           -           -        (368)           -
                                                             --------------------------------------------
Net (loss) income                                            $    10     $     -     $  (616)     $   (58)
                                                             ============================================

(Loss) earnings per share

Basic (loss) earnings per share
     Continuing operations                                   $  0.09     $ (0.18)    $ (0.45)     $ (0.98)
     Discontinued operations                                 $     -     $  0.18     $ (1.83)     $  0.44
     Cumulative effect of change in accounting principle     $     -     $     -     $ (3.37)     $     -
     Net (loss) income                                       $  0.09     $     -     $ (5.65)     $ (0.54)

Diluted (loss) earnings per share
     Continuing operations                                   $  0.09     $ (0.18)    $ (0.45)     $ (0.98)
     Discontinued operations                                 $     -     $  0.18     $ (1.83)     $  0.44
     Cumulative effect of change in accounting principle     $     -     $     -     $ (3.37)     $     -
     Net (loss) income                                       $  0.09     $     -     $ (5.65)     $ (0.54)


                                       77



HERCULES INCORPORATED

PRINCIPAL CONSOLIDATED SUBSIDIARIES AS OF DECEMBER 31, 2002

      Argentina
      ---------
   Hercules Argentina S.A.

      Australia
      ---------
   Little H Pty Ltd.

      Austria
      -------
   Hercules Austria GmbH

      Bahamas
      ------
   Hercules International Trade Corporation Limited

      Belgium
      -------
   Hercules Beringen B.V.B.A.
   Hercules Doel B.V.B.A.
   Hercules Europe B.V.B.A.
   Hercules Holding B.V./B.V.B.A.

     Bermuda
     -------
   Curtis Bay Insurance Co. Ltd.

     Brazil
     ------
   Hercules do Brasil Produtos Quimicos Ltda.

     Canada
     ------
   Hercules Canada (2002) Inc.

     Chile
     -----
   Hercules Chile Limitada

     China
     -----
   FiberVisions (China) Textile Products Ltd.
   Hercules Trading (Shanghai) Company Ltd.
   Shanghai Hercules Chemicals Co., Ltd.*

     Colombia
     --------
   Hercules Americas (Colombia) Ltda.
   Hercules de Colombia S.A.

     Czech (Republic)
     ----------------
   Hercules CZ s.r.o.

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

     Finland
     -------
   Hercules Finland OY

     France
     ------
   Aqualon France B.V.
   Hercules Chemicals SA
   Hercules SA

     Germany
     -------
   Abieta Chemie GmbH*
   Hercules Deutschland GmbH
   Hercules GmbH

     Hong Kong
     ---------
   Hercules China Limited

     India
     -----
   Hercules Industrial Chemicals Private Limited

     Indonesia
     ---------
   P.T. Hercules Chemicals Indonesia

     Italy
     -----
   Hercules Holdings Srl
   Hercules Italia SpA

     Japan
     -----
   Hercules Japan Ltd.

     Korea
     -----
   Hercules Korea Chemical Co. Ltd.

     Liechtenstein
     -------------
   Organa Trust, Registered

     Luxembourg
     ----------
   Hercules Investments S.a.r.l.

     Mexico
     ------
   Hercules Inc. Mexico, S.A. de C.V.
   Hercules Mexico, S.A. de C.V.

     Netherlands
     -----------
   Aqualon France B.V.
   Hercules B.V.
   Hercules Chemicals B.V.
   Hercules Holding Specialty Materials B.V.

     Norway
     ------
   Hercules Norway AS

     Peru
     ----
   Hercules Peru S.R.L.

     Poland
     ------
   Hercules Polska Sp. z.o.o.

     Portugal
     --------
   Misan Portuguesa Lda.

     Russia
     ------
   Hercules Russia L.L.C.

     Singapore
     ---------
   Hercules Chemicals Solutions Pte Ltd.

     Spain
     -----
   Hercules Quimica S.A.

     Sweden
     ------
   Hercules Chemicals AB
   Hercules Holdings AB
   Hercules AB

     Switzerland
     -----------
   FiberVisions A.G./FiberVisions Ltd.

     Taiwan
     ------
   Hercules Chemicals (Taiwan) Co., Ltd.

     Thailand
     --------
   Hercules Chemical Solutions (Thailand) Ltd.

     United Kingdom
     --------------
   Hercules Holding II Limited
   Hercules Limited

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

                                       78




HERCULES INCORPORATED

      United States
      -------------
   Aqualon Company, Delaware
   Athens Holding Inc., Delaware
   Covington Holdings Inc., Delaware
   East Bay Realty Services, Inc., Delaware
   FiberVisions Incorporated, Delaware
   FiberVisions, L.L.C., Delaware
   FiberVisions L.P., Delaware
   FiberVisions Products, Inc., Georgia
   Hercules Credit Inc., Delaware
   Hercules Euro Holdings, L.L.C., Delaware
   Hercules Finance Company, Delaware
   Hercules Flavor, Inc., Delaware
   Hercules Hydrocarbon Holdings, Inc.
   Hercules International Limited, L.L.C., Delaware
   Hercules Paper Holdings, Inc.
   Hercules Trust I
   Hercules Trust II
   Hercules Shared Services Corporation, Delaware
   WSP, Inc., Delaware

      Virgin Islands
      --------------
   Hercules Islands Corporation*

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

                                       79



HERCULES INCORPORATED

ITEM9.            CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
                  AND FINANCIAL DISCLOSURE

         None.

                                    PART III

ITEM 10.          DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

BOARD OF DIRECTORS

         The Company's restated certificate of incorporation and bylaws provide
for three classes of directors, with the term of one class expiring at each
annual meeting of the shareholders. Pursuant to the authority granted to the
Board in Article Six of the restated certificate of incorporation, the Board has
fixed the number of directors at 13: four in the class whose term expires in
2003, five in the class whose term expires in 2004 and four in the class whose
term expires in 2005.

William H. Joyce - Director since 2001

         Dr. Joyce, age 67, joined Hercules as Chief Executive Officer in May
2001 and became Chairman in June 2001. Dr. Joyce had been Chairman, President
and Chief Executive Officer of Union Carbide Corporation since 1996, where he
had been employed since 1957. From 1995 to 1996, Dr. Joyce was President and
Chief Executive Officer and from 1993 to 1995, he was President and Chief
Operating Officer. Prior to that, Dr. Joyce had been Executive Vice President in
charge of operations since 1992. Dr. Joyce holds a B.S. degree in Chemical
Engineering from Pennsylvania State University and a M.B.A. and a Ph.D. from New
York University. Dr. Joyce received the National Medal of Technology Award in
1993, the Plastics Academy's Industry Achievement Award in 1994 and Lifetime
Achievement Award in 1997 and the 2003 Perkin Medal from the Society of Chemical
Industry (American Section). In 1997, he was inducted into the National Academy
of Engineering. Dr. Joyce is a director of CVS Corporation. Dr. Joyce is also a
trustee of the Universities Research Association, Inc. and Co-Chairman of the
Council of Government-University-Industry Research of the National Academies.
Dr. Joyce was Chairman of the Board of Society of Plastics Industry and on the
Executive Committee of the American Chemical Council.

Richard Fairbanks - Director since 1993

         Mr. Fairbanks, age 62, has been a Counselor at the Center for Strategic
& International Studies since April 2000. He was named Senior Counsel at the
Center for Strategic & International Studies in February 1992, became Managing
Director of Domestic and International Issues in March 1994, and was President
and Chief Executive Officer from May 1999 until April 2000. He was
Ambassador-at-Large under President Reagan. He is a member of the Boards of
Directors of SEACOR Smit, Inc., GATX Corporation, and SPACEHAB, Inc.; member,
Council on Foreign Relations, Council of American Ambassadors; and founder, The
American Refugee Committee of Washington.

Samuel J. Heyman - Director since 2001

         Mr. Heyman, age 64, has been a director and Chairman of International
Specialty Products Inc. since its formation and served as its Chief Executive
Officer from its formation until June 1999. He also has been a director of G-I
Holdings Inc., or its predecessor, GAF Corporation (collectively with G-I
Holdings Inc. ("G-I Holdings")), for more than five years and was Chairman,
President and Chief Executive Officer of G-I Holdings and some of its
subsidiaries for more than five years until September 2000. In January 2001, G-I
Holdings filed a voluntary petition for reorganization under Chapter 11 of the
United States Bankruptcy Code due to its asbestos-related claims. Mr. Heyman was
a director and Chairman of Building Materials Corporation of America ("BMCA"),
an indirect wholly-owned subsidiary of G-I Holdings, which is primarily engaged
in the commercial and residential roofing business, from its formation until
September 2000, and served as Chief Executive Officer of BMCA from June 1996 to
January 1999 and from June 1999 to September 2000. He is also the Chief
Executive Officer, Manager and General Partner of a number of closely held real
estate development companies and partnerships whose investments include
commercial real estate and a portfolio of publicly traded securities.

Alan R. Hirsig - Director since 1998

         Mr. Hirsig, age 63, was President and Chief Executive Officer of ARCO
Chemical Company, which was bought by Lyondell Chemical Company, from 1991 until
he retired in 1998. He is a director of Philadelphia Suburban Corporation,
Celanese A.G., and Checkpoint Systems Corporation. Additionally, he is a
director or trustee of Bryn Mawr College, Curtis Institute of Music, Rosenbach
Museum and Library and the YMCA of Philadelphia. Mr. Hirsig served as past
chairman of the Chemical Manufacturers Association.

Edith E. Holiday - Director since 1993

         Ms. Holiday, age 51, is an attorney. She was Assistant to the President
of the United States and Secretary of the Cabinet from 1990 until early 1993 and
served as General Counsel of the U.S. Treasury Department from 1989 through
1990. She served as counselor to the Secretary of the Treasury and Assistant
Secretary for Public Affairs and Public Liaison, U.S. Treasury Department from
1988 to 1989. Ms. Holiday is a director of Amerada Hess Corporation, Canadian
National Railway,

                                       80



HERCULES INCORPORATED

Digex Incorporated, H.J. Heinz Company, Beverly Enterprises, Inc., RTI
International Metals, Inc., and director or trustee of various investment
companies in the Franklin Templeton Group of Funds.

John C. Hunter, III - Director since 2003

         Mr. Hunter, age 56, is Chairman, President and Chief Executive Officer
of Solutia, a specialty chemicals company created in 1997 as a spin-off from
Monsanto Company. Mr. Hunter joined Monsanto in 1969 and has held a number of
executive and senior management positions during his career. He is a member of
the Board of Directors of Solutia, Inc., Missouri Baptist Medical Center and the
Penford Corporation.

Robert D. Kennedy - Director since 2001

         Mr. Kennedy, age 70, held a number of executive and senior management
positions with Union Carbide Corporation, including Chairman, Chief Executive
Officer and President. He retired as Chairman from Union Carbide in 1995 after a
career that spanned 40 years. He is a member of the Boards of Directors of
Sunoco Inc. and International Paper Company.

Sunil Kumar - Director since 2001

         Mr. Kumar, age 53, has been director, President and Chief Executive
Officer of International Specialty Products Inc. ("ISP") since June 1999. Mr.
Kumar has also been President and Chief Executive Officer of certain
subsidiaries of ISP, including ISP Investments Inc., since June 1999. Mr. Kumar
was a director, President and Chief Executive Officer of Building Materials
Corporation of America ("BMCA") from May 1995, July 1996 and January 1999,
respectively, until June 1999. He was Chief Operating Officer of BMCA from March
1996 to January 1999. He was also a director and Vice-Chairman of the Board of
G-I Holdings from January 1999 to June 1999. In January 2001, G-I Holdings filed
a voluntary petition for reorganization under Chapter 11 of the United States
Bankruptcy Code due to its asbestos-related claims.

Jeffrey M. Lipton - Director since 2001

         Mr. Lipton, age 60, is President and Chief Executive Officer and a
Director of NOVA Chemicals Corporation. He joined NOVA in 1993 after retiring
from a 28-year career with the DuPont Company, where he held a number of
management and executive positions. He is Chairman and a Director of Methanex
Corporation and Trimeris, Inc., a member of the Board of Directors and Executive
Committee of the American Chemistry Counsel, and a member of the Board of
Directors of the Canadian Council of Chief Executives - Canada.

Peter McCausland - Director since 1997

         Mr. McCausland, age 53, has been the Chairman and Chief Executive
Officer of Airgas, Inc. (a distributor of industrial, medical, and specialty
gases and related equipment), a company he founded in 1982, since 1987. He
served as general counsel for MG Industries, Inc., an industrial gas producer.
He was a partner in the firm of McCausland, Keen & Buckman that specialized in
mergers, acquisitions, and financings. He is a director of the Independence
Seaport Museum and The Eisenhower Exchange Fellowships.

Gloria Schaffer - Director since 2001

         Ms. Schaffer, age 72, served as a Commissioner of the Department of
Consumer Protection of the State of Connecticut from 1991 to 1995, as a member
of the Civil Aeronautics Board from 1978 to 1985 and as the Secretary of State
of the State of Connecticut from 1970 to 1978. Ms. Schaffer also previously
served on the Board of Directors of Amity Bank and Amity Bankcorp, Mott's Inc.
and Emery Air Worldwide and, since 1996, has served as a partner at C.A. White,
Inc., a real estate development firm. Ms. Schaffer is a director of MP 63 Fund.

Raymond S. Troubh - Director since 2001

         Mr. Troubh, age 76, has been a financial consultant for more than five
years. Prior to that he was a general partner of Lazard Freres & Co., an
investment banking firm, and a governor of the American Stock Exchange. Mr.
Troubh is a director of ARIAD Pharmaceuticals, Inc., a biopharmaceutical
company, Diamond Offshore Drilling, Inc., a contract drilling company, General
American Investors Company, an investment trust company, Gentiva Health
Services, Inc., a healthcare provider, Triarc Companies, Inc., a holding
company, and WHX Corporation, a steel products company. He is also a trustee of
Petrie Stores Liquidating Trust and is the non-executive Chairman of the Board
of Directors of Enron Corp.

Joe B. Wyatt - Director since 2001

         Mr. Wyatt, age 67, is Chancellor Emeritus of Vanderbilt University in
Nashville, Tennessee. He served as Vanderbilt's sixth Chancellor and Chief
Executive Officer for 18 years, beginning in 1982. From 1972 to 1982, he was a
member of the faculty and administration at Harvard University. He is Chairman
of the Board of Directors of the Universities Research Association Inc. of
Washington, D.C., Chairman of a panel on Strategic Education Research for the
National Research Council of the National Academies, a director of New American
Schools, Inc., Advanced Network and Services, Inc., the EAA Aviation Foundation,
Ingram Micro, Inc., where he is Chairman of the Audit Committee, El Paso
Corporation, the Aerostructures Company and ASD.com. He is a Principal of the
Washington Advisory Group, LLC in Washington, D.C.

EXECUTIVE OFFICERS OF THE REGISTRANT

                                       81



HERCULES INCORPORATED

         The name, age and current position of each executive officer of
Hercules is included in Part I, Executive Officers of the Registrant of this
Form 10-K and is incorporated herein by reference.

SECTION 16(A) BENEFICIAL REPORTING COMPANY COMPLIANCE

         Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires the Company's directors, executive officers and holders of more than
10% of the Company's common stock to file with the SEC and the New York Stock
Exchange reports of beneficial ownership and changes in beneficial ownership of
the common stock and other equity securities of the Company. These persons are
required by SEC rules to furnish the Company with copies of all Section 16(a)
forms they file. Mr. Heyman's Form 4 filings that were due in February and March
2002 were filed in April 2002.

ITEM 11.          EXECUTIVE COMPENSATION

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

ITEM 12.          SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

Equity Compensation Plan Information

         The following table provides information as of December 31, 2002
concerning the number of shares of common stock to be issued upon the exercise
of outstanding options, warrants and rights issued under all of the Company's
existing equity compensation plans, including the Hercules Incorporated
Long-Term Incentive Compensation Plan and the Hercules Incorporated Non-Employee
Director Stock Accumulation Plan; and the weighted average exercise price of
such options, warrants and rights and the number of securities remaining
available for future issuance under such plans. All of the Company's equity
compensation plans have been approved by the Company's shareholders.



                                                                                                         Number of securities
                                                                                                        remaining available for
                                                  Number of securities                                  for future issuance under
                                                   to be issued upon       Weighted-average               equity compensation
                                                exercise of outstanding    exercise price of                plans (excluding
                                                 options, warrants and    outstanding options,          securities reflected in
         Plan category                                   rights            warrants and rights                  column (a))
                                                       (a)                       (b)                               (c)
                                                                                               
Equity compensation plans approved by
security holders(1)                                  18,396,559 (2)              $  30.49                           2,203,206

Equity compensation plans not approved
by security holders(3)                                        -                         -                                   -
                                                     ----------                  --------                           ---------
Total                                                18,396,559                  $  30.49                           2,203,206
                                                     ==========                  ========                           =========


(1)  Includes 9,741,685 options with exercise prices in excess of the weighted
     average price of $30.49.

(2)  Includes options to purchase 9,246,425 shares that were not vested at
     December 31, 2002.

(3)  There are no equity compensation plans that have not been approved by the
     Company's shareholders.

ITEM 13.          CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

         In 2002, no director or officer had any relationships or involvement in
any transactions of a nature or magnitude to require disclosure under the
applicable SEC rules.

ITEM 14.          CONTROLS AND PROCEDURES

         The Company carried out an evaluation, under the supervision and with
the participation of the Company's management, including the Company's Chief
Executive Officer and Vice President and Controller, of the effectiveness of the
design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15 as of December 31, 2002. Based upon that evaluation,
the Company's Chief Executive Officer and Vice President and Controller
concluded that the Company's disclosure controls and procedures are effective.
Disclosure controls and procedures are controls and

                                       82



HERCULES INCORPORATED

procedures that are designed to ensure that information required to be disclosed
in Company reports filed or submitted under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms. There have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect internal controls subsequent to the date the Company
carried out its evaluation. A control system, no matter how well designed and
operated, can not provide absolute assurance that the objectives of the control
system are met, and no evaluation of controls can provide absolute assurance
that all control issues and instances of fraud, if any, within a company have
been detected.


                                       83



HERCULES INCORPORATED

                                     PART IV

ITEM 15.          EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM
                   8-K

         (a)      Documents filed as part of this Report:

                  1.       Financial Statements

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

                  2.       Financial Statement Schedules:

HERCULES INCORPORATED
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS



                                                               (Dollars in millions)
- ----------------------------------------------------------------------------------------------------------------------
            Col. A.                     Col. B                Col. C                Col. D                   Col. E
- ----------------------------------------------------------------------------------------------------------------------
                                                             Additions
- ----------------------------------------------------------------------------------------------------------------------
                                      Balance at    Charged to                                              Balance at
                                      beginning     costs and       Charged to                                end of
         Description                  of period      expenses     other accounts   Deductions                 period
- ----------------------------------------------------------------------------------------------------------------------
                                                                                             
YEAR 2002

Allowance for doubtful accounts          $ 24            4              -             (16)                     $ 12
Tax valuation allowance                    75          233              -               -                       308

YEAR 2001

Allowance for doubtful accounts          $ 27           11              -             (14)                     $ 24
Tax valuation allowance                    28           47              -               -                        75

YEAR 2000

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


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

                  3.       Exhibits:

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

         (b)      Reports on Form 8-K

                  None.

                                       84



HERCULES INCORPORATED

                                   SIGNATURES

         Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized on March 31, 2003.

                                            HERCULES INCORPORATED

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

     Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant in the capacities indicated on March 31, 2003.

PRINCIPAL EXECUTIVE OFFICER AND DIRECTOR:
         Chairman and Chief Executive Officer  /s/ William H. Joyce
                                               ---------------------------------
                                               William H. Joyce

PRINCIPAL FINANCIAL OFFICER:
         Vice President and Treasurer          /s/ Stuart C. Shears
                                               ---------------------------------
                                               Stuart C. Shears

PRINCIPAL ACCOUNTING OFFICER:
         Vice President and Controller         /s/ Fred G. Aanonsen
                                               ---------------------------------
                                               Fred G. Aanonsen

DIRECTORS:

/s/ William H. Joyce                        /s/ Sunil Kumar
- ----------------------------------          ------------------------------------
William H. Joyce                            Sunil Kumar

/s/ Richard M. Fairbanks, III               /s/ Jeffrey M. Lipton
- ----------------------------------          ------------------------------------
Richard M. Fairbanks, III                   Jeffrey M. Lipton

/s/ Samuel J. Heyman                        /s/ Peter McCausland
- ----------------------------------          ------------------------------------
Samuel J. Heyman                            Peter McCausland

/s/ Alan R. Hirsig                          /s/ Gloria Schaffer
- ----------------------------------          ------------------------------------
Alan R. Hirsig                              Gloria Schaffer

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

/s/ John C. Hunter, III                     /s/ Joe B. Wyatt
- ----------------------------------          ------------------------------------
John C. Hunter, III                         Joe B. Wyatt

/s/ Robert D. Kennedy
- ----------------------------------
Robert D. Kennedy

                                       85



HERCULES INCORPORATED

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, William H. Joyce, Chairman and Chief Executive Officer, certify that:

1.       I have reviewed this annual report on Form 10-K of Hercules
         Incorporated;

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

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

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

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

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

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

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

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

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

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.

Date:  March 31, 2003

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

                                       86



HERCULES INCORPORATED

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Fred G. Aanonsen, Vice President and Controller, certify that:

1.       I have reviewed this annual report on Form 10-K of Hercules
         Incorporated;

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

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

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

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

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

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

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

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

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

6.       The registrant's other certifying officers and I have indicated in this
         annual report whether there were significant changes in internal
         controls or in other factors that could significantly affect internal
         controls subsequent to the date of our most recent evaluation,
         including any corrective actions with regard to significant
         deficiencies and material weaknesses.

Date:  March 31, 2003

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

                                       87



HERCULES INCORPORATED

EXHIBIT INDEX



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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

4-N             Rights Agreement, dated as of August 24, 2000, between          Exhibit 4.1 to Hercules Registration of
                Hercules Incorporated and Chase Mellon Shareholder              Certain Classes of Securities on Form 8-A
                Services, L.L.C.                                                filed August 10, 2000


                                       88



HERCULES INCORPORATED



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

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


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

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

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

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

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

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

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

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

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

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

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

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

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

10-M            Underwriting Agreement, dated March 12, 1999, among             Exhibit 1.1, Current Report on Form 8-K, dated
                Hercules, Hercules Trust I and the Underwriters named           March 17, 1999
                therein

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

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



                                       89



HERCULES INCORPORATED



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

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

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

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

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

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

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

10-W            Form of Change-of-Control Employment Agreements, dated          Exhibit 10-25, Registration Statement on Form
                as of June 15, 2001, by and between Hercules                    S-4, filed August 9, 2001
                Incorporated and each of Edward V. Carrington and
                Richard G. Dahlen

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

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

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

10-Aa           Stock and Asset Purchase Agreement, dated as of                 Exhibit 10.1, Current Report on Form 8-K,
                February 12, 2002, by and among Hercules Incorporated,          dated February 12, 2002
                General Electric Company and Falcon Acquisition Corp.

10-Bb           Amendment 2002-1 to Amended and Restated Long Term              Exhibit I, Notice of Annual Meeting and Proxy
                Incentive Compensation Plan                                     Statement, dated May 15, 2002

10-Cc           Amendment 2002-1 to Non-Employee Director Stock                 Exhibit II, Notice of Annual Meeting and Proxy
                Accumulation Plan                                               Statement, dated May 15, 2002

10-Dd*          Credit Agreement, dated December 20, 2002, among Hercules
                Incorporated, certain subsidiaries of Hercules, several
                banks and other financial institutions identified in the
                agreement and Credit Suisse First Boston, as
                administrative agent


                                       90



HERCULES INCORPORATED



NUMBER                              DESCRIPTION                                         INCORPORATED BY REFERENCE TO
                                                                          
21.1            Subsidiaries of Registrant                                      See Part II, Item 8 on page 78 of this 2002
                                                                                Form 10-K

23.1*           Consent of Independent Accountants

99.1*           Certification of Chairman and Chief Executive Officer
                Pursuant to 18. U.S.C. Section 1350, as adopted
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002

99.2*           Certification of Vice President and Controller Pursuant
                to 18. U.S.C. Section 1350, as adopted pursuant to
                Section 906 of the Sarbanes-Oxley Act of 2002


*Filed herewith

                                       91

EX-10.DD

                                                                  EXECUTION COPY

================================================================================

                                CREDIT AGREEMENT

                          DATED AS OF DECEMBER 20, 2002

                                      AMONG

                              HERCULES INCORPORATED
                                   AS BORROWER

                  CERTAIN SUBSIDIARIES OF HERCULES INCORPORATED
                         FROM TIME TO TIME PARTY HERETO
                                  AS GUARANTORS

                               THE SEVERAL LENDERS
                         FROM TIME TO TIME PARTY HERETO

                           CREDIT SUISSE FIRST BOSTON
   AS ADMINISTRATIVE AGENT, COLLATERAL AGENT, JOINT BOOKRUNNER AND JOINT LEAD
                                    ARRANGER

                       WACHOVIA BANK, NATIONAL ASSOCIATION
                     AS SYNDICATION AGENT AND ISSUING LENDER

                            WACHOVIA SECURITIES, INC.
                   AS JOINT BOOKRUNNER AND JOINT LEAD ARRANGER

                             THE BANK OF NOVA SCOTIA
                                       AND
                         PNC BANK, NATIONAL ASSOCIATION
                           AS CO-DOCUMENTATION AGENTS

================================================================================

                                TABLE OF CONTENTS



                                                                                                                PAGE
                                                                                                                ----
                                                                                                          
SECTION 1.    Representations and Warranties of the Company..................................................     1
     1.1.     Corporate or Other Authority...................................................................     1
     1.2.     Financial Statements...........................................................................     2
     1.3.     Validity of Documents..........................................................................     2
     1.4.     No Events of Default...........................................................................     3
     1.5.     Litigation.....................................................................................     3
     1.6.     Use of Proceeds................................................................................     3
     1.7.     No Change......................................................................................     4
     1.8.     Federal Regulations............................................................................     4
     1.9.     ERISA..........................................................................................     4
     1.10.    Investment Company Act; Other Regulations......................................................     5
     1.11.    Compliance with Law............................................................................     5
     1.12.    Taxes..........................................................................................     5
     1.13.    Subsidiaries...................................................................................     6
     1.14.    Environmental Matters..........................................................................     6
     1.15.    Solvency.......................................................................................     7
     1.16.    Disclosure.....................................................................................     7
     1.17.    No Burdensome Restrictions.....................................................................     8
     1.18.    Collateral Documents...........................................................................     8
     1.19.    Insurance......................................................................................     8
     1.20.    Intentionally Omitted..........................................................................     8
     1.21.    Business Locations.............................................................................     8
     1.22.    Ownership of Property; Liens...................................................................     9
     1.23.    Indebtedness...................................................................................     9
     1.24.    Labor Matters..................................................................................     9
     1.25.    Nature of Business.............................................................................     9
     1.26.    Investments....................................................................................     9
     1.27.    Representations and Warranties from Other Credit Documents.....................................     9
SECTION 2.    Amount and Terms of Commitments................................................................     9
     2.1.     Revolving Commitments..........................................................................     9
     2.2.     Notes Evidencing Revolving Loans...............................................................    10
     2.3.     Procedure for Revolving Credit Borrowing.......................................................    10
     2.4.     Fees...........................................................................................    11
     2.5.     Termination or Reduction of a Revolving Committed Amount.......................................    12
     2.6.     Prepayments....................................................................................    12
     2.7.     Conversion and Continuation Options............................................................    15
     2.8.     Maximum Number of Eurodollar Loans.............................................................    16
     2.9.     Interest Rates and Payment Dates...............................................................    16
     2.10.    Computation of Interest and Fees...............................................................    17
     2.11.    Pro Rata Treatment and Payments................................................................    17
     2.12.    Taxes..........................................................................................    18
     2.13.    Swingline Loan Subfacility.....................................................................    19


                                                                                                          
     2.14.    Letter of Credit Subfacility...................................................................    21
     2.15.    Term B Loan....................................................................................    27
     2.16.    Incremental Term Loan..........................................................................    28
SECTION 3.    Change in Circumstances Affecting Loans........................................................    30
     3.1.     Basis for Determining Interest Rate Inadequate or Unfair.......................................    31
     3.2.     Illegality.....................................................................................    31
     3.3.     Increased Cost.................................................................................    31
     3.4.     Effect on Obligation to Convert................................................................    33
     3.5.     Funding Losses.................................................................................    33
SECTION 3A.   Guaranty.......................................................................................    33
              3A.1.    Guaranty of Payment...................................................................    33
              3A.2.    Obligations Unconditional.............................................................    33
              3A.3.    Modifications.........................................................................    34
              3A.4.    Waiver of Rights......................................................................    35
              3A.5.    Reinstatement.........................................................................    35
              3A.6.    Remedies..............................................................................    35
              3A.7.    Limitation of Guaranty................................................................    35
              3A.8.    Rights of Contribution................................................................    36
SECTION 4.    Conditions Precedent...........................................................................    36
     4.1.     Effectiveness of this Agreement................................................................    36
     4.2.     Conditions to all Borrowings...................................................................    40
     4.3.     Conditions to Incremental Term Loan............................................................    41
SECTION 5.    Covenants......................................................................................    42
     5.1.     Affirmative Covenants..........................................................................    42
              (a)      Financial Statements..................................................................    42
              (b)      Certificates; Other Information.......................................................    42
              (c)      Notices and Information...............................................................    44
              (d)      Payment of Obligations................................................................    45
              (e)      Conduct of Business and Maintenance of Existence......................................    45
              (f)      Maintenance of Property; Insurance....................................................    46
              (g)      Compliance with Laws..................................................................    47
              (h)      Books and Records.....................................................................    47
              (i)      EBITDA and Assets of Credit Parties...................................................    47
              (j)      Use of Proceeds.......................................................................    47
              (k)      Audits/Inspections....................................................................    47
              (l)      Additional Credit Parties.............................................................    48
              (m)      Pledged Assets........................................................................    48
              (n)      High Yield Note Indenture.............................................................    48
              (o)      Addition of Excluded Inactive Subsidiaries as Guarantors..............................    49
              (p)      Release of Cash Collateral............................................................    49
     5.2.     Negative Covenants.............................................................................    49
              (a)      Limitation on Liens...................................................................    49
              (b)      Limitations on Mergers, Acquisitions and Asset Sales..................................    49
              (c)      Limitations on Sale/Leaseback Transactions............................................    52
              (d)      Financial Covenants...................................................................    52
              (e)      Limitations on Transactions with Affiliates...........................................    53



                                       ii

                                                                                                          
              (f)      Limitations on Indebtedness..........................................................     53
              (g)      Fiscal Year; Organizational Documents................................................     55
              (h)      Limitation on Restricted Actions.....................................................     55
              (i)      No Other Negative Pledges............................................................     55
              (j)      Restricted Payments..................................................................     55
              (k)      Limitation on Prepayment, Redemption or Repurchase of Indebtedness or Capital Stock..     56
              (l)      Advances, Investments and Loans......................................................     57
              (m)      Asbestos Payment Limitations.........................................................     57
              (n)      Plan Contribution Limitations........................................................     57
     5.3.     Incorporation of Covenants from High Yield Note Indenture.....................................     58
SECTION 6.    Defaults......................................................................................     58
     6.1.     Defaults; Events of Default; Certain Remedies.................................................     58
SECTION 7.    Definitions and Accounting Terms..............................................................     62
     7.1      Definitions...................................................................................     62
     7.2      Accounting Terms..............................................................................     86
     7.3      Rounding......................................................................................     87
     7.4      References to Agreements and Requirements of Law..............................................     87
     7.5      Times of Day..................................................................................     87
     7.6      Letter of Credit Amounts......................................................................     88
SECTION 8.    The Agents....................................................................................     88
     8.1.     Appointment...................................................................................     88
     8.2.     Delegation of Duties..........................................................................     88
     8.3.     Exculpatory Provisions........................................................................     88
     8.4.     Reliance by Administrative Agent and the Collateral Agent.....................................     89
     8.5.     Notice of Default.............................................................................     89
     8.6.     Non-Reliance on Agents and Other Lenders......................................................     89
     8.7.     Indemnification...............................................................................     90
     8.8.     Agents in Their Individual Capacity...........................................................     90
     8.9.     Successor Agent...............................................................................     91
     8.10.    Other Agents, Arrangers and Managers..........................................................     91
SECTION 9.    Miscellaneous.................................................................................     91
     9.1.     Amendments and Waivers........................................................................     91
     9.2.     Notices.......................................................................................     93
     9.3.     No Waiver; Cumulative Remedies................................................................     94
     9.4.     Survival of Representations and Warranties....................................................     94
     9.5.     Payment of Expenses and Taxes.................................................................     95
     9.6.     Successors and Assigns; Participations and Assignments........................................     95
     9.7.     Adjustments; Set-off..........................................................................     99
     9.8.     Counterparts..................................................................................     99
     9.9.     Adjustments for Changes in GAAP...............................................................    100
     9.10.    Severability; Section Headings................................................................    100
     9.11.    Integration...................................................................................    100
     9.12.    Governing Law.................................................................................    100
     9.13.    Submission To Jurisdiction; Waivers...........................................................    100
     9.14.    Acknowledgments...............................................................................    101
     9.15.    Waiver of Jury Trial..........................................................................    101
     9.16.    Confidentiality...............................................................................    102
     9.17.    Binding Effect; Further Assurances............................................................    102



                                      iii

EXHIBITS

Exhibit A         Form of Note
Exhibit B         Form of Assignment and Assumption
Exhibit C         Form of Joinder Agreement
Exhibit D         Form of Advance Request
Exhibit E         Form of Notice of Borrowing for Term Loans
Exhibit F         Form of Notice of Continuation/Conversion
Exhibit G         Form of Security Agreement
Exhibit H         Form of Mortgage
Exhibit I         Form of Incremental Term Loan Acceptance

SCHEDULES

Schedule 1.3      Required Consents, Authorizations, Notices and Filings
Schedule 1.9      ERISA matters
Schedule 1.13     Subsidiaries
Schedule 1.19     Insurance
Schedule 1.21(a)  Real Properties
Schedule 1.21(b)  Personal Property locations
Schedule 1.21(c)  Chief Executive Office, Jurisdiction of Incorporation, etc.
Schedule 1.24     Labor Matters
Schedule 5.2(e)   Certain Transactions with Affiliates
Schedule 5.2(f)   Indebtedness of the Company and its Subsidiaries
Schedule 7(a)     Commitment and Pro Rata Shares
Schedule 7(b)     Certain Excluded Assets
Schedule 7(c)     Permitted Investments
Schedule 7(d)     Permitted Liens
Schedule 9.2      Names and Address of Lenders

                                       v

                                CREDIT AGREEMENT

         CREDIT AGREEMENT, dated as of December 20, 2002 (as amended, restated,
supplemented or otherwise modified from time to time pursuant to the applicable
provisions hereof, the "Agreement"), among HERCULES INCORPORATED, a Delaware
corporation (the "Company"), such subsidiaries of the Company as may from time
to time be Guarantors hereunder in accordance with the provisions hereof
(collectively with the Company, the "Credit Parties"), the several banks and
other financial institutions from time to time party to this Agreement (the
"Lenders"), CREDIT SUISSE FIRST BOSTON, acting through its Cayman Islands
Branch, as administrative agent (in such capacity, the "Administrative Agent")
and Collateral Agent (as defined herein) for the Lenders, and WACHOVIA BANK,
NATIONAL ASSOCIATION, as syndication agent (the "Syndication Agent") and Issuing
Lender (as defined herein).

                                    RECITALS

         A.       The Company has requested that the Lenders (i) provide credit
                  facilities of up to $325,000,000 on the Closing Date and (ii)
                  provide the Company with the ability to propose to incur up to
                  an additional $150,000,000 in the form of an incremental term
                  loan, in each case, for the purposes hereinafter set forth;
                  and

         B.       The Lenders have agreed to make the requested credit
                  facilities to the Company on the terms and conditions
                  hereinafter set forth.

         Therefore, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties hereto hereby agree as
follows:

         SECTION 1. REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

         In order to induce the Lenders and the Administrative Agent (as that
term and other capitalized terms not otherwise defined herein are hereinafter
defined in Section 7) to enter into this Agreement and to make the Loans and
other extensions of credit hereunder, the Credit Parties make the following
representations, covenants and warranties which shall survive the execution and
delivery of the Credit Documents:

                           1.1.     CORPORATE OR OTHER AUTHORITY.

         (a)      Each Credit Party is duly incorporated, organized or formed,
validly existing and is in good standing under the laws of the jurisdiction of
its incorporation, organization or formation. The execution, delivery and
performance of the Credit Documents are within each Credit Party's corporate or
other organizational authority and have been duly authorized by proper corporate
or other proceedings. This Agreement has been, and each of the other Credit
Documents required to be executed and delivered by a Credit Party will be, duly
executed and delivered by each Credit Party that is a party thereto.

         (b)      Each Credit Party (i) has the corporate or other necessary
power and authority, and the legal right, to (A) own and operate its property,
to lease the property it operates as lessee and to conduct the business in which
it is currently engaged and (B) execute, deliver and perform its obligations
under the Credit Documents and (ii) is duly qualified as a foreign entity and in
good standing under the laws of each jurisdiction where its ownership, lease or
operation of property or the conduct of its business requires such
qualification, other than in such jurisdictions where the failure to be so
qualified and in good standing could not reasonably be expected to have a
Material Adverse Effect.

                           1.2.     FINANCIAL STATEMENTS.

         (a)      The consolidated balance sheet of the Company and its
Consolidated Subsidiaries as of December 31, 2001, and the related consolidated
statements of income, stockholders' equity and cash flow (including the notes
thereto) for the fiscal year ended on such date, reported upon by
PricewaterhouseCoopers LLP, present fairly in all material respects the
consolidated financial position of the Company and its Consolidated Subsidiaries
as of said date and the consolidated results of their operations for such fiscal
year, in conformity with GAAP.

         (b)      The consolidated balance sheets of the Company and its
Consolidated Subsidiaries as of September 30, 2002, and the related consolidated
statements of income and cash flows for the quarterly period ended on such date,
present fairly in all material respects the consolidated financial position of
the Company and its Consolidated Subsidiaries as of said date and the
consolidated results of their operations for such quarterly period, in
conformity with GAAP; provided, however, that such financial statements are
subject to year-end adjustments.

         (c)      The financial statements delivered to the Lenders pursuant to
Section 5.1(a)(i) and (ii), (i) have been prepared in accordance with GAAP
(except as may otherwise be permitted hereunder) and (ii) present fairly (on the
basis disclosed in the footnotes to such financial statements) the consolidated
financial condition, results of operations and cash flows of the Company and its
Consolidated Subsidiaries as of such date and for such periods.

                           1.3.     VALIDITY OF DOCUMENTS.

         (a)      This Agreement constitutes, and the other Credit Documents
when duly executed and delivered by each Credit Party that is a party thereto in
accordance with this Agreement will constitute, legal, valid and binding
obligations of each Credit Party, each enforceable in accordance with its terms
except as the enforceability of such Credit Document may be limited (x) by
general principles of equity and conflicts of laws or (y) by bankruptcy,
reorganization, insolvency, moratorium or other laws of general application
relating to or affecting the enforcement, of creditors' rights. Neither the
execution, delivery or performance of this Agreement or the other Credit
Documents, nor compliance with the terms and provisions hereof and thereof, will
(i) violate or conflict with any provisions of the articles or certificate of
incorporation or bylaws or other organizational or governing documents of any
Credit Party, (ii) conflict with, or result in a breach of any provisions of,
any material Requirement of Law applicable to the Credit Parties, (iii) violate,
contravene or conflict with contractual provisions of or cause a event of
default under, any indenture, loan agreement, mortgage, deed of trust,

                                       2

contract or other agreement or instrument to which a Credit Party is a party, or
by which it or its properties is bound, or constitute a default thereunder,
except where such conflict, breach or default would not reasonably be expected
to have a Material Adverse Effect or (iv) result in or require the creation of
any Lien (other than Permitted Liens) upon a Credit Party or with respect to its
properties.

         (b)      No consent or authorization of, filing with, notice to or
other similar act by or in respect of, any Governmental Authority or any other
Person is required to be obtained or made by or on behalf of any Credit Party in
connection with the borrowings or other extensions of credit hereunder or with
the execution, delivery, performance, validity or enforceability of the Credit
Documents to which such Credit Party is a party, except for (i) consents,
authorizations, notices and filings described in Schedule 1.3, all of which have
been obtained or made or have the status described in such Schedule 1.3 and (ii)
filings to perfect the Liens created by the Collateral Documents.

                           1.4.     NO EVENTS OF DEFAULT.

         Neither the Company nor any of its Subsidiaries is in default under or
with respect to any indenture, loan agreement, mortgage, deed of trust, contract
or other agreement or instrument to which a Credit Party is a party, or by which
it or its properties is bound that could, either individually or in the
aggregate, reasonably be expected to have a Material Adverse Effect. No Default
or Event of Default has occurred and is continuing or would result from the
consummation of the transactions contemplated by this Agreement or any other
Credit Document.

                           1.5.     LITIGATION.

         Except as set forth on the Company's Form 10-Q filed with the SEC for
the quarterly period ended September 30, 2002, there are no actions, suits or
proceedings pending or, to the knowledge of a Credit Party, threatened against
or affecting the Company or any Consolidated Subsidiary before any court or
before any governmental or administrative body or agency, which could reasonably
be expected to have a Material Adverse Effect.

                           1.6.     USE OF PROCEEDS.

         The proceeds of the Revolving Loans shall be used for working capital,
capital expenditures and other general corporate purposes in the ordinary course
of business consistent with past practices of the Company. The Letters of Credit
shall be used only for or in connection with appeal bonds, reimbursement
obligations arising in connection with surety and reclamation bonds,
reinsurance, domestic or international trade transactions and obligations not
otherwise aforementioned relating to transactions entered into by the applicable
account party in the ordinary course of business by the Company and its
Subsidiaries. The proceeds of the Term Loan shall be used on the Closing Date,
(i) to refinance existing Indebtedness (including the deposit by the Company of
$125,000,000 into an escrow account to pay the principal amount of the 6.625%
Senior Notes due 2003 at maturity), (ii) to fund cash taxes and restructuring
costs, (iii) to pay related fees and expenses in connection with the Credit
Documents and (iv) for general corporate purposes.

                                       3

                           1.7.     NO CHANGE.

         Since December 31, 2001, there has been no development or event which
has had or could reasonably be expected to have a Material Adverse Effect, other
than facts, circumstances, changes or events, which, as of September 30, 2002,
have been discussed in the Company's public filings with the SEC, but only to
the extent actually discussed in such filings (i.e. without giving effect to any
material deterioration since the date of such filings).

                           1.8.     FEDERAL REGULATIONS.

         No part of the Letters of Credit or the proceeds of any Loans will be
used for "purchasing" or "carrying" any "margin stock", within the respective
meanings of each of the quoted terms under Regulation U of the Board of
Governors of the Federal Reserve System as now and from time to time hereafter
in effect or for any purpose which violates the provisions of the Regulations of
such Board of Governors. If requested by any Lender or the Administrative Agent,
the Company will furnish to the Administrative Agent and each Lender a statement
to the foregoing effect in conformity with the requirements of FR Form U-1
referred to in said Regulation U.

                           1.9.     ERISA.

         Except as set forth on Schedule 1.9:

         (a)      Each Plan is in compliance in all material respects with the
applicable provisions of ERISA, the Code and other Federal or state Laws. Each
Plan that is intended to qualify under Section 401(a) of the Code has received a
favorable determination letter from the IRS or an application for such a letter
is currently being processed by the IRS with respect thereto and, to the best
knowledge of the Credit Parties, nothing has occurred which would prevent, or
cause the loss of, such qualification. Each Credit Party and each ERISA
Affiliate have made all required contributions to each Plan subject to Section
412 of the Code, and no application for a funding waiver or an extension of any
amortization period pursuant to Section 412 of the Code has been made with
respect to any Plan.

         (b)      There are no pending or, to the best knowledge of the Credit
Parties, threatened claims, actions or lawsuits, or action by any Governmental
Authority, with respect to any Plan that could reasonably be expected to have a
Material Adverse Effect. There has been no prohibited transaction or violation
of the fiduciary responsibility rules with respect to any Plan that has resulted
or could reasonably be expected to result in a Material Adverse Effect.

         (c)      (i) None of the following has occurred or is reasonably
expected to occur: (a) a Reportable Event with respect to a Pension Plan; (b) a
withdrawal by the Company or any ERISA Affiliate from a Pension Plan subject to
Section 4063 of ERISA during a plan year in which it was a substantial employer
(as defined in Section 4001(a)(2) of ERISA) or a cessation of operations that is
treated as such a withdrawal under Section 4062(e) of ERISA; (c) a complete or
partial withdrawal by the Company or any ERISA Affiliate from a Multiemployer

                                       4

Plan or notification that a Multiemployer Plan is in reorganization; (d) the
filing of a notice of intent to terminate, the treatment of a Plan amendment as
a termination under Sections 4041 or 4041A of ERISA, or the commencement of
proceedings by the PBGC to terminate a Pension Plan or Multiemployer Plan; (e)
an event or condition which constitutes grounds under Section 4042 of ERISA for
the termination of, or the appointment of a trustee to administer, any Pension
Plan or Multiemployer Plan; or (f) the imposition of any liability under Title
IV of ERISA, other than for PBGC premiums due but not delinquent under Section
4007 of ERISA, upon the Company or any ERISA Affiliate; (ii) no Pension Plan has
any Unfunded Pension Liability that is not being funded in accordance with
ERISA; (iii) no Credit Party nor any ERISA Affiliate has incurred, or reasonably
expects to incur, any liability (and no event has occurred which, with the
giving of notice under Section 4219 of ERISA, would result in such liability)
under Sections 4201 or 4243 of ERISA with respect to a Multiemployer Plan; and
(iv) no Credit Party nor any ERISA Affiliate has engaged in a transaction that
could be subject to Sections 4069 or 4212(c) of ERISA; except to the extent
that, in each case in clauses (i) through (iv) above, any such event or
condition, together with all other such events or conditions, if any, would not
reasonably be expected to have a Material Adverse Effect.

                           1.10.    INVESTMENT COMPANY ACT; OTHER REGULATIONS.

         No Credit Party is an "investment company", or a company "controlled"
by an "investment company", within the meaning of the Investment Company Act of
1940, as amended. No Credit Party is subject to regulation under any Federal or
State statute or regulation which limits its ability to incur Indebtedness. No
director, executive officer or principal shareholder of a Credit Party or any of
its Subsidiaries is a director, executive officer or principal shareholder of
any Lender. For the purposes hereof the terms "director", "executive officer"
and "principal shareholder" (when used with reference to any Lender) have the
respective meanings assigned thereto in Regulation O issued by the Board of
Governors of the Federal Reserve System. None of the transactions contemplated
by this Agreement (including, without limitation, the direct or indirect use of
the proceeds of the Loans) will violate or result in a violation of the
Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as
amended, or regulations issued pursuant thereto.

                           1.11.    COMPLIANCE WITH LAW.

         Each of the Company and its Consolidated Subsidiaries is in compliance
with all Requirements of Law except to the extent that the failure to comply
therewith could not, individually or in the aggregate, reasonably be expected to
have a Material Adverse Effect.

                           1.12.    TAXES.

         Each of the Company and its Consolidated Subsidiaries has filed, or
caused to be filed, all tax returns (federal, state, provincial, local and
foreign) required to be filed and paid (a) all amounts of taxes shown thereon to
be due (including interest and penalties) and (b) all other taxes, fees,
assessments and other governmental charges (including mortgage recording taxes,
documentary stamp taxes and intangibles taxes) owing by it, except for such
taxes (i) which are not yet delinquent or (ii) that are being contested in good
faith and by proper proceedings, and against which adequate

                                       5

reserves are being maintained in accordance with GAAP (if such reserves are
required pursuant to GAAP). No Credit Party is aware as of the Closing Date of
any proposed tax assessments against any of the Company and its Consolidated
Subsidiaries, which could reasonably be expected to have a Material Adverse
Effect and against which adequate reserves are not being maintained in
accordance with GAAP (if such reserves are required pursuant to GAAP).

                           1.13.    SUBSIDIARIES.

         Set forth on Schedule 1.13 is a complete and accurate list of all
Subsidiaries of the Company. Information on Schedule 1.13 includes, for each
Subsidiary, jurisdiction of incorporation, the number of shares of each class of
Capital Stock outstanding, the number and percentage of outstanding shares of
each class owned (directly or indirectly) by a Credit Party; and the number and
effect, if exercised, of all outstanding options, warrants, rights of conversion
or purchase and all other similar rights with respect thereto. The outstanding
Capital Stock of all such Subsidiaries is validly issued, fully paid and
non-assessable and is owned by each such Credit Party, directly or indirectly,
free and clear of all Liens (other than Permitted Liens). Other than as set
forth in Schedule 1.13, no such Subsidiary has outstanding any securities
convertible into or exchangeable for its Capital Stock nor does any such Person
have outstanding any rights to subscribe for or to purchase or any options for
the purchase of, or any agreements providing for the issuance (contingent or
otherwise) of, or any calls, commitments or claims of any character relating to
its Capital Stock. Schedule 1.13 may be updated from time to time by the Company
by giving written notice thereof to the Administrative Agent.

                           1.14.    ENVIRONMENTAL MATTERS.

         (a)      Except as set forth in the Company's Form 10-Q filed with the
SEC for the quarterly period ended September 30, 2002, as would not have or be
reasonably expected to have a Material Adverse Effect, or to the extent related
solely to asbestos personal injury claims (it being understood that such claims
are covered separately under Section 1.5):

                  (i)      Each of the real properties owned by the Credit
         Parties (the "Real Properties") and all operations at the Real
         Properties are in compliance with all applicable Environmental Laws,
         and there is no violation of any Environmental Law with respect to the
         Real Properties or the businesses operated by the Company or any of its
         Subsidiaries (the "Businesses"), and there are no conditions relating
         to the Businesses or Real Properties that would be reasonably expected
         to give rise to liability under any applicable Environmental Laws.

                  (ii)     No Credit Party has received any written notice of,
         or inquiry from any Governmental Authority regarding, any violation,
         alleged violation, non-compliance, liability or potential liability
         regarding Hazardous Materials or compliance with Environmental Laws
         with regard to any of the Real Properties or the Businesses, nor does
         any Credit Party have knowledge or reason to believe that any such
         notice is being threatened.

                                       6

                  (iii)    Hazardous Materials have not been transported or
         disposed of from the Real Properties, or generated, treated, stored or
         disposed of at, on or under any of the Real Properties or any other
         location, in each case by, or on behalf or with the permission of, the
         Company or any of its Subsidiaries.

                  (iv)     No judicial proceeding or governmental or
         administrative action is pending or, to the knowledge of any Credit
         Party, threatened, under any Environmental Law to which any Credit
         Party is or, to the best knowledge of such Credit Party, will be named
         as a party, nor are there any consent decrees or other decrees, consent
         orders, administrative orders or other orders, or other administrative
         or judicial requirements outstanding under any Environmental Law with
         respect to the Company or any of its Subsidiaries, the Real Properties
         or the Businesses.

                  (v)      There has been no release or, to the best knowledge
         of any Credit Party, threat of release of Hazardous Materials at or
         from the Real Properties, or arising from or related to the operations
         (including, without limitation, disposal) of the Company or any of its
         Subsidiaries in connection with the Real Properties or otherwise in
         connection with the Businesses, in violation of, or in amounts or in a
         manner that could give rise to liability under, Environmental Laws.

                  (vi)     None of the Real Properties contains, or has
         previously contained, any Hazardous Materials at, on or under the Real
         Properties in amounts or concentrations that, if released, constitute
         or constituted a violation of, or would give rise to liability under,
         Environmental Laws.

                  (vii)    No Credit Party, nor any of its Subsidiaries, has
         assumed any liability of any Person (other than another Credit Party,
         or one of its Subsidiaries) under any Environmental Law.

         (b)      The Company has adopted procedures that are designed to (i)
ensure that each Credit Party, each of its operations and each of the properties
owned or leased by each Credit Party remains in compliance with applicable
Environmental Laws, to the extent that the failure to comply with such
Environmental Laws would have or would be reasonably expected to have a Material
Adverse Effect, and (ii) manage, to the same extent as and in accordance with
the practices of companies engaged in the same or a similar business, any
liabilities or potential liabilities that each Credit Party, any of its
operations and each of the properties owned or leased by each Credit Party may
have under applicable Environmental Laws.

                           1.15.    SOLVENCY.

         Each Credit Party is, and after the consummation of the transactions
contemplated by this Agreement, will be Solvent.

                           1.16.    DISCLOSURE.

                                       7

         Neither this Agreement nor any financial statements delivered to the
Lenders nor any other document, certificate or statement furnished to the
Lenders by or on behalf of the Company or any of its Consolidated Subsidiaries
in connection with the transactions contemplated hereby contains any untrue
statement of a material fact or omits to state a material fact necessary in
order to make the statements contained therein or herein not misleading.

                           1.17.    NO BURDENSOME RESTRICTIONS.

         Neither the Company nor any of its Subsidiaries is a party to any
agreement or instrument or subject to any other obligation or any charter or
corporate restriction or any provision of any applicable law, rule or regulation
which, individually or in the aggregate, could have a Material Adverse Effect.

                           1.18.    COLLATERAL DOCUMENTS.

         The Collateral Documents create valid security interests in, and Liens
on, the Collateral purported to be covered thereby, which security interests and
Liens will, upon (a) the filing of the UCC financing statements executed by the
Credit Parties in the appropriate filing jurisdictions, (b) the recording of the
Mortgages in the appropriate recording jurisdictions, (c) the filing of
appropriate notices in the office of the United States Patent and Trademark
Office and (d) consummation of such other actions as are contemplated for
perfection under the Collateral Documents, be and remain perfected security
interests and Liens, prior to all other Liens other than Permitted Liens. Each
of the representations and warranties made by the Company and the other Credit
Parties in the Collateral Documents is true and correct in all material
respects.

                           1.19.    INSURANCE.

         The properties of the Company and its Consolidated Subsidiaries are
insured with financially sound and reputable insurance companies not Affiliates
of the Company, in such amounts, with such deductibles and covering such risks
as are customarily carried by companies engaged in similar businesses and
owning similar properties in localities where the Company or the applicable
Consolidated Subsidiary operates, to the extent such information with respect
to other companies is reasonably determinable and taking into account any
specific circumstances. The present insurance coverage of the Credit Parties is
outlined as to carrier, policy number, expiration date, type and amount on
Schedule 1.19.

                           1.20     INTENTIONALLY OMITTED.

                           1.21     BUSINESS LOCATIONS.

         Set forth on Schedule 1.21(a) is a list of all Real Properties (to the
extent not constituting Excluded Assets) located in the United States that are
owned or leased by the Credit Parties in the United States of America as of the
Closing Date, and an indication as to which of such Real Properties constitute
Mortgaged Properties. Set forth on Schedule 1.21(b) is a list of all locations
where any tangible personal property of a Credit Party with a fair market value
(as determined by the Company on a reasonable, good-faith basis) in excess of
$500,000 per location, is located as of

                                       8

the Closing Date. Set forth on Schedule 1.21(c) is the chief executive office,
jurisdiction of incorporation or formation and principal place of business of
each Credit Party as of the Closing Date.

                           1.22     OWNERSHIP OF PROPERTY; LIENS.

         Each of the Company and its Consolidated Subsidiaries has good record
and marketable title in fee simple to, or valid leasehold interests in, all real
property necessary or used in the ordinary conduct of its business, except for
such defects in title as could not, individually or in the aggregate, reasonably
be expected to have a Material Adverse Effect. The property of the Company and
its Consolidated Subsidiaries is subject to no Liens, other than Permitted
Liens.

                           1.23     INDEBTEDNESS.

         Except as otherwise permitted under Section 5.2(f), neither the Company
nor any of its Consolidated Subsidiaries has any Indebtedness.

                           1.24     LABOR MATTERS.

         There are no collective bargaining agreements or Multiemployer Plans
covering the employees of the Company and its Consolidated Subsidiaries as of
the Closing Date other than as set forth on Schedule 1.24. None of the Company
or any of its Consolidated Subsidiaries has suffered, within the last five (5)
years, any strikes, walkouts, work stoppages, in each case that lasted for more
than five (5) days, or any other material labor difficulty that is currently
ongoing or that lasted for more than five (5) days.

                           1.25     NATURE OF BUSINESS.

         As of the Closing Date, the Company and its Consolidated Subsidiaries
are engaged in the global specialty chemicals business.

                           1.26     INVESTMENTS.

         All Investments of the Company and its Consolidated Subsidiaries are
Permitted Investments.

                           1.27     REPRESENTATIONS AND WARRANTIES FROM OTHER
                                    CREDIT DOCUMENTS.

         Each of the representations and warranties made by any of the Credit
Parties in any of the other Credit Documents is true and correct in all material
respects.

         SECTION 2. AMOUNT AND TERMS OF COMMITMENTS.

                           2.1.     REVOLVING COMMITMENTS.

                                       9

         (a)      Revolving Loans. Subject to the terms and conditions hereof,
each Lender severally agrees, on the terms and conditions hereinafter set forth,
to make revolving credit loans in Dollars ("Revolving Loans") to the Company,
from time to time during the Commitment Period in an aggregate principal amount
at any one time outstanding not to exceed the amount of such Lender's Pro Rata
Share of ONE HUNDRED TWENTY-FIVE MILLION DOLLARS ($125,000,000) (as such amount
may be reduced pursuant to this Agreement, the "Revolving Committed Amount");
provided that with regard to each individual Lender, the principal amount of
such Lender's Pro Rata Share of outstanding Revolving Loans plus such Lender's
Pro Rata Share of outstanding Swingline Loans plus such Lender's Pro Rata Share
of LOC Obligations outstanding shall not exceed such Lender's Revolving
Commitment. During the Commitment Period the Company may use the Revolving
Committed Amount by borrowing, prepaying the Revolving Loans in whole or in
part, and reborrowing, all in accordance with the terms and conditions hereof;
provided that in no event shall the aggregate principal amount of outstanding
Revolving Loans plus the aggregate principal amount of outstanding Swingline
Loans plus all LOC Obligations outstanding at any one time outstanding exceed
the Revolving Committed Amount. There shall be no Revolving Loans outstanding on
the Closing Date.

         (b)      Loan Types. The Revolving Loans may from time to time be (i)
Eurodollar Loans, (ii) ABR Loans or (iii) a combination thereof, as determined
by the Company and notified to the Administrative Agent in accordance with
Sections 2.3 and 2.7, provided that no Revolving Loan shall be made as a
Eurodollar Loan after the day that is one month prior to the Revolving Credit
Termination Date.

                           2.2.     NOTES EVIDENCING REVOLVING LOANS.

         The Revolving Loans made by each Lender shall, at the request of such
Lender, be evidenced by a promissory note of the Company, substantially in the
form of Exhibit A (as amended, modified, restated, supplemented, extended,
renewed or replaced from time to time, a "Note"), with appropriate insertions as
to payee, payable to the order of such Lender. Each Lender is hereby authorized
to record the date, Type and amount of each Revolving Loan made by such Lender,
each continuation thereof, each conversion of all or a portion thereof to
another Type, the date and amount of each payment or prepayment of principal
thereof and, in the case of Eurodollar Loans, the length of each Interest Period
with respect thereto, on a schedule annexed to and constituting a part of its
Note and any such recordation shall constitute prima facie evidence of the
accuracy of the information so recorded; provided, however, that the failure to
make any such recordation or an error in any such recordation shall not affect
the liability of the Company hereunder or under any Note. Each Note shall (a) be
dated the Closing Date and (b) provide for the payment of principal and interest
in accordance with the terms of this Agreement.

                           2.3.     PROCEDURE FOR REVOLVING CREDIT BORROWING.

         The Company may borrow under the Revolving Committed Amount during the
Commitment Period on any Business Day (except for the Closing Date), provided
that the Company shall give the Administrative Agent irrevocable notice (which
notice must be received by the Administrative Agent prior to 11:00 A.M. (New
York, New York time) (a) three (3) Business Days prior to the requested
Borrowing Date, if all or any part of the requested

                                       10

Revolving Loan is to be initially Eurodollar Loans or (b) one (1) Business Day
prior to the requested Borrowing Date, otherwise), substantially in the form of
Exhibit D, specifying (i) the amount to be borrowed, (ii) the requested
Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, ABR
Loans or a combination thereof, and the respective amounts of each such Type of
Loan, (iv) if the borrowing is to be entirely or partly of Eurodollar Loans, the
respective lengths of the initial Interest Periods therefor, and (v) remittance
instructions. Each borrowing under the Revolving Committed Amount shall be in an
amount equal to $5,000,000 or a whole multiple of $1,000,000 in excess thereof
(or, with respect to ABR Loans only, if the then available amount under the
applicable Revolving Committed Amount is less than $5,000,000, such lesser
amount). Upon receipt of any such notice from the Company, the Administrative
Agent shall promptly notify each Lender thereof. Each Lender will make the
amount of its Pro Rata Share of each borrowing available to the Administrative
Agent for the account of the Company at the office of the Administrative Agent
specified in Section 9.2 prior to 1:00 P.M. (New York, New York time) on the
Borrowing Date in funds immediately available to the Administrative Agent. Such
borrowing will then be made available to the Company by the Administrative Agent
crediting the account of the Company as set forth on the notice of borrowing
with the aggregate of the amounts made available to the Administrative Agent by
the Lenders and in like funds as received by the Administrative Agent.

                           2.4.     FEES.

         (a)      Commitment Fee. The Company agrees to pay to the
Administrative Agent for the account of each Lender a fee (the "Commitment Fee")
for the period from and including the first day of the Commitment Period to the
Revolving Credit Termination Date, computed at the Applicable Margin for
Commitment Fee on the actual daily amount by which the Revolving Committed
Amount exceeds the sum of (i) the aggregate principal amount of Revolving Loans
(and funded Participation Interests in Swingline Loans) and (ii) the LOC
Obligations outstanding. The Commitment Fee shall be due and payable quarterly
in arrears on the last Business Day of each March, June, September and December
and on the Revolving Credit Termination Date or such earlier date as the
Revolving Committed Amount shall terminate as provided herein, commencing on the
first of such dates to occur after the Closing Date. For purposes of
clarification, in computing the Commitment Fee hereunder (A) LOC Obligations
shall be considered usage under the aggregate Revolving Committed Amount and (B)
Swingline Loans shall not be considered usage under the aggregate Revolving
Committed Amount unless and until other Lenders having a Revolving Commitment
purchase Participation Interests in such Swingline Loans pursuant to Section
2.13(b)(iii).

         (b)      Other Fees.

                  (i)      The Company shall pay to the Administrative Agent,
         for its own account, an annual administrative fee and such other fees,
         if any, referred to in the Fee Letter and at the times specified in the
         Fee Letter. Such fees shall be fully earned when paid and shall not be
         refundable for any reason whatsoever, unless otherwise indicated in the
         Fee Letter.

                                       11

                  (ii)     The Company shall pay to the Lenders such fees as
         shall have been separately agreed upon in writing in the amounts and at
         the times so specified. Such fees shall be fully earned when paid and
         shall not be refundable for any reason whatsoever, unless otherwise
         indicated in such writing.

         (c)      Letter of Credit Fees. In consideration of the issuance of
Letters of Credit hereunder, the Company promises to pay to the Administrative
Agent for the account of each Lender a fee (the "Letter of Credit Fee") on such
Lender's Pro Rata Share (relative to the Revolving Committed Amount) of the
aggregate face amount of outstanding Letters of Credit, computed at a per annum
rate for each day from the date of issuance to the date of expiration equal to
the Applicable Margin for Eurodollar Loans that are Revolving Loans. The Letter
of Credit Fee will be payable quarterly in arrears on the last Business Day of
each March, June, September and December and on the Revolving Credit Termination
Date or such earlier date as the Revolving Committed Amount shall terminate, in
each case calculated based upon the actual number of days elapsed over a 360-day
year. In addition to the Letter of Credit Fee, the Company promises to pay to
the Issuing Lender for its own account without sharing by the other Lenders (i)
a fronting fee of .125% per annum on the aggregate stated amount of each
outstanding Letter of Credit for the stated duration thereof, payable quarterly
in arrears on the last Business Day of each March, June, September and December
and on the Revolving Credit Termination Date or such earlier date as the
Revolving Committed Amount shall terminate, in each case calculated based upon
the actual number of days elapsed over a 360-day year and (ii) the customary and
reasonable charges from time to time of the Issuing Lender with respect to the
amendment, transfer, administration, cancellation and conversion of, and
drawings under, such Letters of Credit.

                           2.5.     TERMINATION OR REDUCTION OF A REVOLVING
                                    COMMITTED AMOUNT.

         The Company shall have the right, upon not less than five Business
Days' notice to the Administrative Agent, to terminate the Revolving Committed
Amount or, from time to time, to reduce the amount of the Revolving Committed
Amount, provided, that the Company complies with any applicable provisions of
Section 2.6(b)(i). Any such reduction of the Revolving Committed Amount shall be
in an amount equal to $5,000,000 (or, if the then available amount of such
Revolving Committed Amount is less than $5,000,000, such lesser amount) or a
whole multiple of $1,000,000 in excess thereof and shall reduce permanently such
Revolving Committed Amount then in effect.

                           2.6.     PREPAYMENTS.

         (a)      Optional Prepayments. The Company may on the last day of any
Interest Period with respect thereto, in the case of Eurodollar Loans, or at any
time and from time to time, in the case of ABR Loans, prepay, in whole or in
part, either the outstanding Revolving Loans or the outstanding Term Loans,
without premium or penalty, upon irrevocable notice to the Administrative Agent
(which notice must be received by the Administrative Agent prior to 11:00 A.M.
(New York, New York time) (i) three (3) Business Days prior to the prepayment
date if all or any part of the Loans to be prepaid consist of Eurodollar Loans
and (ii) one (1) Business Day prior to the prepayment date, otherwise),
specifying the date and amount of prepayment and whether the prepayment is of
Eurodollar Loans, ABR Loans or a combination thereof, and, if of

                                       12

a combination thereof, the amount allocable to each. Upon receipt of any such
notice the Administrative Agent shall promptly notify each applicable Lender
thereof. If any such notice is given, the amount specified in such notice shall
be due and payable on the date specified therein, together with any amounts
payable pursuant to Section 3.5 and interest on the principal amount prepaid
through the date of prepayment. Partial prepayments of Revolving Loans or Term
Loans shall be in an aggregate principal amount of $5,000,000 or a whole
multiple of $1,000,000 in excess thereof. Subject to the foregoing terms,
prepayments of Revolving Loans that are made under this Section 2.6(a) shall be
applied as the Company may elect; provided that if the Company fails to specify
the application of a voluntary prepayment of Revolving Loans then such
prepayment shall be applied first to ABR Loans and then to Eurodollar Loans in
direct order of Interest Period maturities. Voluntary prepayments of the Term
Loans shall be applied to prepay on a pro rata basis the Term B Loan (pro rata
to the remaining amortization payments thereunder) and the Incremental Term Loan
(pro rata to the remaining amortization payments thereunder).

         (b)      Mandatory Prepayments.

                  (i)      Commitment Limitations. If at any time, (A) the
         aggregate outstanding amount of Revolving Loans plus Swingline Loans
         plus LOC Obligations shall exceed the Revolving Committed Amount at
         such time, (B) the aggregate outstanding amount of Swingline Loans
         shall exceed the Swingline Committed Amount or (C) the aggregate amount
         of LOC Obligations shall exceed the LOC Committed Amount, the Company
         shall immediately make payment on the Revolving Loans, Swingline Loans
         and/or to a cash collateral account in respect of the LOC Obligations,
         in an amount sufficient to eliminate the excess (such prepayment to be
         applied as set forth in clause (vi) below).

                  (ii)     Excess Cash Flow. Within 90 days after the end of
         each fiscal year (commencing with the fiscal year ending December 31,
         2003), the Company shall prepay the Loans in an amount equal to (A) 50%
         (if the Leverage Ratio as of the end of such fiscal year most recently
         ended for which the Company has delivered a compliance certificate
         pursuant to Section 5.1(b)(i) hereof is greater than 2.0 to 1.0) or 0%
         (if the Leverage Ratio as of the end of such fiscal year most recently
         ended for which the Company has delivered a compliance certificate
         pursuant to Section 5.1(b)(i) hereof is less than or equal to 2.0 to
         1.0) of Excess Cash Flow for such prior fiscal year minus (B) to the
         extent the amount determined pursuant to clause (A) above is greater
         than 0, the amount of any voluntary prepayments made during such fiscal
         year of the Term Loans or (to the extent accompanied by a permanent
         reduction in the Revolving Committed Amount) the Revolving Loans (such
         prepayment to be applied as set forth in clause (vi) below).

                  (iii)    Asset Dispositions. The Net Cash Proceeds from any
         Asset Disposition or Involuntary Disposition (including insurance and
         condemnation proceeds) received at any time by any Credit Party or any
         Subsidiary of a Credit Party may, within 270 days from the date of
         receipt, be applied (or caused to be applied) by the Company and its
         Consolidated Subsidiaries to make Eligible Reinvestments. If and
         whenever any such Net Cash Proceeds in excess of $15,000,000 in the
         aggregate from the Closing Date are not reinvested in Eligible
         Reinvestments prior to the expiration of such 270-day period, the
         Company shall,

                                       13

         on the first Business Day thereafter, apply such excess unreinvested
         amount as set forth in clause (vi) below.

                  (iv)     Debt Issuances. Immediately upon receipt by the
         Company or any Consolidated Subsidiary of proceeds from any Debt
         Issuance, the Company shall prepay the Loans in an aggregate amount
         equal to 100% of the Net Cash Proceeds of such Debt Issuance (such
         prepayment to be applied as set forth in clause (vi) below).

                  (v)      Issuances of Equity. Immediately upon receipt by the
         Company or any Consolidated Subsidiary of proceeds from any Equity
         Issuance, the Company shall apply (A) 50% (if the Leverage Ratio as of
         the end of the fiscal quarter most recently ended for which the Company
         has delivered a compliance certificate pursuant to Section 5.1(b)(i)
         hereof is greater than 2.0 to 1.0) or 0% (if the Leverage Ratio as of
         the end of the fiscal quarter most recently ended for which the Company
         has delivered a compliance certificate pursuant to Section 5.1(b)(i)
         hereof is less than or equal to 2.0 to 1.0) of such Equity Issuance as
         set forth in clause (vi) below.

                  (vi)     Application of Mandatory Prepayments. All amounts
         required to be paid pursuant to this Section 2.6 shall be applied as
         follows:

                           (A)      (1) with respect to all amounts prepaid
                  pursuant to Section 2.6(b)(i)(A) and (B), to Swingline Loans,
                  then to Revolving Loans and (after all Swingline Loans and
                  Revolving Loans have been repaid) to a cash collateral account
                  to cash collateralize outstanding LOC Obligations; and (2)
                  with respect to all amounts prepaid pursuant to Section
                  2.6(b)(i)(C), to a cash collateral account to cash
                  collateralize outstanding LOC Obligations;

                           (B)      with respect to all amounts prepaid pursuant
                  to Section 2.6(b)(iii), pro rata (1) to prepay the Term Loans
                  (pro rata to the Term B Loan (pro rata to the remaining
                  amortization payments thereunder) and the Incremental Term
                  Loan (pro rata to the remaining amortization payments
                  thereunder)) and (2) to reduce the Revolving Committed Amount
                  (and, to the extent outstanding, to prepay the Revolving Loans
                  and (after all Revolving Loans have been repaid) to cash
                  collateralize the LOC Obligations outstanding by a
                  corresponding amount), it being understood that, to the extent
                  that Revolving Loans and/or LOC Obligations are not
                  outstanding, the Company shall be entitled to retain the
                  portion of any prepayment amount applied to reduce the
                  Revolving Committed Amount in an aggregate amount equal to
                  such reduction; and

                           (C)      with respect to all amounts prepaid pursuant
                  to Section 2.6(b)(ii), (iv) and (v), (1) until the Term Loans
                  have been paid in full, first to prepay the Term Loans (pro
                  rata to the Term B Loan (pro rata to the remaining
                  amortization payments thereunder) and the Incremental Term
                  Loan (pro rata to the remaining amortization payments
                  thereunder)) and (2) after the Term Loans have been paid in
                  full, to reduce the Revolving Committed Amount (and, to the
                  extent outstanding, to prepay first Swingline Loans and then
                  the Revolving Loans and (after all

                                       14

                  Swingline Loans and Revolving Loans have been repaid) to cash
                  collateralize LOC Obligations by a corresponding amount), it
                  being understood that, to the extent that Revolving Loans
                  and/or LOC Obligations are not outstanding, the Company shall
                  be entitled to retain the portion of any prepayment amount
                  applied to reduce the Revolving Committed Amount in an
                  aggregate amount equal to such reduction.

         Within the parameters of the applications set forth above, each
mandatory prepayment required by this Section 2.6(b) shall be applied (i) with
regard to Revolving Loans, first to ABR Loans and then to Eurodollar Loans in
direct order of Interest Period maturities and (ii) with regard to Term Loans,
pro rata to all outstanding Term Loans. Each such mandatory prepayment shall be
subject to Sections 2.6(c) and 3.5 and shall be accompanied by interest on the
principal amount prepaid through the date of prepayment.

         (c)      Term Loan Refusal Option. Notwithstanding anything to the
contrary in this Section 2.6, in the case of each mandatory prepayment described
in Section 2.6(b) that is to be allocated to the Term Loans, the Company shall
give the Administrative Agent telephonic notice (promptly confirmed in writing)
at least five (5) Business Days (to the extent reasonably practicable) prior to
the date of such prepayment, requesting that the Administrative Agent prepare
and provide to each Lender holding any of the Term Loans a notice (in form and
substance reasonably satisfactory to the Administrative Agent) to the effect
that such Lender has the right, at its option, so long as there are Swingline
Loans or Revolving Loans outstanding, to accept or decline its share of such
prepayment, and, under such circumstances, all amounts that would otherwise be
used to prepay the Term Loans as set forth above shall instead be used to prepay
first Swingline Loans and then Revolving Loans, and setting forth procedures
reasonably satisfactory to the Administrative Agent relating to the exercise of
such option. The Administrative Agent thereupon shall promptly prepare and
deliver such notice to such Lenders. Each such Lender shall be deemed to have
elected to accept or decline its share of such prepayment as determined by the
Administrative Agent pursuant to the procedures set forth in the notice.

                           2.7.     CONVERSION AND CONTINUATION OPTIONS.

         (a)      The Company may elect from time to time to convert Eurodollar
Loans to ABR Loans, giving the Administrative Agent at least three (3) Business
Days' prior irrevocable notice of such election on behalf of the Company
pursuant to a Notice of Continuation/Conversion, substantially in the form of
Exhibit F, provided that any such conversion of Eurodollar Loans may only be
made on the last day of an Interest Period with respect thereto. The Company may
elect from time to time to convert ABR Loans to Eurodollar Loans, giving the
Administrative Agent at least three (3) Business Days' prior irrevocable notice
of such election on behalf of the Company. Any such notice of conversion to
Eurodollar Loans shall specify the length of the initial Interest Period or
Interest Periods therefor. Upon receipt of any such notice the Administrative
Agent shall promptly notify each applicable Lender thereof. All or any part of
outstanding Eurodollar Loans and ABR Loans may be converted as provided herein,
provided that (i) no ABR Loan may be converted into a Eurodollar Loan when any
Event of Default has occurred and is continuing, and (ii) no ABR Loan may be
converted into a Eurodollar Loan after the date that is one month prior to the
respective Termination Date.

                                       15

         (b)      Any Eurodollar Loan may be continued as a Eurodollar Loan upon
the expiration of the then current Interest Period with respect thereto by the
Company giving notice to the Administrative Agent, in accordance with the
applicable provisions of the term "Interest Period" set forth in Section 7, of
the length of the next Interest Period to be applicable to such Loans, provided
that no Eurodollar Loan may be continued as such (i) when any Event of Default
has occurred and is continuing or (ii) after the date that is one month prior to
the respective Termination Date and provided, further, that if the Company shall
fail to give any required notice as described above in this paragraph or if such
continuation is not permitted pursuant to the preceding proviso, such Loans
shall be automatically converted to ABR Loans.

                           2.8.     MAXIMUM NUMBER OF EURODOLLAR LOANS.

         Notwithstanding anything in this Agreement to the contrary, (a) no more
than six (6) Eurodollar Loans shall be outstanding under each of the Revolving
Committed Amount, the Term B Loan and the Incremental Term Loan and (b) no more
than twelve (12) Eurodollar Loans in the aggregate shall be outstanding
hereunder, at any time (it being understood that, for purposes hereof,
Eurodollar Loans with different Interest Periods shall be considered as separate
Eurodollar Loans, even if they begin on the same date, although borrowings,
continuations and conversions may, in accordance with the provisions hereof, be
combined at the end of existing Interest Periods to constitute a new Eurodollar
Loan with a single Interest Period).

                           2.9.     INTEREST RATES AND PAYMENT DATES.

         (a)      Each Eurodollar Loan that is a Revolving Loan shall bear
interest for each Interest Period with respect thereto at a rate per annum equal
to the Eurodollar Rate determined for such Interest Period plus the Applicable
Margin for Eurodollar Loans that are Revolving Loans.

         (b)      Each Eurodollar Loan under the Term B Loan shall bear interest
for each Interest Period with respect thereto at a rate per annum equal to the
Eurodollar Rate determined for such Interest Period plus 3.25%.

         (c)      Each ABR Loan that is a Revolving Loan shall bear interest at
a rate per annum equal to the ABR plus the Applicable Margin for ABR Loans that
are Revolving Loans.

         (d)      Each ABR Loan under the Term B Loan shall bear interest at a
rate per annum equal to the ABR plus 2.25%.

         (e)      If any amount payable by the Company under any Credit Document
is not paid when due (without regard to any applicable grace periods), whether
at stated maturity, by acceleration or otherwise, such amount shall thereafter
bear interest at a fluctuating interest rate per annum at all times equal to the
Default Rate to the fullest extent permitted by applicable Requirements of Law.
Furthermore, upon the request of the Required Lenders, while any Event of
Default exists, the Company shall pay interest on the principal amount of all
outstanding Obligations hereunder at a fluctuating interest rate per annum at
all times equal to the Default Rate to the fullest extent permitted by
applicable Requirements of Law. Accrued and unpaid

                                       16

interest on past due amounts (including interest on past due interest) shall be
due and payable upon demand.

         (f)      Interest on Revolving Loans and the Term Loans shall be
payable in arrears on each Interest Payment Date, provided that interest
accruing pursuant to paragraph (e) of this Section 2.9 shall be payable from
time to time on demand.

         (g)      The principal amount of, and any unpaid interest on, all Loans
shall be due and payable in full on the respective Termination Date unless
accelerated sooner pursuant to Section 6.1 or unless subject to a mandatory
prepayment required by Section 2.6(b).

         (h)      The Swingline Loans shall bear interest, and such interest
shall be payable, as specified in Section 2.13(c).

         (i)      Each Eurodollar Loan under the Incremental Term Loan shall
bear interest for each Interest Period with respect thereto at a rate per annum
equal to the Eurodollar Rate determined for such Interest Period plus the
applicable margin agreed to among the Company and the Lenders making the
Incremental Term Loan.

         (j)      Each ABR Loan under the Incremental Term Loan shall bear
interest at a rate per annum equal to the ABR plus the applicable margin agreed
to among the Company and the Lenders making the Incremental Term Loan.

                           2.10.    COMPUTATION OF INTEREST AND FEES.

         (a)      Unless otherwise specifically provided herein, the Commitment
Fees and interest shall be calculated on the basis of a 360-day year for the
actual days elapsed, except with respect to computation of interest on ABR Loans
determined by reference to the Prime Rate (as defined in the definition of
"ABR"), which shall be calculated based on a year of 365 or 366 days, as
appropriate. The Administrative Agent shall as soon as practicable notify the
Company and the applicable Lenders of each determination of a Eurodollar Rate.
Any change in the interest rate on a Loan resulting from a change in the ABR or
the Eurocurrency Reserve Requirements shall become effective as of the opening
of business on the day on which such change becomes effective. The
Administrative Agent shall as soon as practicable notify the Company and the
Lenders of the effective date and the amount of each such change in interest
rate.

         (b)      Each determination of an interest rate by the Administrative
Agent pursuant to any provision of this Agreement shall be conclusive and
binding on the Credit Parties and the Lenders in the absence of manifest error.
The Administrative Agent shall, at the request of the Company, deliver to the
Company a statement showing the calculations of the Administrative Agent in
determining the Eurodollar Rate.

                           2.11.    PRO RATA TREATMENT AND PAYMENTS.

         (a)      Each borrowing of Revolving Loans or Term Loans by the Company
from the Lenders hereunder, each payment by the Company on account of the
Commitment Fee and the

                                       17

Letter of Credit Fee hereunder and any reduction of the Commitments of the
Lenders shall be made pro rata according to the respective Pro Rata Shares of
the applicable Lenders. Each payment (including each prepayment) by the Company
or another Credit Party on account of principal of and interest on the Revolving
Loans, the Term Loans or other extensions of credit shall be made pro rata
according to the respective amounts of principal and interest then due and owing
to the applicable Lenders except to the extent otherwise elected by the Lenders
holding the Term Loans pursuant to Section 2.6(c). All payments (including
prepayments) to be made by the Company or another Credit Party hereunder,
whether on account of principal, interest, fees or otherwise, shall be made
without set off or counterclaim and shall be made prior to 11:00 A.M. (New York,
New York time) on the due date thereof to the Administrative Agent, for the
account of the applicable Lenders (unless such payment is for the Administrative
Agent's own account) at the Administrative Agent's office specified in Section
9.2, in immediately available funds. If applicable, the Administrative Agent
shall distribute such payments to the applicable Lenders promptly upon receipt
in like funds as received. If any payment hereunder (other than payments on
Eurodollar Loans) becomes due and payable on a day other than a Business Day,
such payment shall be extended to the next succeeding Business Day, and, with
respect to payments of principal, interest thereon shall be payable at the then
applicable rate during such extension. If any payment on a Eurodollar Loan
becomes due and payable on a day other than a Business Day, the maturity thereof
shall be extended to the next succeeding Business Day unless the result of such
extension would be to extend such payment into another calendar month, in which
event such payment shall be made on the immediately preceding Business Day.

         (b)      Unless the Administrative Agent shall have been notified in
writing by any Lender prior to a borrowing that such Lender will not make the
amount that would constitute its portion of such borrowing available to the
Administrative Agent, the Administrative Agent may assume that such Lender is
making such amount available to the Administrative Agent, and the Administrative
Agent may, in reliance upon such assumption, make available to the Company a
corresponding amount. If the Administrative Agent in such circumstances, makes
available to the Company such corresponding amount and such Lender does not make
available such ratable portion of such borrowing to the Administrative Agent by
the required time on the Borrowing Date therefor, such Lender shall pay to the
Administrative Agent, on demand, its portion of such borrowing with interest
thereon at a rate equal to the Federal Funds Effective Rate (as defined in the
definition of "ABR") for the period until such Lender makes such amount
immediately available to the Administrative Agent. A certificate of the
Administrative Agent submitted to any Lender with respect to any amounts owing
under this subsection shall be conclusive in the absence of manifest error. If
such Lender's portion of such borrowing is not made available to the
Administrative Agent by such Lender within three Business Days of such Borrowing
Date, the Administrative Agent, having made available to the Company a
corresponding amount, shall also be entitled to recover such corresponding
amount with interest thereon at the rate per annum applicable to ABR Loans, on
demand, from the Company. Nothing contained in this Section 2.11(b) shall
relieve any Lender which has failed to make available its portion of any
borrowing hereunder from its obligation to do so in accordance with the terms
hereof.

                           2.12.    TAXES.

                                       18

         All payments made by a Credit Party under this Agreement shall be made
free and clear of, and without deduction or withholding for or on account of,
any present or future income, stamp or other taxes, levies, imposts, duties,
charges, fees, deductions or withholdings, now or hereafter imposed, levied,
collected, withheld or assessed by any Governmental Authority, excluding net
income taxes and franchise taxes (imposed in lieu of net income taxes) imposed
on the Administrative Agent or any Lender as a result of a present or former
connection between the Administrative Agent or such Lender and the jurisdiction
of the Governmental Authority imposing such tax or any political subdivision or
taxing authority thereof or therein (other than to the extent any such
connection arose from the Administrative Agent or such Lender having executed,
delivered or performed its obligations or received a payment under, or enforced,
this Agreement or any other Credit Document). If any such non-excluded taxes,
levies, imposts, duties, charges, fees, deductions or withholdings
("Non-Excluded Taxes") are required to be withheld from any amounts payable to
the Administrative Agent or any Lender hereunder or under the Notes, the amounts
so payable to the Administrative Agent or such Lender shall be increased to the
extent necessary to yield to the Administrative Agent or such Lender (after
payment of all Non-Excluded Taxes) interest or any such other amounts payable
hereunder at the rates or in the amounts specified in this Agreement and the
other Credit Documents; provided, however, that no Credit Party shall be
required to increase any such amounts payable to any Lender that is not
organized under the laws of the United States of America or a state thereof if
such Lender fails to comply with the requirements of this subsection. Whenever
any Non-Excluded Taxes are payable by a Credit Party, as promptly as possible
thereafter such Credit Party shall send to the Administrative Agent for its own
account or for the account of such Lender, as the case may be, a certified copy
of an original official receipt received by such Credit Party showing payment
thereof. If a Credit Party fails to pay any Non-Excluded Taxes when due to the
appropriate taxing authority or fails to remit to the Administrative Agent the
required receipts or other required documentary evidence, such Credit Party
shall indemnify the Administrative Agent and the Lenders for any incremental
taxes, interest or penalties that may become payable by the Administrative Agent
or any Lender as a result of any such failure. The agreements in this subsection
shall survive the termination of this Agreement and the other Credit Documents
and all amounts payable hereunder or thereunder.

                           2.13.    SWINGLINE LOAN SUBFACILITY.

         (a)      Swingline Commitment. Subject to the terms and conditions
hereof and in reliance upon the representations and warranties set forth herein,
the Swingline Lender, in its individual capacity, agrees to make certain
revolving credit loans requested by the Company to the Company in Dollars (each
a "Swingline Loan" and, collectively, the "Swingline Loans") from time to time
during the Commitment Period for the purposes hereinafter set forth; provided,
however, (i) the aggregate principal amount of Swingline Loans outstanding at
any time shall not exceed TEN MILLION DOLLARS ($10,000,000) (the "Swingline
Committed Amount"), and (ii) the aggregate principal amount of outstanding
Revolving Loans plus outstanding Swingline Loans plus all outstanding LOC
Obligations shall not exceed the Revolving Committed Amount. Swingline Loans
hereunder shall be made as ABR Loans in accordance with the provisions of this
Section 2.13, and may be repaid and reborrowed in accordance with the provisions
hereof. No Swingline Loans shall be made on the Closing Date.

                                       19

         (b)      Swingline Loan Advances.

                  (i)      Notices; Disbursement. Whenever the Company desires a
         Swingline Loan advance hereunder it shall give written notice (or
         telephonic notice promptly confirmed in writing) to the Swingline
         Lender not later than 1:00 P.M. (New York, New York time) on the
         Business Day of the requested Swingline Loan advance. Each such notice
         shall be irrevocable and shall specify (A) that a Swingline Loan
         advance is requested, (B) the date of the requested Swingline Loan
         advance (which shall be a Business Day) and (C) the principal amount of
         the Swingline Loan advance requested. Each Swingline Loan shall be made
         as an ABR Loan and shall have, subject to clause (iii) below, such
         maturity date as the Swingline Lender and the Company shall agree upon
         receipt by the Swingline Lender of any such notice from the Company.
         The Swingline Lender shall initiate the transfer of funds representing
         the Swingline Loan advance to the Company by 3:00 P.M. (New York, New
         York time) on the Business Day of the requested borrowing.

                  (ii)     Minimum Amounts. Each Swingline Loan advance shall be
         in a minimum principal amount of $1,000,000 and in integral multiples
         of $500,000 in excess thereof (or the remaining amount of the Swingline
         Committed Amount, if less).

                  (iii)    Repayment of Swingline Loans. The principal amount of
         all Swingline Loans shall be due and payable on the earlier of (A) the
         maturity date agreed to by the Swingline Lender and the Company with
         respect to such Loan (which maturity date shall not be a date more than
         five (5) Business Days from the date of the earliest advance thereof)
         and (B) the Revolving Credit Termination Date. The Swingline Lender
         may, at any time, in its sole discretion, by written notice to the
         Company and the Lenders, demand repayment of its Swingline Loans
         advanced in accordance with the terms hereof by way of a Revolving Loan
         advance on the Business Day following the date of such notice, in which
         case the Company shall be deemed to have requested a Revolving Loan
         advance comprised solely of ABR Loans in the amount of such Swingline
         Loans; provided, however, that any such demand shall be deemed to have
         been given one (1) Business Day prior to the Revolving Credit
         Termination Date and on the date of the occurrence of any Event of
         Default described in Section 6.1(f) or Section 6.1(g) and upon
         acceleration of the indebtedness hereunder and the exercise of remedies
         in accordance with the provisions of Section 6.1. Each Lender hereby
         irrevocably agrees to make its Pro Rata Share of each such Revolving
         Loan in the amount, in the manner and on the date specified in the
         preceding sentence notwithstanding (I) the amount of such borrowing may
         not comply with the minimum amount for advances of Revolving Loans
         otherwise required hereunder, (II) whether any conditions specified in
         Section 4.2 are then satisfied, (III) whether a Default or an Event of
         Default then exists, (IV) failure of any such request or deemed request
         for a Revolving Loan to be made by the time otherwise required
         hereunder, (V) whether the date of such borrowing is a date on which
         Revolving Loans are otherwise permitted to be made hereunder or (VI)
         any termination of the Commitments relating thereto immediately prior
         to or contemporaneously with such borrowing. In the event that any
         Revolving Loan cannot for any reason be made on the date otherwise
         required above (including, without limitation, as a result of the
         commencement of a proceeding under Debtor Relief Laws with respect to
         the Company), then each Lender hereby agrees that it shall forthwith
         purchase (as of the date such borrowing would

                                       20

         otherwise have occurred, but adjusted for any payments received from
         the Company on or after such date and prior to such purchase) from the
         Swingline Lender such Participation Interest in the outstanding
         Swingline Loans as shall be necessary to cause each such Lender to
         share in such Swingline Loans ratably based upon its respective Pro
         Rata Share (determined before giving effect to any termination of the
         Commitments pursuant to Section 2.5), provided that (A) all interest
         payable on the Swingline Loans shall be for the account of the
         Swingline Lender until the date as of which the respective
         Participation Interest is purchased and (B) at the time any purchase of
         Participation Interests pursuant to this sentence is actually made, the
         purchasing Lender shall be required to pay to the Swingline Lender, to
         the extent not paid to the Swingline Lender by the Company in
         accordance with the terms of subsection (c)(ii) below, interest on the
         principal amount of Participation Interests purchased for each day from
         and including the day upon which such purchase of Participation
         Interests would otherwise have occurred to but excluding the date of
         actual payment for the purchase of such Participation Interests, at the
         rate equal to the Federal Funds Effective Rate (as defined in the
         definition of "ABR").

         (c)      Interest on Swingline Loans.

                  (i)      Subject to the provisions of Section 2.9(e), each
         Swingline Loan shall bear interest at a per annum rate (computed on the
         basis of the actual number of days elapsed over a year of 365/366 days)
         equal to the ABR plus the Applicable Margin for ABR Loans that are
         Revolving Loans.

                  (ii)     Payment of Interest. Interest on Swingline Loans
         shall be payable in arrears on each applicable Interest Payment Date
         (or at such other times as may be specified herein), unless accelerated
         sooner pursuant to Section 6.1.

         (d)      Note Evidencing Swingline Loans. The Swingline Loans shall be
evidenced, at the Swingline Lender's request, by a duly executed Note of the
Company in the form of Exhibit A to the Swingline Lender.

                           2.14.    LETTER OF CREDIT SUBFACILITY.

         (a)      Issuance. Subject to the terms and conditions hereof and of
the LOC Documents, if any, and any other terms and conditions which the Issuing
Lender may reasonably require, during the Commitment Period the Issuing Lender
shall issue, and the Lenders shall participate in, Letters of Credit for the
account of the Company from time to time upon request in a form acceptable to
the Issuing Lender; provided, however, that (i) the aggregate amount of
outstanding LOC Obligations shall not at any time exceed ONE HUNDRED MILLION
DOLLARS ($100,000,000) (the "LOC Committed Amount"), (ii) the sum of the
aggregate amount of outstanding Revolving Loans plus Swingline Loans plus LOC
Obligations shall not at any time exceed the aggregate Revolving Committed
Amount then in effect, (iii) all Letters of Credit shall be denominated in
Dollars, and (iv) Letters of Credit shall be issued for a purpose described in
Section 1.6 and may be issued as standby letters of credit or trade letters of
credit. Except as otherwise expressly agreed upon by all the Lenders, no Letter
of Credit shall have an original expiry date more than twelve (12) months from
the date of issuance; provided, however,

                                       21

so long as no Default or Event of Default has occurred and is continuing and
subject to the other terms and conditions to the issuance of Letters of Credit
hereunder, the expiry dates of Letters of Credit may be extended annually or
periodically from time to time on the request of the Company or by operation of
the terms of the applicable Letter of Credit to a date not more than twelve (12)
months from the date of extension; provided, further, that no Letter of Credit,
as originally issued or as extended, shall have an expiry date extending beyond
the fifth day prior to the Revolving Credit Termination Date. Each Letter of
Credit shall comply with the related LOC Documents. The issuance and expiry date
of each Letter of Credit shall be a Business Day.

         (b)      Request for Issuance, Notices and Reports. The request for the
issuance of a Letter of Credit shall be submitted by the Company to the
Administrative Agent (with a copy to the Issuing Lender) at least five (5)
Business Days prior to the requested date of issuance. Promptly after receipt of
any application for any Letter of Credit, the Administrative Agent will (i)
confirm with the Issuing Lender (by telephone or in writing) that the Issuing
Lender has received a copy of such application for such Letter of Credit from
the Company and, if not, the Administrative Agent will provide the Issuing
Lender with a copy thereof and (ii) provide confirmation to the Issuing Lender
that the requested issuance or amendment is permitted in accordance with the
terms hereof (such confirmation shall be provided to the Issuing Lender no later
than the next Business Day following the Administrative Agent's receipt of a
copy of such application for a Letter of Credit). Following such confirmation
from the Administrative Agent, subject to the terms and conditions hereof, the
Issuing Lender shall, on or before the requested date, issue a Letter of Credit
for the account of the Company or enter into the applicable amendment, as the
case may be, in each case in accordance with the Issuing Lender's usual and
customary business practices. Immediately upon the issuance of each Letter of
Credit, each Lender shall be deemed to, and hereby irrevocably and
unconditionally agrees to, purchase from the Issuing Lender a risk participation
in such Letter of Credit in an amount equal to the Lender's Pro Rata Share of
such Letter of Credit. Promptly after its delivery of any Letter of Credit or
any amendment to any Letter of Credit to the beneficiary thereof, the Issuing
Lender will also deliver to the Company and to the Administrative Agent a true
and complete copy of such Letter of Credit or amendment. The Issuing Lender
will, at least quarterly and more frequently upon request, disseminate to the
Administrative Agent and each of the Lenders a detailed report specifying the
Letters of Credit which are then issued and outstanding and any activity with
respect thereto which may have occurred since the date of the prior report, and
including therein, among other things, the beneficiary, the face amount and the
expiry date, as well as any payment or expirations which may have occurred.

         (c)      Participation. Each Lender, upon issuance of a Letter of
Credit, shall be deemed to have purchased without recourse a Participation
Interest from the Issuing Lender in such Letter of Credit and the obligations
arising thereunder and any collateral relating thereto, in each case in an
amount equal to its Pro Rata Share of the obligations under such Letter of
Credit and shall absolutely, unconditionally and irrevocably assume and be
obligated to pay to the Issuing Lender and discharge when due, its Pro Rata
Share of the obligations arising under such Letter of Credit in accordance with
Section 2.14(d) below. Without limiting the scope and nature of each Lender's
Participation Interest in any Letter of Credit, to the extent that the Issuing
Lender has not been reimbursed as required hereunder or under any such Letter of
Credit, each such Lender shall pay to the Issuing Lender its Pro Rata Share of
such unreimbursed drawing in same day funds on the day of notification by the
Issuing Lender of an unreimbursed drawing pursuant to the provisions of

                                       22

subsection (d) below. The obligation of each Lender to so reimburse the Issuing
Lender shall be absolute and unconditional and shall not be affected by the
occurrence of a Default, an Event of Default or any other occurrence or event.
Any such reimbursement shall not relieve or otherwise impair the obligation of
the Company to reimburse the Issuing Lender under any Letter of Credit, together
with interest as hereinafter provided.

         (d)      Reimbursement. In the event of any drawing under any Letter of
Credit, the Issuing Lender will promptly notify the Administrative Agent and the
Company. Unless the Company shall immediately notify the Administrative Agent
and the Issuing Lender that the Company intends to otherwise reimburse the
Issuing Lender through the Administrative Agent for such drawing, the Company
shall be deemed to have requested that the Lenders make Revolving Loans totaling
the amount of the drawing as provided in subsection (e) below on the related
Letter of Credit, the proceeds of which will be used to satisfy the related
reimbursement obligations. The Company promises to reimburse the Issuing Lender
on the Business Day of any drawing under any Letter of Credit (either with the
proceeds of a Revolving Loan obtained hereunder or otherwise) in same day funds.
If the Company shall fail to reimburse the Issuing Lender as provided
hereinabove, the unreimbursed amount of such drawing shall bear interest at a
per annum rate equal to the ABR plus the Applicable Margin for ABR Loans that
are Revolving Loans plus 2%. The Company's reimbursement obligations hereunder
shall be absolute and unconditional under all circumstances irrespective of any
rights of setoff, counterclaim or defense to payment the Company may claim or
have against the Issuing Lender, the Administrative Agent, the Lenders, the
beneficiary of the Letter of Credit drawn upon or any other Person, including
without limitation any defense based on any failure of the Company or any of its
Consolidated Subsidiaries to receive consideration or the legality, validity,
regularity or unenforceability of the Letter of Credit. The Issuing Lender will
promptly notify the Administrative Agent of the amount of any unreimbursed
drawing and the Administrative Agent shall promptly notify the Lenders of such
amount of any unreimbursed drawing. Each Lender shall promptly pay to the
Administrative Agent for the account of the Issuing Lender in immediately
available funds, the amount of such Lender's Pro Rata Share of such unreimbursed
drawing. Such payment shall be made on the day such notice is received by such
Lender from the Administrative Agent if such notice is received at or before
2:00 P.M. (New York, New York time); otherwise such payment shall be made at or
before 12:00 Noon (New York, New York time) on the Business Day next succeeding
the day such notice is received. If such Lender does not pay such amount to the
Administrative Agent for the account of the Issuing Lender in full upon such
request, such Lender shall, on demand, pay to the Administrative Agent for the
account of the Issuing Lender interest on the unpaid amount during the period
from the date of such drawing until such Lender pays such amount to the
Administrative Agent for the account of the Issuing Lender in full at a rate per
annum equal to, if paid within two (2) Business Days of the date that such
Lender is required to make payments of such amount pursuant to the preceding
sentence, the Federal Funds Effective Rate (as defined in the definition of
"ABR") and thereafter at a rate equal to the ABR. Each Lender's obligation to
make such payment to the Administrative Agent for the benefit of the Issuing
Lender, and the right of the Issuing Lender to receive the same, shall be
absolute and unconditional, shall not be affected by any circumstance whatsoever
and without regard to the termination of this Agreement or the Commitments
hereunder, the existence of a Default or Event of Default or the acceleration of
the obligations of the Company hereunder and shall be made without any offset,
abatement, withholding or reduction whatsoever. Simultaneously with the making
of each such payment by a Lender to the Issuing Lender (through the

                                       23

Administrative Agent), such Lender shall, automatically and without any further
action on the part of the Issuing Lender or such Lender, acquire a Participation
Interest in an amount equal to such payment (excluding the portion of such
payment constituting interest owing to the Issuing Lender) in the related
unreimbursed drawing portion of the LOC Obligation and in the interest thereon
and in the related LOC Documents, and shall have a claim against the Company
with respect thereto.

         (e)      Repayment with proceeds of Revolving Loans. On any day on
which the Company shall have requested, or been deemed to have requested, a
Revolving Loan advance to reimburse a drawing under a Letter of Credit, the
Administrative Agent shall give notice to the Lenders that a Revolving Loan has
been requested or deemed requested by the Company to be made in connection with
a drawing under a Letter of Credit, in which case a Revolving Loan advance,
comprised of ABR Loans (or Eurodollar Loans to the extent the Company has
complied with the procedures of Section 2.3 with respect thereto), shall be
immediately made to the Company by all Lenders, as applicable (notwithstanding
any termination of the Commitments pursuant to Section 6.1), pro rata based on
their respective Pro Rata Shares (determined before giving effect to any
termination of the Commitments pursuant to Section 6.1) and the proceeds thereof
shall be paid directly to the Issuing Lender for application to the respective
LOC Obligations. Each such Lender hereby irrevocably agrees to make its Pro Rata
Share of each such Revolving Loan immediately upon any such request or deemed
request in the amount, in the manner and on the date specified in the preceding
sentence notwithstanding (i) the amount of such borrowing may not comply with
the minimum amount for advances of Revolving Loans otherwise required hereunder,
(ii) whether any conditions specified in Section 4.2 are then satisfied, (iii)
whether a Default or an Event of Default then exists, (iv) failure for any such
request or deemed request for Revolving Loans to be made by the time otherwise
required hereunder, (v) whether the date of such borrowing is a date on which
Revolving Loans are otherwise permitted to be made hereunder or (vi) any
termination of the Commitments relating thereto immediately prior to or
contemporaneously with such borrowing. In the event that any Revolving Loan
cannot for any reason be made on the date otherwise required above (including,
without limitation, as a result of the commencement of a proceeding under Debtor
Relief Laws with respect to the Company or any of its Consolidated
Subsidiaries), then each such Lender hereby agrees that it shall forthwith
purchase (as of the date such borrowing would otherwise have occurred, but
adjusted for any payments received from the Company on or after such date and
prior to such purchase) from the Issuing Lender such Participation Interests in
the outstanding LOC Obligations as shall be necessary to cause each such Lender
to share in such LOC Obligations ratably (based upon the respective Pro Rata
Shares of such Lenders (determined before giving effect to any termination of
the Commitments pursuant to Section 6.1)), provided that at the time any
purchase of Participation Interests pursuant to this sentence is actually made,
the purchasing Lender shall be required to pay to the Issuing Lender, to the
extent not paid to the Issuing Lender by the Company in accordance with the
terms of subsection (d) above, interest on the principal amount of Participation
Interests purchased for each day from and including the day upon which such
borrowing would otherwise have occurred but excluding the date of payment for
such Participation Interests, at the rate equal to, if paid within two (2)
Business Days of the date of the Revolving Loan advance, the Federal Funds
Effective Rate (as defined in the definition of "ABR"), and thereafter at a rate
equal to the ABR.

         (f)      Designation of Consolidated Subsidiaries as Account Parties.
Notwithstanding anything to the contrary set forth in this Agreement, including
without limitation Section 2.14(a), a

                                       24

Letter of Credit issued hereunder may contain a statement to the effect that
such Letter of Credit is issued for the account of a Consolidated Subsidiary of
the Company, provided that notwithstanding such statement, the Company shall be
the actual account party for all purposes of this Agreement for such Letter of
Credit and such statement shall not affect the Company's reimbursement
obligations hereunder with respect to such Letter of Credit.

         (g)      Renewal, Extension. The renewal or extension of any Letter of
Credit shall, for purposes hereof, be treated in all respects the same as the
issuance of a new Letter of Credit hereunder.

         (h)      Applicability of ISP98 and UCP. Unless otherwise expressly
agreed by the Issuing Lender and the Company when a Letter of Credit is issued,
(i) the rules of the "International Standby Practices 1998" published by the
Institute of International Banking Law & Practice (or such later version thereof
as may be in effect at the time of issuance) shall apply to each standby Letter
of Credit, and (ii) The Uniform Customs and Practice for Documentary Credits, as
most recently published by the International Chamber of Commerce ("ICC") at the
time of issuance (including the ICC decision published by the Commission on
Banking Technique and Practice on April 6, 1998 regarding the European single
currency (euro)) shall apply to each commercial Letter of Credit.

         (i)      Indemnification; Nature of Issuing Lender's Duties.

                  (i)      In addition to its other obligations under this
         Section 2.14, the Company hereby agrees to pay, and protect, indemnify
         and save each Lender (including the Issuing Lender) harmless from and
         against, any and all claims, demands, liabilities, damages, losses,
         costs, charges and expenses (including reasonable attorneys' fees and
         expenses) that such Lender may incur or be subject to as a
         consequence, direct or indirect, of (A) the issuance of any Letter of
         Credit or (B) the failure of such Lender or the Issuing Lender to
         honor a drawing under a Letter of Credit as a result of any act or
         omission, whether rightful or wrongful, of any present or future de
         jure or de facto government or Governmental Authority that impacts,
         directly or indirectly, any such Letter of Credit (all such acts or
         omissions, herein called "Government Acts").

                  (ii)     As between the Company and the Lenders (including the
         Issuing Lender), the Company shall assume all risks of the acts,
         omissions or misuse of any Letter of Credit by the beneficiary
         thereof. No Lender (including the Issuing Lender) shall be
         responsible: (A) for the form, validity, sufficiency, accuracy,
         genuineness or legal effect of any document submitted by any party in
         connection with the application for and issuance of any Letter of
         Credit, even if it should in fact prove to be in any or all respects
         invalid, insufficient, inaccurate, fraudulent or forged; (B) for the
         validity or sufficiency of any instrument transferring or assigning or
         purporting to transfer or assign any Letter of Credit or the rights or
         benefits thereunder or proceeds thereof, in whole or in part, that may
         prove to be invalid or ineffective for any reason; (C) for errors,
         omissions, interruptions or delays in transmission or delivery of any
         messages, by mail, cable, telegraph, telex or otherwise, whether or
         not they be in cipher; (D) for any loss or delay in the transmission
         or otherwise of any document required in order to make a drawing under
         a Letter of Credit or of the

                                       25

         proceeds thereof; and (E) for any consequences arising from causes
         beyond the control of such Lender, including, without limitation, any
         Government Acts. None of the above shall affect, impair, or prevent the
         vesting of the Issuing Lender's rights or powers hereunder.

                  (iii)    In furtherance and extension and not in limitation of
         the specific provisions hereinabove set forth, any action taken or
         omitted by any Lender (including the Issuing Lender), under or in
         connection with any Letter of Credit or the related certificates, if
         taken or omitted in good faith, shall not put such Lender under any
         resulting liability to the Company. It is the intention of the parties
         that this Agreement shall be construed and applied to protect and
         indemnify each Lender (including the Issuing Lender) against any and
         all risks involved in the issuance of the Letters of Credit, all of
         which risks are hereby assumed by the Company (on behalf of itself and
         each of its Consolidated Subsidiaries), including, without limitation,
         any and all Government Acts. No Lender (including the Issuing Lender)
         shall, in any way, be liable for any failure by such Lender or anyone
         else to pay any drawing under any Letter of Credit as a result of any
         Government Acts or any other cause beyond the control of such Lender.

                  (iv)     Nothing in this subsection (i) is intended to limit
         the reimbursement obligations of the Company contained in subsection
         (d) above. The obligations of the Company under this subsection (i)
         shall survive the termination of this Agreement. No act or omission of
         any current or prior beneficiary of a Letter of Credit shall in any
         way affect or impair the rights of the Lenders (including the Issuing
         Lender) to enforce any right, power or benefit under this Agreement.

                  (v)      Notwithstanding anything to the contrary contained in
         this subsection (i), the Company shall have no obligation to indemnify
         any Lender (including the Issuing Lender) in respect of any liability
         incurred by such Lender (A) to the extent such liability arose out of
         the gross negligence or willful misconduct of such Lender, as
         determined by a court of competent jurisdiction, or (B) caused by such
         Lender's failure to pay under any Letter of Credit after presentation
         to it of a request strictly complying with the terms and conditions of
         such Letter of Credit, as determined by a court of competent
         jurisdiction, unless such payment is prohibited by any law,
         regulation, court order or decree.

         (j)      Responsibility of Issuing Lender. It is expressly understood
and agreed that the obligations of the Issuing Lender hereunder to the Lenders
are only those expressly set forth in this Agreement and that the Issuing Lender
shall be entitled to assume that the conditions precedent set forth in Section
4.2 have been satisfied unless it shall have acquired actual knowledge that any
such condition precedent has not been satisfied; provided, however, that nothing
set forth in this Section 2.14 shall be deemed to prejudice the right of any
Lender to recover from the Issuing Lender any amounts made available by such
Lender to the Issuing Lender pursuant to this Section 2.14 in the event that it
is finally determined by a court of competent jurisdiction that the payment with
respect to a Letter of Credit constituted gross negligence, bad faith or willful
misconduct on the part of the Issuing Lender.

         (k)      Conflict with LOC Documents. In the event of any conflict
between this Agreement and any LOC Document (including any letter of credit
application), this Agreement shall control.

                                       26

                           2.15.    TERM B LOAN.

         (a)      Term B Loan Commitment. Subject to the terms and conditions
hereof and in reliance upon the representations and warranties set forth herein
each Lender severally agrees to make available to the Company on the Closing
Date such Lenders' Pro Rata Share of a term loan in the aggregate principal
amount of TWO HUNDRED MILLION DOLLARS ($200,000,000) (the "Term B Loan"). The
Term B Loan may consist of ABR Loans or Eurodollar Loans, or a combination
thereof, as the Company may request. Amounts borrowed under the Term B Loan that
are repaid or prepaid may not be reborrowed.

         (b)      Borrowing Procedures. The Term B Loan must be drawn in a
single drawing on the Closing Date and shall be subject to the following
procedures: The Company shall submit an appropriate notice of borrowing,
substantially in the form of Exhibit E, to the Administrative Agent not later
than 11:00 A.M. (New York, New York time) on the Closing Date with respect to
that portion of the Term B Loan initially consisting of an ABR Loan, or on (or
before) the third Business Day prior to the Closing Date with respect to that
portion of the Term B Loan initially consisting of one or more Eurodollar Loans
(provided that, in regard to Eurodollar Loans, if the Company submits a notice
of borrowing prior to the Closing Date, such notice of borrowing shall be
accompanied by a funding indemnity letter in form and substance satisfactory to
the Administrative Agent), which notice of borrowing shall be irrevocable and
shall specify (i) that the funding of the Term B Loan is requested, (ii) whether
the funding of the Term B Loan shall be comprised of ABR Loans, Eurodollar Loans
or a combination thereof, (iii) if Eurodollar Loans are requested, the Interest
Period(s) therefor, and (iv) remittance instructions. If the Company shall fail
to deliver such notice of borrowing to the Administrative Agent by 11:00 A.M.
(New York, New York time) on the third Business Day prior to the Closing Date
then the full amount of the Term B Loan shall be disbursed on the Closing Date
as an ABR Loan. Each Lender shall make its Pro Rata Share of the Term B Loan
available to the Administrative Agent for the account of the Company at the
office of the Administrative Agent specified in Section 9.2, or at such other
office as the Administrative Agent may designate in writing, by 1:00 P.M. (New
York, New York time) on the Closing Date in funds immediately available to the
Administrative Agent. The Term B Loan will then be made available to the Company
by the Administrative Agent crediting the account of the Company as set forth on
the notice of borrowing with the aggregate of the amounts made available to the
Administrative Agent by the Lenders and in like funds as received by the
Administrative Agent.

         (c)      Minimum Amounts. Each Eurodollar Loan or ABR Loan that is part
of the Term B Loan shall be in an aggregate principal amount that is not less
than $5,000,000 and in an integral multiple of $1,000,000 (or, in the case of an
ABR Loan only, the then remaining principal balance of that portion of the Term
B Loan available, if less).

         (d)      Repayment of Term B Loan. The principal amount of the Term B
Loan shall be repaid on each of the Principal Amortization Payment Dates set
forth below with a quarterly payment on each such date equal to the amount set
forth below corresponding to the relevant Principal Amortization Payment Date,
unless accelerated sooner pursuant to Section 6.1:

                                       27



- ---------------------------------------------------------
Principal Amortization              Term B Loan
    Payment Dates              Amortization Payment
                            
March 31, 2003                    $    500,000
- ---------------------------------------------------------
June 30, 2003                     $    500,000
- ---------------------------------------------------------
September 30, 2003                $    500,000
- ---------------------------------------------------------
December 31, 2003                 $    500,000
- ---------------------------------------------------------
March 31, 2004                    $    500,000
- ---------------------------------------------------------
June 30, 2004                     $    500,000
- ---------------------------------------------------------
September 30, 2004                $    500,000
- ---------------------------------------------------------
December 31, 2004                 $    500,000
- ---------------------------------------------------------
March 31, 2005                    $    500,000
- ---------------------------------------------------------
June 30, 2005                     $    500,000
- ---------------------------------------------------------
September 30, 2005                $    500,000
- ---------------------------------------------------------
December 31, 2005                 $    500,000
- ---------------------------------------------------------
March 31, 2006                    $    500,000
- ---------------------------------------------------------
June 30, 2006                     $    500,000
- ---------------------------------------------------------
September 30, 2006                $    500,000
- ---------------------------------------------------------
December 31, 2006                 $    500,000
- ---------------------------------------------------------
March 31, 2007                    $    500,000
- ---------------------------------------------------------
May 15, 2007                      $191,500,000
- ---------------------------------------------------------


         (e)      Interest. The Term B Loan shall bear interest, and such
interest shall be payable, as specified in Section 2.9.

         (f)      Notes Evidencing Term B Loan. The portion of the Term B Loan
made by a Lender shall be, at the request of such Lender, evidenced by a duly
executed Note in the form of Exhibit A of the Company to such Lender.

                           2.16.    INCREMENTAL TERM LOAN.

         (a)      Incremental Term Loan. At any time prior to the Incremental
Term Loan Availability Expiration Date, subject to the requirements of this
Section 2.16 and the other terms and conditions of this Agreement and in
reliance upon the representations and warranties of the Company set forth
herein, the Company may propose to incur an Incremental Term Loan in accordance
with clause (b) of this Section 2.16 in an aggregate amount of at least FIFTY
MILLION DOLLARS ($50,000,000) and of no more than ONE HUNDRED FIFTY MILLION
DOLLARS ($150,000,000) (the "Incremental Term Loan"). The Incremental Term Loan
shall have terms identical to the Term B Loan; provided that (i) fees payable to
lenders for their Incremental Term Loan commitments and (ii) interest payable on
the Incremental Term Loan will, in each case, be as determined at the time such
commitments becomes effective. The Incremental Term Loan may only be incurred
(x) so long as no Default or Event of Default exists at the time of funding or
would result therefrom (on a Pro Forma Basis or otherwise) and (y) so long as at
the time of funding the Company can demonstrate that the Secured Leverage Ratio
is

                                       28

less than or equal to 2.0 to 1.0 on a Pro Forma Basis. Amounts borrowed under
the Incremental Term Loan that are repaid or prepaid may not be reborrowed.

         (b)      Procedure for Requesting Incremental Term Loan. If the Company
desires to incur the Incremental Term Loan, the Company may request any one or
more Lenders, selected by the Company in its sole discretion, to fund all or any
portion of the Incremental Term Loan up to a stated maximum aggregate principal
amount and at proposed interest rates and fees for the Incremental Term Loan set
forth in such request (provided that such terms shall be in accordance with this
Section 2.16 and provided further that the Company shall, concurrently with such
request, notify the Administrative Agent, and the Administrative Agent shall
thereafter notify all Lenders, of such request). Any Lender requested by the
Company to do so may (but is not obligated to) fund all or any portion of the
Incremental Term Loan. If Lenders (including Lenders not initially selected by
the Company) are not willing to provide all of the Incremental Term Loan
requested on the proposed terms, with the written consent of the Administrative
Agent (such consent not to be unreasonably withheld), the Company may request
one or more Persons meeting the requirements of the definition of "Eligible
Assignee" (each a "Prospective Lender"), by execution of an Incremental Term
Loan Acceptance substantially in the form of Exhibit I hereunder, to become a
Lender hereunder and to fund all or any portion of the Incremental Term Loan. If
one or more Lenders or Prospective Lenders agree to provide the Incremental Term
Loan, the Company shall give written notice to the Administrative Agent
specifying the aggregate amount of the Incremental Term Loan to be made, the
amount of the Incremental Term Loan to be made by each Lender or Prospective
Lender, based on such Lender's Pro Rata Share, the proposed funding date of the
Incremental Term Loan (the "Incremental Term Loan Funding Date") and the
interest rates and fees payable with respect to the Incremental Term Loan. The
Company and the Administrative Agent shall agree in writing on all conditions
(in addition to those specified in Section 4.2 and Section 4.3) to the making of
such Incremental Term Loan. Upon the making of the Incremental Term Loan,
Section 2.16(d) shall be deemed amended to provide for the amount and date of
the scheduled payments of principal thereon and Section 2.9 shall be deemed
amended to specify the interest rate or rates applicable to the Incremental Term
Loan. The Company shall pay to Administrative Agent (for distribution to each
Lender making the Incremental Term Loan) the fees payable for the Incremental
Term Loan. Notwithstanding anything to the contrary contained herein, in the
event that the Incremental Term Loan Yield received by any Lender with respect
to such Lender's Pro Rata Share of the Incremental Term Loan, exceeds the Term B
Yield received by any Lender with respect to such Lender's Pro Rata Share of the
Term B Loan by an amount in excess of 0.25% (the amount of such excess, the
"Differential Yield Amount"), the Company shall, in conjunction with the funding
of the Incremental Term Loan, (i) increase the margin for Eurodollar Loans with
respect to the Term B Loan and the margin for ABR Loans with respect to the Term
B Loan (in each case as set forth in Section 2.9) (it being understood that any
such increase of the margin with respect to the Term B Loan shall remain in
effect for the term of this Agreement, subject to any additional increase
pursuant to this provision), and/or (ii) pay upfront fees to the Lenders (based
on each Lender's Pro Rata Share of the Term B Loan), in an aggregate amount
equal to the Differential Yield Amount (taking into account the remaining term
to final maturity of the Term B Loan); provided that in any event, the Company
shall use commercially reasonable efforts to assure that the increase pursuant
to clauses (i) and (ii) above shall be allocated across such clauses on a
substantially similar basis to the allocation of the Incremental

                                       29

Term Loan Yield across the Incremental Term Loan Excess Yield and the margin
with respect to the Incremental Term Loan.

         The Incremental Term Loan must be drawn in a single drawing on the
Incremental Term Loan Funding Date. The Company shall submit an appropriate
notice of borrowing, substantially in the form of Exhibit D, to the
Administrative Agent not later than 11:00 A.M. (New York, New York time) on the
Incremental Term Loan Funding Date with respect to that portion of the
Incremental Term Loan initially consisting of an ABR Loan, or on (or before) the
third Business Day prior to the Incremental Term Loan Funding Date with respect
to that portion of the Incremental Term Loan initially consisting of one or more
Eurodollar Loans, which notice of borrowing shall be irrevocable and shall
specify (i) that the funding of the Incremental Term Loan is requested, (ii) the
aggregate amount of the Incremental Term Loan to be funded, (iii) whether the
funding of the Incremental Term Loan shall be comprised of ABR Loans, Eurodollar
Loans or a combination thereof, (iv) if Eurodollar Loans are requested, the
Interest Period(s) therefor and (v) remittance instructions. If the Company
shall fail to indicate whether the Incremental Term Loan is to be initially
funded as Eurodollar Rate Loans or ABR Loans by 11:00 A.M. (New York, New York
time) on the third Business Day prior to the Incremental Term Loan Funding Date,
then the full amount of the Incremental Term Loan shall be disbursed on the
Incremental Term Loan Funding Date as an ABR Loan. Each Lender shall make its
Pro Rata Share of the Incremental Term Loan available to the Administrative
Agent for the account of the Company at the office of the Administrative Agent
specified in Section 9.2, or at such other office as the Administrative Agent
may designate in writing, by 1:00 P.M. (New York, New York time) on the Closing
Date in funds immediately available to the Administrative Agent. The Incremental
Term Loan will then be made available to the Company by the Administrative Agent
crediting the account of the Company as set forth on the notice of borrowing
with the aggregate of the amounts made available to the Administrative Agent by
the Lenders and in like funds as received by the Administrative Agent.

         (c)      Minimum Amounts. Each Eurodollar Loan or ABR Loan that is part
of the Incremental Term Loan shall be in an aggregate principal amount that is
not less than $5,000,000 and in an integral multiple of $1,000,000 (or, in the
case of an ABR Loan only, the then remaining principal balance of that portion
of the Incremental Term Loan available, if less).

         (d)      Repayment of Incremental Term Loan. The principal amount of
the Incremental Term Loan shall be repaid on the amortization schedule agreed to
among the Company and the Lenders making the Incremental Term Loan, unless
accelerated sooner pursuant to Section 6.1.

         (e)      Interest. The Incremental Term Loan shall bear interest, and
such interest shall be payable, as specified in Section 2.9.

         (f)      Notes Evidencing Incremental Term Loan. The portion of the
Incremental Term Loan made by a Lender shall be, at the request of such Lender,
evidenced by a duly executed Note in the form of Exhibit A of the Company to
such Lender.

         SECTION 3. CHANGE IN CIRCUMSTANCES AFFECTING LOANS.

                                       30

                           3.1.     BASIS FOR DETERMINING INTEREST RATE
                                    INADEQUATE OR UNFAIR.

         If before the beginning of any Interest Period applicable to a
Eurodollar Loan:

                           (i)      by reason of circumstances affecting the
                   interbank eurodollar market generally, deposits in Dollars
                   are not being offered by the Administrative Agent in the
                   interbank eurodollar market for such Interest Period;

                           (ii)     the Required Lenders shall determine that
                   the Eurodollar Rate determined or to be determined for such
                   Interest Period will not adequately and fairly reflect the
                   cost to such Lenders of maintaining or funding, for such
                   Interest Period, their Eurodollar Loans to which such
                   Interest Period applies; or

                           (iii)    the Administrative Agent is unable to
                   determine the London Interbank Offered Rate;

the Administrative Agent (upon receipt of notice from the Required Lenders in
the case of clause (ii) above) shall forthwith give notice thereof to the
Company whereupon until the Administrative Agent notifies the Company that the
circumstances giving rise to such suspension no longer exist (A) the obligations
of the Lenders to make the affected Eurodollar Loans shall be suspended and (B)
the Company shall repay in full the then outstanding principal amount of each
affected Eurodollar Loan received by it, together with accrued interest thereon,
on the last day of the then current Interest Period applicable to such Loan or
convert the then outstanding principal amount of each Eurodollar Loan on the
last day of the then current Interest Period applicable to such Loan to an ABR
Loan.

                           3.2.     ILLEGALITY.

         If, after the date of this Agreement, the introduction of, or any
change in, any applicable law, rule or regulation or in the interpretation or
administration thereof by any Governmental Authority charged with the
interpretation or administration thereof or compliance by any Lender with any
request or directive (whether or not having the force of law) of any such
Governmental Authority shall make it unlawful or impossible for any Lender to
make, maintain or fund its Eurodollar Loans, such Lender forthwith shall so
notify the Company. Upon receipt of such notice, the Company shall prepay in
full the then outstanding principal amount of each Eurodollar Loan of such
Lender received by it, together with accrued interest thereon, or convert the
then outstanding principal amount of each such Eurodollar Loan to an ABR Loan,
in either case, on either (a) the last day of the then current Interest Period
applicable to such Eurodollar Loan if such Lender may lawfully continue to
maintain and fund such Loan to such day or (b) immediately if such Lender may
not lawfully continue to fund and maintain such Loan to such day.

                           3.3.     INCREASED COST.

         (a)      If, after the date of this Agreement, the introduction of, or
any change in, any applicable law, rule or regulation or in the interpretation
or administration thereof by any

                                       31

Governmental Authority, central bank or comparable agency charged with the
interpretation or administration thereof or compliance by any Lender with any
request or directive of any such Governmental Authority, central bank or
comparable agency (whether or not having the force of law):

                  (i)      shall subject any Lender to any tax, duty or other
         charge with respect to any Loan made by it or any Letter of Credit, or
         its obligation to make or issue any of the foregoing, or shall change
         the basis of taxation of payments to such Lender of the principal of
         or interest on any Loan made by it or any Letter of Credit, or its
         obligation to make or issue any of the foregoing (except for changes
         in the rate of tax on the overall net income of such Lender imposed by
         the jurisdiction, at any level, in which the principal executive
         office of such Lender is located); or

                  (ii)     shall impose, modify or deem applicable any reserve
         (including, without limitation, any reserve imposed by the Board of
         Governors of the Federal Reserve System), special deposit or similar
         requirement against assets of, deposits with or for the account of, or
         credit extended by, any Lender or shall impose on any Lender or the
         interbank eurodollar market any other condition affecting its
         Eurodollar Loans or its other Loans;

and the result of any of the foregoing is to increase the cost to such Lender of
making or maintaining its Loans or issuing or participating in Letters of
Credit, or to reduce the amount of any sum received or receivable by such Lender
under this Agreement or any other Credit Document by any amount deemed by such
Lender to be material, then, within fifteen (15) days after receipt of written
demand from such Lender, the Company agrees to pay to such Lender such
additional amount or amounts as will compensate such Lender for such increased
cost or reduction. A certificate of such Lender setting forth in reasonable
detail the basis for determining such additional amount or amounts necessary to
compensate such Lender shall be conclusive in the absence of manifest error.

                  (b)      If any Lender shall have determined that the
         introduction of any applicable law, rule, regulation or guideline
         regarding capital adequacy, or any change therein or any change in the
         interpretation or administration thereof by any Governmental Authority
         or compliance by such Lender or any corporation controlling such
         Lender with any request, guideline or directive regarding capital
         adequacy (whether or not having the force of law) of any such
         Governmental Authority, central bank or comparable agency, affects or
         would affect the amount of capital required or expected to be
         maintained by such Lender or any corporation controlling such Lender
         and such Lender (taking into consideration such Lender's or such
         corporation's policies with respect to capital adequacy and such
         Lender's desired return on capital) determines that the amount of such
         capital is increased as a consequence of such Lender's obligations
         under this Agreement, then, upon demand of such Lender, the Company
         shall immediately pay to such Lender, from time to time as specified
         by such Lender, additional amounts sufficient to compensate such
          Lender for such increase, to the extent related to the Loans made to
          the Company. A certificate of such Lender setting forth in reasonable
          detail the basis for determining any such additional amounts payable
          pursuant to the preceding sentence shall be

                                       32

          submitted by such Lender through the Administrative Agent to the
          Company and shall be conclusive in the absence of manifest error.

                           3.4.     EFFECT ON OBLIGATION TO CONVERT.

         If notice has been given pursuant to Section 3.1 or 3.2 hereof
requiring the Eurodollar Loans of any Lender to be prepaid or converted, then,
unless and until such Lender notifies the Company that the circumstances giving
rise to such prepayment or conversion no longer apply, the obligation of such
Lender to make or convert to Eurodollar Loans shall be suspended.

                           3.5.     FUNDING LOSSES.

         The Company shall pay to each Lender, upon written request, such amount
or amounts as shall compensate such Lender for any loss or expense incurred by
such Lender (including, without limitation, any loss or expense incurred by
reason of the liquidation or redeployment of deposits or other funds acquired by
such Lender to fund or maintain its Eurodollar Loans made to the Company) as a
result of (i) any payment or prepayment or conversion of a Eurodollar Loan on a
date other than a date which is the last day of an Interest Period for such
Eurodollar Loan or any payment in respect of increased costs to such Lender,
whether pursuant to Section 2.6(a), Section 3.2, Section 3.3 or Section 6.1
hereof or otherwise or (ii) any failure by the Company to borrow or prepay a
Eurodollar Loan or to convert an ABR Loan into a Eurodollar Loan on the date
scheduled for such borrowing, prepayment or conversion. Each Lender shall
furnish the Company with a reasonably detailed statement explaining the amount
of any such loss or expense, which statement shall be conclusive absent manifest
error.

         SECTION 3A. GUARANTY.

                           3A.1.    GUARANTY OF PAYMENT.

         Subject to Section 3A.7 below, each of the Guarantors hereby, jointly
and severally, unconditionally guarantees to (a) each Lender, (b) each Affiliate
of a Lender that enters into a Hedging Agreement and (c) the Administrative
Agent the prompt payment of the Obligations in full when due (whether at stated
maturity, as a mandatory prepayment, by acceleration or otherwise). This
guaranty is a guaranty of payment and not merely of collection and is a
continuing guaranty and shall apply to all Obligations whenever arising.

                           3A.2.    OBLIGATIONS UNCONDITIONAL.

         The obligations of the Guarantors hereunder are absolute and
unconditional, irrespective of the value, genuineness, validity, regularity or
enforceability of the Credit Documents or the Hedging Agreements, or any other
agreement or instrument referred to herein, to the fullest extent permitted by
applicable law, irrespective of any other circumstance whatsoever which might
otherwise constitute a legal or equitable discharge or defense of a surety or
guarantor. Each Guarantor agrees that this guaranty may be enforced by the
Lenders without the necessity at any time of resorting to or exhausting any
security or collateral and without the necessity at any time of having recourse
to the Notes, the Agreement or any other Credit Documents or any

                                       33

collateral, if any, hereafter securing the Obligations or otherwise and each
Guarantor hereby waives the right to require the Lenders to proceed against the
Company or any other Person (including a co-guarantor) or to require the Lenders
to pursue any other remedy or enforce any other right. Each Guarantor further
agrees that it shall have no right of subrogation, indemnity, reimbursement or
contribution against the Company or any other guarantor of the Obligations for
amounts paid under this guaranty until such time as the Lenders (and any
Affiliates of Lenders entering into Hedging Agreements) have been paid in full,
all Commitments under this Agreement have been terminated and no Person or
Governmental Authority shall have any right to request any return or
reimbursement of funds from the Lenders in connection with monies received under
this Agreement. Each Guarantor further agrees that nothing contained herein
shall prevent the Lenders from suing on the Notes, this Agreement or any other
Credit Document or any of the Hedging Agreements or foreclosing its security
interest in or Lien on any collateral securing the Obligations or from
exercising any other rights available to it under this Agreement, the other
Credit Documents, or any other instrument of security, if any, and the exercise
of any of the aforesaid rights and the completion of any foreclosure proceedings
shall not constitute a discharge of any of a Guarantor's obligations hereunder;
it being the purpose and intent of each Guarantor that its obligations hereunder
shall be absolute, independent and unconditional under any and all
circumstances. Neither a Guarantor's obligations under this guaranty nor any
remedy for the enforcement thereof shall be impaired, modified, changed or
released in any manner whatsoever by an impairment, modification, change,
release or limitation of the liability of the Company or by reason of the
bankruptcy or insolvency of the Company. Each Guarantor waives any and all
notice of the creation, renewal, extension or accrual of any of the Obligations
and notice of or proof of reliance by the Administrative Agent or any Lender
upon this guaranty or acceptance of this guaranty. The Obligations, and any of
them, shall conclusively be deemed to have been created, contracted, incurred,
renewed, extended, amended or waived, in reliance upon this guaranty. All
dealings between the Company and any of the Guarantors, on the one hand, and the
Administrative Agent and the Lenders, on the other hand, likewise shall be
conclusively presumed to have been had or consummated in reliance upon this
guaranty.

                           3A.3.    MODIFICATIONS.

         Each Guarantor agrees that (a) all or any part of the security which
hereafter may be held for the Obligations may be exchanged, compromised or
surrendered from time to time; (b) the Lenders shall not have any obligation to
protect, perfect, secure or insure any such security interests, liens or
encumbrances which hereafter may be held for the Obligations or the properties
subject thereto; (c) the time or place of payment of the Obligations may be
changed or extended, in whole or in part, to a time certain or otherwise, and
may be renewed or accelerated, in whole or in part; (d) the Company and any
other party liable for payment under this Agreement may be granted indulgences
generally; (e) any of the provisions of the Notes, this Agreement or any other
Credit Document may be modified, amended or waived; (f) any party (including any
co-guarantor) liable for the payment thereof may be granted indulgences or be
released; and (g) any deposit balance for the credit of the Company or any other
party liable for the payment of the Obligations or liable upon any security
therefor may be released, in whole or in part, at, before or after the stated,
extended or accelerated maturity of the Obligations, all without notice to or
further assent by such Guarantor, which shall remain bound thereon,

                                       34

notwithstanding any such exchange, compromise, surrender, extension, renewal,
acceleration, modification, indulgence or release.

                           3A.4.    WAIVER OF RIGHTS.

         Each Guarantor expressly waives to the fullest extent permitted by
applicable law: (a) notice of acceptance of this guaranty by the Lenders and of
all extensions of credit to the Company by the Lenders; (b) presentment and
demand for payment or performance of any of the Obligations; (c) protest and
notice of dishonor or of default (except as specifically required in this
Agreement) with respect to the Obligations or with respect to any security
therefor; (d) notice of the Lenders obtaining, amending, substituting for,
releasing, waiving or modifying any security interest, lien or encumbrance, if
any, hereafter securing the Obligations, or the Lenders subordinating,
compromising, discharging or releasing such security interests, liens or
encumbrances; (e) all other notices to which such Guarantor might otherwise be
entitled in connection with the guaranty evidenced by this Section 3A; and (f)
demand for payment under this guaranty.

                           3A.5.    REINSTATEMENT.

         The obligations of the Guarantors under this Section 3A shall be
automatically reinstated if and to the extent that for any reason any payment by
or on behalf of any Person in respect of the Obligations is rescinded or must be
otherwise restored by any holder of any of the Obligations, whether as a result
of any proceedings in bankruptcy or reorganization or otherwise, and each
Guarantor agrees that it will indemnify the Administrative Agent and each Lender
on demand for all reasonable, documented costs and expenses (including, without
limitation, reasonable, documented fees of counsel) incurred by the
Administrative Agent or such Lender in connection with such rescission or
restoration, including any such costs and expenses incurred in defending against
any claim alleging that such payment constituted a preference, fraudulent
transfer or similar payment under any bankruptcy, insolvency or similar law.

                           3A.6.    REMEDIES.

         Each Guarantor agrees that, as between the Guarantors, on the one hand,
and the Administrative Agent and the Lenders, on the other hand, the Obligations
may be declared to be forthwith due and payable as provided in Section 6.1 (and
shall be deemed to have become automatically due and payable in the
circumstances provided in Section 6.1) notwithstanding any stay, injunction or
other prohibition preventing such declaration (or preventing such Obligations
from becoming automatically due and payable) as against any other Person and
that, in the event of such declaration (or such Obligations being deemed to have
become automatically due and payable), such Obligations (whether or not due and
payable by any other Person) shall forthwith become due and payable by the
Guarantors. The Guarantors acknowledge and agree that the Lenders may exercise
their rights and remedies thereunder in accordance with the terms thereof.

                           3A.7.    LIMITATION OF GUARANTY.

                                       35

         Notwithstanding any provision to the contrary contained herein, to the
extent the obligations of any Guarantor shall be adjudicated to be invalid or
unenforceable for any reason (including, without limitation, because of any
applicable state or federal law relating to fraudulent conveyances or transfers)
then the obligations of such Guarantor hereunder shall be limited to the maximum
amount that is permissible under applicable law (whether federal or state and
including, without limitation, Debtor Relief Laws).

                           3A.8.    RIGHTS OF CONTRIBUTION.

         The Guarantors agree among themselves that, in connection with payments
made hereunder, each Guarantor shall have contribution rights against the other
Guarantors as permitted under applicable law. Such contribution rights shall be
subordinate and subject in right of payment to the obligations of the Guarantors
under the Credit Documents and no Guarantor shall exercise such rights of
contribution until all Obligations have been paid in full and the Commitments
terminated.

         SECTION 4. CONDITIONS PRECEDENT.

                           4.1.     EFFECTIVENESS OF THIS AGREEMENT.

         The effectiveness of this Agreement is subject to the satisfaction of
the following conditions precedent on the Closing Date:

                           (a)      Credit Documents, Organization Documents,
                  Etc. The Administrative Agent's receipt of the following,
                  each of which shall be originals or facsimiles (followed
                  promptly by originals) unless otherwise specified, each
                  properly executed by a Responsible Officer of the signing
                  Credit Party, each dated the Closing Date (or, in the case
                  of certificates of governmental officials, a recent date
                  before the Closing Date) and each in form and substance
                  satisfactory to the Administrative Agent and its legal
                  counsel:

                           (i)      executed counterparts of this Agreement, the
                  Security Agreement, the Mortgages and the other Credit
                  Documents;

                           (ii)     a Note executed by the Company in favor of
                  each Lender requesting a Note;

                           (iii)    copies of (a) with respect to any Credit
                  Party that is a corporation, the certificate or articles of
                  incorporation and the bylaws; (b) with respect to any Credit
                  Party that is a limited liability company, the certificate
                  or articles of formation or organization and operating
                  agreement; and (c) with respect to any Credit Party that is
                  a partnership, joint venture, trust or other form of
                  business entity, the partnership, joint venture or other
                  applicable agreement of formation or organization and any
                  agreement, instrument, filing or notice with respect thereto
                  filed in connection with its formation or organization with
                  the applicable Governmental Authority in the jurisdiction of
                  its formation or organization and, if applicable, any
                  certificate or articles of formation or organization of such
                  entity,

                                       36

                  certified by a secretary or assistant secretary of such Credit
                  Party to be true and correct as of the Closing Date;

                           (iv)     such certificates of resolutions or other
                  action, incumbency certificates and/or other certificates of
                  Responsible Officers of each Credit Party as the
                  Administrative Agent may require evidencing the identity,
                  authority and capacity of each Responsible Officer thereof
                  authorized to act as a Responsible Officer in connection
                  with this Agreement and the other Credit Documents to which
                  such Credit Party is a party; and

                           (v)      such documents and certifications as the
                  Administrative Agent may reasonably require to evidence that
                  each Credit Party is duly organized or formed, and is
                  validly existing, in good standing and qualified to engage
                  in business in (A) the jurisdiction of its incorporation or
                  organization and (B) each jurisdiction where its ownership,
                  lease or operation of properties or the conduct of its
                  business requires such qualification, except to the extent
                  that failure to do so could not reasonably be expected to
                  have a Material Adverse Effect.

                  (b)      Opinions of Counsel. The Administrative Agent shall
         have received, in each case dated as of the Closing Date, addressed to
         the Administrative Agent, the Collateral Agent and the Lenders and in
         form and substance reasonably satisfactory to the Administrative
         Agent:

                           (i)      a legal opinion of Israel J. Floyd, general
                  counsel for Company;

                           (ii)     a legal opinion of Ballard Spahr Andrews &
                  Ingersoll, LLP, acting as special counsel to each of the
                  Credit Parties; and

                           (iii)    a legal opinion of special local counsel for
                 the Credit Parties for each state in which any Mortgaged
                 Property is located.

                 (c)       Personal Property Collateral. The Administrative
         Agent shall have received:

                           (i)      searches of Uniform Commercial Code filings
                  in the jurisdiction of the chief executive office of each
                  Credit Party and each jurisdiction where any Collateral is
                  located or where a filing would need to be made in order to
                  perfect the Collateral Agent's security interest in the
                  Collateral, copies of the financing statements on file in
                  such jurisdictions and evidence that no Liens exist other
                  than Permitted Liens;

                           (ii)     UCC financing statements for each
                  appropriate jurisdiction as is necessary, in the
                  Administrative Agent's sole discretion, to perfect the
                  Collateral Agent's security interest in the Collateral;

                           (iii)    duly executed notices of grant of security
                  interest in the form required by the Security Agreement as
                  are necessary, in the Administrative

                                       37

                  Agent's sole discretion, to perfect the Collateral Agent's
                  security interest in the Collateral;

                           (iv)     all instruments and chattel paper in the
                  possession of any of the Credit Parties, together with
                  allonges or assignments as may be necessary or appropriate
                  to perfect the Collateral Agent's security interest in the
                  Collateral;

                           (v)      duly executed consents as are necessary, in
                  the Administrative Agent's sole discretion, to perfect the
                  Collateral Agent's security interest in the Collateral; and

                           (vi)     in the case of any personal property
                  Collateral located at a premises leased by a Credit Party,
                  such estoppel letters, consents and waivers from the
                  landlords on such real property as may be required by the
                  Administrative Agent.

                  (d)      Real Property Collateral. The Administrative Agent
         shall have received, in form and substance reasonably satisfactory to
         the Administrative Agent:

                           (i)      fully executed and notarized mortgages,
                  deeds of trust or deeds to secure debt (each, as the same
                  may be amended, modified, restated or supplemented from time
                  to time, a "Mortgage" and collectively the "Mortgages")
                  encumbering the fee interest and/or leasehold interest of
                  any Credit Party in each of the Real Properties designated
                  as a Mortgaged Property (in consultation with the
                  Administrative Agent) in Schedule 1.21(a) (each a "Mortgaged
                  Property" and collectively the "Mortgaged Properties")
                  together with such UCC-1 financing statements as are
                  necessary with respect to each such Mortgaged Property;

                           (ii)     in the case of each real property leasehold
                  interest of any Credit Party constituting Mortgaged
                  Property, (a) such estoppel letters, consents and waivers
                  from the landlords on such real property as may be required
                  by the Administrative Agent, which estoppel letters shall be
                  in the form and substance reasonably satisfactory to the
                  Administrative Agent and (b) evidence that the applicable
                  lease, a memorandum of lease with respect thereto, or other
                  evidence of such lease in form and substance reasonably
                  satisfactory to the Administrative Agent, has been or will
                  be recorded in all places to the extent necessary or
                  desirable, in the reasonable judgment of the Administrative
                  Agent, so as to enable the Mortgage encumbering such
                  leasehold interest to effectively create a valid and
                  enforceable first priority lien (subject to Permitted Liens)
                  on such leasehold interest in favor of the Collateral Agent
                  (or such other Person as may be required or desired under
                  local law) for the benefit of Lenders and any other secured
                  parties identified in such Mortgage;

                           (iii)    searches with respect to the title of the
                  Real Properties covered by the Mortgages conducted by the
                  title insurance company issuing the policies referred to in
                  Section 4.1(d)(iv) (the "Title Insurance Company") in a
                  manner

                                       38

                  reasonably satisfactory to the Administrative Agent, dated a
                  date reasonably satisfactory to the Administrative Agent;

                           (iv)     ALTA mortgagee title insurance policies
                  issued by Commonwealth Land Title Insurance Company and
                  Lawyers Title Insurance Company (the "Mortgage Policies")
                  with respect to each Mortgaged Property designated as a
                  material Mortgaged Property on Schedule 1.21(a), assuring
                  the Collateral Agent that the Mortgage on each such material
                  Mortgaged Property creates a valid and enforceable first
                  priority mortgage lien on the applicable Mortgaged Property,
                  free and clear of all defects and encumbrances except for
                  Permitted Liens, which Mortgage Policies shall otherwise be
                  in form and substance reasonably satisfactory to the
                  Administrative Agent, and shall include such endorsements
                  and coverage as are reasonably requested by the
                  Administrative Agent and shall contain such reinsurance as
                  the Administrative Agent may require; without limiting the
                  foregoing, such Mortgage Policies shall be in such amounts
                  as the Administrative Agent may reasonably require (but in
                  no event shall the aggregate amount of such Mortgage
                  Policies be less than $325,000,000); and

                           (v)      evidence as to (A) whether any Mortgaged
                  Property is in an area designated by the Federal Emergency
                  Management Agency as having special flood or mud slide
                  hazards (a "Flood Hazard Property") and (B) if any Mortgaged
                  Property is a Flood Hazard Property, (1) whether the
                  community in which such Mortgaged Property is located is
                  participating in the National Flood Insurance Program, (2)
                  the applicable Credit Party's written acknowledgment of
                  receipt of written notification from the Collateral Agent
                  (a) as to the fact that such Mortgaged Property is a Flood
                  Hazard Property and (b) as to whether the community in which
                  each such Flood Hazard Property is located is participating
                  in the National Flood Insurance Program and (3) copies of
                  insurance policies or certificates of insurance of the
                  Consolidated Parties evidencing flood insurance satisfactory
                  to the Administrative Agent and naming the Collateral Agent
                  as sole loss payee on behalf of the Lenders.

                  (e)      Evidence of Insurance. Receipt by the Administrative
         Agent of copies of insurance policies or certificates of insurance of
         the Credit Parties evidencing liability and casualty insurance meeting
         the requirements set forth in the Credit Documents, including, but not
         limited to, naming the Collateral Agent as additional insured (in the
         case of liability insurance) or loss payee (in the case of hazard
         insurance) on behalf of the Lenders.

                  (f)      Officer's Certificates. The Administrative Agent
         shall have received a certificate or certificates executed by a
         Responsible Officer of the Company as of the Closing Date, in form and
         substance satisfactory to the Administrative Agent, stating that (A)
         the conditions specified in Sections 4.1 and 4.2 have been satisfied,
         (B) each Credit Party is in compliance with all existing material
         financial obligations, (C) all governmental, shareholder and third
         party consents and approvals, if any, with respect to the Credit
         Documents and the transactions contemplated thereby have been obtained
         (and attaching

                                       39

         copies thereof), (D) no action, suit, investigation or proceeding is
         pending or threatened in any court or before any arbitrator or
         governmental instrumentality that purports to affect any Credit Party
         or any transaction contemplated by the Credit Documents, if such
         action, suit, investigation or proceeding could have a Material Adverse
         Effect, and (E) immediately after giving effect to the transactions
         contemplated herein, (1) no Default or Event of Default exists, (2) all
         representations and warranties contained herein and in the other Credit
         Documents are true and correct in all material respects and (3) on the
         basis of income statement items and capital expenditures for the
         12-month period ending on the last day of the most recently ended
         fiscal quarter prior to the Closing Date and balance sheet items as of
         the Closing Date after giving effect to the transactions contemplated
         hereunder, the Credit Parties would be in pro forma compliance with
         each of the financial covenants set forth in Section 5.2(d) as of the
         first date provided for the measurement of each of such financial
         covenants in accordance with the terms thereof.

                  (g)      Fees and Expenses. Any fees and expenses required to
         be paid under the Credit Documents on or before the Closing Date shall
         have been paid.

                  (h)      Termination of Existing Credit Agreement. The
         Administrative Agent shall have received evidence to its satisfaction
         that the Existing Credit Agreement shall have been (or will be upon
         the initial borrowings and issuance of Letters of Credit hereunder on
         the Closing Date and the application of the proceeds thereof)
         terminated and the obligations of the Company and its Subsidiaries
         thereunder shall have been (or will upon such borrowing and
         application of proceeds) paid in full and fully satisfied.

                  (i)      Escrow Account. The Company shall have established an
         escrow account for the purposes of holding $125,000,000 of the
         proceeds of the Term Loan made on the Closing Date, which will be used
         solely to repay the $125,000,000 in principal amount of 6.625% Senior
         Notes maturing on June 1, 2003, pursuant to the Escrow Agreement and
         other documentation satisfactory in all respects to the Administrative
         Agent.

                  (j)      Other. Receipt by the Lenders of such other
         documents, instruments, agreements or information as reasonably
         requested by any Lender, including, but not limited to, information
         regarding litigation, tax, accounting, labor, insurance, pension
         liabilities (actual or contingent), real estate leases, material
         contracts, debt agreements, property ownership and contingent
         liabilities of the Company and its Subsidiaries.

                           4.2.     CONDITIONS TO ALL BORROWINGS.

         In the case of all borrowings or issuances or extensions of Letters of
Credit hereunder (including, without limitation, the initial borrowing, the
borrowing of the Incremental Term Loan and the initial Letters of Credit), the
obligation of each Lender (including the Swingline Lender) to make, or
participate in, each Loan, and of the Issuing Lender to issue or extend, and the
obligation of the Lenders to participate in, a Letter of Credit, is subject to
the satisfaction of the following conditions:

                                       40

                  (i)      with respect to the first such borrowing or Letter of
         Credit, satisfaction of each of the conditions precedent set forth in
         Section 4.1;

                  (ii)     on and as of the Borrowing Date of such Loan or
         Letter of Credit no Default or Event of Default shall have occurred
         and be continuing or would exist after giving effect to the making of
         such Loan or the issuance or extension of such Letter of Credit;

                  (iii)    on and as of the Borrowing Date of such Loan or
         Letter of Credit the representations and warranties of each Credit
         Party contained in Section 1 hereof and in each other Credit Document
         shall be true and correct in all material respects (except to the
         extent that such representations and warranties specifically refer to
         an earlier date, in which case they shall be true and correct in all
         material respects as of such earlier date, and except that for
         purposes of this Section 4.2, the representations and warranties
         contained in Section 1.2(a) and (b) shall be deemed to refer to the
         most recent statements furnished pursuant to Section 5.1(a));

                  (iv)     receipt by the Administrative Agent of any applicable
         notice(s) from the Company required by Section 2 hereof.

         Each borrowing by the Company hereunder or request for the issuance or
extension of a Letter of Credit by the Company hereunder shall constitute a
representation and warranty by the Company to the Administrative Agent and the
Lenders to the effect that the representations and warranties of the Company and
the other Credit Parties contained in Section 1 hereof and in each other Credit
Document are true and correct in all material respects on and as of the
Borrowing Date of the applicable Loan or Letter of Credit (except to the extent
that such representations and warranties specifically refer to an earlier date,
in which case they shall be true and correct in all material respects as of such
earlier date, and except that for purposes of this Section 4.2, the
representations and warranties contained in Section 1.2(a) and (b) shall be
deemed to refer to the most recent statements furnished pursuant to Section
5.1(a)) and that, on and as of such Borrowing Date, no Default or Event of
Default has occurred and is continuing or would exist after giving effect to the
making of such Loan or the issuance or extension of such Letter of Credit.

                           4.3.     CONDITIONS TO INCREMENTAL TERM LOAN.

         The obligations of the Lenders providing the Incremental Term Loan to
make the Incremental Term Loan shall be, in addition to the conditions precedent
specified in Section 4.2, subject to prior or concurrent satisfaction of each
condition agreed to by the Company, all Lenders providing the Incremental Term
Loan and the Administrative Agent in writing prior to the Incremental Term Loan
Funding Date. Such additional conditions precedent shall include:

         (a)      increasing the coverage under the Mortgage Policies (by
endorsement or otherwise) with respect to each material Mortgaged Property by an
aggregate amount sufficient to secure, on a collective basis, the Lenders'
Incremental Term Loan Commitments; and

                                       41

         (b)      such certificates of resolutions or other action as the
Administrative Agent may require evidencing the Company's ability to borrow the
Incremental Term Loan.

         SECTION 5. COVENANTS.

                           5.1.     AFFIRMATIVE COVENANTS.

         So long as this Agreement, any of the Notes, any LOC Obligations or any
other Credit Document shall remain in effect or any of the principal of or
interest on any of the Loans or any other amount payable by a Credit Party to
the Administrative Agent or any of the Lenders pursuant to this Agreement, any
of the Notes, any LOC Obligations or any other Credit Document shall remain
unpaid, unless compliance shall have been waived in writing by the Required
Lenders, each Credit Party covenants and agrees that:

         (a)      FINANCIAL STATEMENTS.

         The Company will deliver to the Administrative Agent, which will
deliver to each Lender:

                  (i)      on or before the day that is ninety (90) days after
         the end of each of the Company's fiscal years (or such later date as
         the Company actually files with the SEC its Form 10-K for such fiscal
         year, but in any event not to exceed one hundred five (105) days after
         the end of such fiscal year), the audited consolidated statement of
         financial position of the Company and its Consolidated Subsidiaries as
         of the end of such year, and the related audited consolidated
         statements of income, stockholders' equity and cash flows for the year
         then ended, including notes thereto, all in reasonable detail and
         prepared in accordance with GAAP and accompanied by a report of
         independent public accountants of recognized standing satisfactory to
         the Administrative Agent as to such statements, which certificate will
         contain no material exceptions or qualifications except such as are
         acceptable to the Required Lenders; and

                  (ii)     on or before the day that is forty-five (45) days
         after the end of each of the first three (3) quarters of each of the
         Company's fiscal years (or such later date as the Company actually
         files with the SEC its Form 10-Q for such fiscal quarter, but in any
         event not to exceed fifty (50) days after the end of such fiscal
         quarter), the consolidated statement of financial position of the
         Company and its Consolidated Subsidiaries as at the end of such
         quarters, and the related consolidated statements of income and cash
         flows for such quarters and the portion of the fiscal year then ended.

         (b)      CERTIFICATES; OTHER INFORMATION.

         The Company will deliver to the Administrative Agent, which will
deliver to each Lender:

                  (i)      simultaneously with the delivery of each set of
         financial statements referred to in Section 5.1(a), a certificate of a
         Responsible Officer of the Company (1) stating that in the course of
         the performance of his duties he would normally obtain

                                       42

         knowledge of any condition or event which constitutes, or which after
         notice or lapse of time or both would constitute, an Event of Default
         specified in Section 6.1, (2) stating whether or not he has obtained
         knowledge of any such condition or event and, if so, specifying each
         such condition or event of which he has knowledge and the nature and
         period of existence thereof and the action the Company is taking and
         proposes to take with respect thereto and (3) setting forth the
         calculations required to establish compliance with Section 5.2(d);

                  (ii)     within 90 days after the end of each fiscal year of
         the Company, a certificate containing information regarding (i) the
         calculation of Excess Cash Flow and (ii) the amount of all Asset
         Dispositions, Debt Issuances and Equity Issuances that occurred during
         the prior fiscal year;

                  (iii)    simultaneously with the delivery of the financial
         statements referred to in Section 5.1(a)(i), a certificate of its
         independent certified public accountants certifying such financial
         statements and stating that in making the examination necessary
         therefor no knowledge was obtained of any Default with respect to the
         financial covenants contained in Section 5.2(d) or, if any such
         Default shall exist, stating the nature and status of such event;

                  (iv)     on or prior to the first Business Day of each fiscal
         year of the Company, beginning with the fiscal year ending December
         31, 2004, an annual business plan and budget of the Consolidated
         Parties containing, among other things, pro forma financial statements
         for the next fiscal year;

                  (v)      promptly upon receipt thereof, copies of any detailed
         audit reports, management letters or written recommendations submitted
         to the board of directors (or the audit committee of the board of
         directors) of the Company by independent accountants in connection
         with the accounts or books of the Company or any Subsidiary, or any
         audit of any of them;

                  (vi)     promptly after the same are available, (i) copies of
         each annual report, proxy or financial statement or other report or
         communication sent to the stockholders of the Company, and copies of
         all annual, regular, periodic and special reports and registration
         statements which the Company may file or be required to file with the
         SEC under Section 13 or 15(d) of the Securities Exchange Act of 1934
         or to a holder of any Indebtedness owed by any Consolidated Party in
         its capacity as such a holder and not otherwise required to be
         delivered to the Administrative Agent pursuant hereto and (ii) upon
         the reasonable written request of the Administrative Agent, following
         the occurrence of any event or the discovery of any condition which
         the Administrative Agent or the Required Lenders reasonably believe
         has caused (or could be reasonably expected to cause) the
         representations and warranties set forth in Section 1.14 to be untrue
         in any material respect, all reports and written information to and
         from the United States Environmental Protection Agency, or any state
         or local agency responsible for environmental matters, the United
         States Occupational Health and Safety Administration, or

                                       43

         any state or local agency responsible for health and safety matters, or
         any successor agencies or authorities concerning environmental, health
         or safety matters;

                  (vii)    promptly, such additional information regarding the
         business, financial or corporate affairs of the Company or any
         Subsidiary, or compliance with the terms of the Credit Documents, as
         the Administrative Agent or any Lender may from time to time
         reasonably request.

         (c)      Notices and Information.

                  The Company shall

                  (i)      promptly notify the Administrative Agent and each
         Lender of the occurrence of any Default;

                  (ii)     promptly notify the Administrative Agent, which will
         notify each Lender, of any matter that has resulted or could
         reasonably be expected to result in a Material Adverse Effect,
         including (i) breach or non-performance of, or any default under, a
         Contractual Obligation of the Company or any Subsidiary; (ii) any
         dispute, litigation, investigation, proceeding or suspension between
         the Company or any Subsidiary and any Governmental Authority; or (iii)
         the commencement of, or any material development in, any litigation or
         proceeding affecting the Company or any Subsidiary, including pursuant
         to any applicable Environmental Laws.

                  (iii)    Promptly notify the Administrative Agent, which will
         notify each Lender, of the occurrence of any of the following: (a) any
         material Reportable Event with respect to a Pension Plan; (b) a
         withdrawal by the Company or any ERISA Affiliate from a Pension Plan
         subject to Section 4063 of ERISA during a plan year in which it was a
         substantial employer (as defined in Section 4001(a)(2) of ERISA) or a
         cessation of operations that is treated as such a withdrawal under
         Section 4062(e) of ERISA; (c) a complete or partial withdrawal by the
         Company or any ERISA Affiliate from a Multiemployer Plan or
         notification that a Multiemployer Plan is in reorganization; (d) the
         filing of a notice of intent to terminate, the treatment of a Plan
         amendment as a termination under Sections 4041 or 4041A of ERISA, or
         the commencement of proceedings by the PBGC to terminate a Pension
         Plan or Multiemployer Plan; (e) an event or condition which
         constitutes grounds under Section 4042 of ERISA for the termination
         of, or the appointment of a trustee to administer, any Pension Plan or
         Multiemployer Plan; or (f) the imposition of any liability under Title
         IV of ERISA, other than for PBGC premiums due but not delinquent under
         Section 4007 of ERISA, upon the Company or any ERISA Affiliate.

                  (iv)     Promptly notify the Administrative Agent, which will
         notify each Lender, of any material discretionary change in accounting
         policies or financial reporting practices by the Company or any
         Subsidiary.

                                       44

                  (v)      Upon the reasonable written request of the
         Administrative Agent following the occurrence of any event or the
         discovery of any condition which the Administrative Agent or the
         Required Lenders reasonably believe has caused (or could be reasonably
         expected to cause) the representations and warranties set forth in
         Section 1.14 to be untrue in any material respect, the Credit Parties
         will furnish or cause to be furnished to the Administrative Agent, at
         the Credit Parties' expense, a report of an environmental assessment
         of reasonable scope, form and depth, (including, where appropriate,
         invasive soil or groundwater sampling) by a consultant reasonably
         acceptable to the Administrative Agent as to the nature and extent of
         the presence of any Hazardous Materials on any Real Properties and as
         to the compliance by any Consolidated Party with Environmental Laws at
         such Real Properties. If the Credit Parties fail to deliver such an
         environmental report within ninety (90) days after receipt of such
         written request then the Administrative Agent may arrange for same,
         and the Consolidated Parties hereby grant to the Administrative Agent
         and its representatives access to the Real Properties to reasonably
         undertake such an assessment (including, where appropriate, invasive
         soil or groundwater sampling). The reasonable cost of any assessment
         arranged for by the Administrative Agent pursuant to this provision
         will be payable by the Credit Parties on demand and added to the
         obligations secured by the Collateral Documents.

                  (vi)     At the time of delivery of the financial statements
         and reports provided for in Section 5.1(a), deliver to the
         Administrative Agent a report signed by an Responsible Officer of the
         Company setting forth (i) a list of registration numbers for all
         patents, trademarks, service marks, trade names and copyrights awarded
         to any Credit Party since the last day of the immediately preceding
         fiscal year and (ii) a list of all patent applications, trademark
         applications, service mark applications, trade name applications and
         copyright applications submitted by any Credit Party since the last
         day of the immediately preceding fiscal year and the status of each
         such application, all in such form as shall be reasonably satisfactory
         to the Administrative Agent.

         Each notice pursuant to this Section 5.1(c)(i)-(v) shall be accompanied
by a statement of a Responsible Officer of the Company setting forth details of
the occurrence referred to therein and stating what action the Company has taken
and proposes to take with respect thereto.

         (d)      PAYMENT OF OBLIGATIONS.

         It will, and will cause each of its Subsidiaries to, pay, discharge or
otherwise satisfy at or before maturity or before they become delinquent, as the
case may be, all its material obligations of whatever nature, including (i) all
material tax liabilities, assessments and governmental charges or levies upon it
or its properties or assets; (ii) all lawful material claims which, if unpaid,
would by law become a Lien upon its property; and (iii) all material
Indebtedness, as and when due and payable, but subject to any subordination
provisions contained in any instrument or agreement evidencing such
Indebtedness, in each case, unless the same are being contested in good faith by
appropriate proceedings diligently conducted and adequate reserves in accordance
with GAAP are being maintained by the Company or such Subsidiary.

         (e)      CONDUCT OF BUSINESS AND MAINTENANCE OF EXISTENCE.

                                       45

         It will, and will cause each of its Subsidiaries to, (i) continue to
engage in business of the same general type as now conducted by it and preserve,
renew and keep in full force and effect its corporate existence (except in
connection with mergers, consolidations or dissolutions permitted under Section
5.2(b)) and take all reasonable action to maintain all rights, privileges and
franchises necessary in the normal conduct of its business and (ii) comply with
all Contractual Obligations and Requirements of Law except to the extent that
failure to comply therewith could not, individually or in the aggregate, be
reasonably expected to have a Material Adverse Effect.

         (f)      MAINTENANCE OF PROPERTY; INSURANCE.

                  (i)      The Company will, and will cause each of its
         Subsidiaries to, (A) keep all property useful and necessary in its
         business in good working order and condition, except where the failure
         to keep such property in good working order could not reasonably be
         expected to have a Material Adverse Effect, (B) make all necessary
         repairs thereto and renewals and replacements thereof and (C) use the
         standard of care typical in the industry in the operation and
         maintenance of its facilities, to the extent such standard of care is
         reasonably determinable and taking into account any specific
         circumstances.

                  (ii)     The Company will, and will cause each of its
         Subsidiaries to, maintain with financially sound and reputable
         insurance companies insurance on all its property in at least such
         amount and against at least such risks as are usually insured against
         in the same general area by companies engaged in the same or a similar
         business (to the extent such standards are reasonably determinable and
         taking into account any specific circumstances, it being understood
         that the Company may maintain self-insurance to a similar extent as is
         commonly maintained by companies engaged in the same or a similar
         business). The Collateral Agent shall be named as loss payee or
         mortgagee, as its interest may appear, and/or additional insured with
         respect to any such insurance providing coverage in respect of any
         Collateral, and the Company will, and will cause each of its
         Subsidiaries to, (i) ensure that each provider of any such insurance
         shall agree, by endorsement upon the policy or policies issued by it
         or by independent instruments furnished to the Collateral Agent, that
         it will give the Collateral Agent thirty (30) days prior written
         notice before any such policy or policies shall be altered in any
         material respect or canceled, and (ii) use commercially reasonable
         efforts to ensure that each provider of any such insurance shall
         agree, by endorsement upon the policy or policies issued by it or by
         independent instruments furnished to the Collateral Agent, that it
         will give the Collateral Agent at least thirty (30) days prior written
         notice before any such policy or policies shall be materially altered,
         and, if the provider does not so agree, the Company or such Subsidiary
         agrees that it shall give such notice to the Collateral Agent.

                  (iii)    In the event that any Credit Party or any of its
         Subsidiaries receives Net Cash Proceeds on account of any loss of,
         damage to or destruction of, or any condemnation or other taking for
         public use of, any Property of the Credit Parties or their
         Subsidiaries (with respect to any such Person, an "Involuntary
         Disposition"), the Credit Parties shall apply (or cause to be applied)
         such Net Cash Proceeds in accordance with

                                       46

         the terms of Section 2.6(b)(iii). All insurance proceeds with respect
         to the Collateral shall be subject to the security interest of the
         Collateral Agent (for the ratable benefit of the Secured Parties
         referred to in applicable Collateral Documents) under the Collateral
         Documents. Pending final application of any such Net Cash Proceeds, the
         Credit Parties may apply such Net Cash Proceeds to temporarily reduce
         the Revolving Loans or to make Permitted Investments.

         (g)      COMPLIANCE WITH LAWS.

         Comply with the requirements of all Laws and all orders, writs,
injunctions and decrees applicable to it or to its business or property, except
in such instances in which (a) such requirement of Law or order, writ,
injunction or decree is being contested in good faith by appropriate proceedings
diligently conducted; or (b) the failure to comply therewith could not
reasonably be expected to have a Material Adverse Effect.

         (h)      BOOKS AND RECORDS.

         It will, and will cause each of its Subsidiaries to, keep proper books
and records of accounts in which full, true and correct entries in conformity
with generally accepted accounting principles in effect with respect to such
Person (meaning GAAP for the Company and its Domestic Subsidiaries) and all
Requirements of Law shall be made of all dealings and transactions in relation
to its business and activities.

         (i)      EBITDA AND ASSETS OF CREDIT PARTIES.

         The Credit Parties shall at all times collectively account for 55% or
more of Consolidated EBITDA and assets, respectively, of the Company and its
Consolidated Subsidiaries.

         (j)      USE OF PROCEEDS.

         It will use (i) the proceeds of the Loans solely in accordance with
Section 1.6 and (ii) the Letters of Credit solely for the purposes set forth in
Section 1.6.

         (k)      AUDITS/INSPECTIONS.

         Upon reasonable notice and during normal business hours, each Credit
Party will permit representatives appointed by the Administrative Agent,
including, without limitation, independent accountants, agents, attorneys and
appraisers, to visit and inspect such Credit Party's property, including its
books and records, its accounts receivable and inventory, its facilities and its
other business assets, and to make photocopies or photographs thereof and to
write down and record any information such representative obtains and shall
permit the Administrative Agent or its representatives to investigate and verify
the accuracy of information provided to the Lenders, and to discuss all such
matters with the executive officers, pertinent employees and representatives of
the Credit Parties, all at the expense of the Company, provided that upon each
visit the representatives shall each sign a customary plant visitor agreement
and otherwise comply with all customary and reasonable visitation procedures;
provided, however, that so long as no Event of Default shall have

                                       47

occurred and be continuing, (i) no verification of accuracy of information shall
include contacting the account debtors under any accounts receivable of any
Credit Party and (ii) such visits and inspections shall only occur with
reasonable frequency and shall not disrupt the normal business operations of any
Credit Party. The Administrative Agent agrees to keep confidential the
information obtained from any such audit or inspection in accordance with the
provisions of Section 9.16.

         (l)      ADDITIONAL CREDIT PARTIES.

         At the time any Person becomes a Domestic Subsidiary (other than a
Receivables Financing SPC or a Preferred Stock SPC or as otherwise agreed to by
the Administrative Agent) or becomes a guarantor with respect to any other
Indebtedness of the Company, the Company shall so notify the Administrative
Agent and promptly thereafter (but in any event within 30 days after the date
thereof) shall (a) cause such Person to execute a Joinder Agreement in
substantially the same form as Exhibit C, (b) cause such Person to execute
counterparts of, or a joinder in, the Security Agreement, and (c) deliver, or
cause such Person to deliver, such other documentation as the Administrative
Agent may reasonably request in connection with the foregoing, including,
without limitation, certified resolutions and other organizational and
authorizing documents of such Person, favorable opinions of counsel to such
Person (which shall cover, among other things, the legality, validity, binding
effect and enforceability of the documentation referred to above and the
perfection of the Collateral Agent's Liens thereunder) and appropriate UCC-1
financing statements, all in form, content and scope reasonably satisfactory to
the Administrative Agent.

         (m)      PLEDGED ASSETS.

         Each Credit Party will (i) cause all of its owned and leased real and
personal Property other than Excluded Assets to be subject at all times to first
priority, perfected Liens (which Liens shall be, in the case of material Real
Property (whether leased or owned), insured by a Mortgage Policy) in favor of
the Collateral Agent to secure the Obligations pursuant to the terms and
conditions of the Collateral Documents or, with respect to any such Property
acquired subsequent to the Closing Date, such other additional security
documents as the Collateral Agent shall reasonably request, subject in any case
to Permitted Liens and (ii) deliver such other documentation as the Collateral
Agent may reasonably request in connection with the foregoing, including,
without limitation, appropriate UCC-1 financing statements, real estate title
insurance policies with respect to material real Property, surveys,
environmental reports, landlord's waivers, certified resolutions and other
organizational and authorizing documents of such Person, favorable opinions of
counsel to such Person (which shall cover, among other things, the legality,
validity, binding effect and enforceability of the documentation referred to
above and the perfection of the Collateral Agent's Liens thereunder) and other
items of the types required to be delivered pursuant to Section 4.1(c) and (d),
all in form, content and scope reasonably satisfactory to the Collateral Agent.

         (n)      HIGH YIELD NOTE INDENTURE.

         It will duly and punctually perform and observe each and all of its
covenants and obligations under the High Yield Note Indenture, as in effect on
the Closing Date and as waived,

                                       48

amended or otherwise changed from time to time thereafter with the written
consent of the Required Lenders, without giving effect to any other waiver,
modification, termination or replacement thereof.

         (o)      ADDITION OF EXCLUDED INACTIVE SUBSIDIARIES AS GUARANTORS.

         Each of the Excluded Inactive Subsidiaries which has not been merged
with and into a Credit Party, dissolved or otherwise liquidated within 90 days
of the Closing Date shall promptly and in any event within five (5) Business
Days thereof execute a Joinder Agreement and thereby become a Guarantor
hereunder and otherwise comply with the requirements of Section 5.1(l);
provided, however, that to the extent that an Excluded Inactive Subsidiary
acquires or is otherwise in receipt of any assets, then such Excluded Inactive
Subsidiary shall promptly and in any event within five (5) Business Days of such
acquisition or other receipt of assets execute a Joinder Agreement and thereby
become a Guarantor hereunder and otherwise comply with the requirements of
Section 5.1(l).

         (p)      RELEASE OF CASH COLLATERAL.

         Within sixty (60) days of the Closing Date the Company shall have
secured the release by Bank of America, N.A. of the balance of the funds on
deposit in the cash collateral account securing the letters of credit issued
under the Existing Credit Agreement and set forth on Schedule 5.2(f) as of the
Closing Date.

                           5.2.     NEGATIVE COVENANTS.

         So long as this Agreement, any of the Notes, any LOC Obligations or any
other Credit Document shall remain in effect or any of the principal of or
interest on any of the Loans or any other amount payable by a Credit Party to
the Administrative Agent or any of the Lenders pursuant to this Agreement, any
of the Notes, any LOC Obligations or any other Credit Document shall remain
unpaid, unless waived in writing by the Required Lenders, each Credit Party
covenants and agrees that:

         (a)      LIMITATION ON LIENS.

         It will not, and will not permit any of the Subsidiaries to, create,
incur, assume or suffer to exist any Lien on any Property owned by such Person
(including all Capital Stock of any Subsidiary now or hereafter owned by such
Person) to secure Indebtedness, or acquire any such Property subject to any
conditional sale or title retention agreement, except for Permitted Liens.

         (b)      LIMITATIONS ON MERGERS, ACQUISITIONS AND ASSET SALES.

                  (i)      Limitations on Mergers and Liquidations. It will not,
         and will not permit any of its Subsidiaries to, merge, consolidate,
         amalgamate or enter into any similar combination with any other Person
         or liquidate, wind-up or dissolve itself (or suffer any liquidation or
         dissolution), except:

                                       49

                           (A)      Any Credit Party or any of its Subsidiaries
                  may merge or otherwise combine with another Person, provided
                  that (I) such Credit Party or its Subsidiary, as the case
                  may be, is the entity surviving such transaction, (II)
                  immediately prior to and after giving effect on a Pro Forma
                  Basis to such transaction, no Default or Event of Default
                  exists or would exist and (III) the Board of Directors of
                  such Person has approved such transaction;

                           (B)      Any Credit Party (other than the Company)
                  may merge or otherwise combine with any other Credit Party
                  (other than the Company);

                           (C)      The Company may merge or consolidate with
                  any of its Subsidiaries provided that the Company shall be
                  the continuing or surviving corporation;

                           (D)      Any wholly-owned Subsidiary of a Credit
                  Party (which Subsidiary is not itself a Credit Party) may
                  merge or otherwise combine with a Credit Party to the extent
                  the Credit Party shall be the continuing or surviving
                  corporation; and

                           (E)      Any wholly-owned Subsidiary of a Credit
                  Party may liquidate, wind-up or dissolve itself (I) into a
                  Credit Party or any other wholly-owned Subsidiary of a
                  Credit Party or (II) otherwise in a transaction in which the
                  assets of such dissolving Subsidiary become owned by a
                  wholly-owned Subsidiary of a Credit Party.

                  (ii)     Limitations on Acquisitions. It will not, and will
         not permit any of its Subsidiaries to, consummate an
         Acquisition unless:

                           (A)      Same or Similar Line of Business. The
                   Property acquired (or the Property of the Person acquired)
                   in such Acquisition is used or useful in the same or a
                   similar line of business as the Company and its Subsidiaries
                   were engaged in on the Closing Date (or any reasonable
                   extensions or expansions thereof);

                           (B)      Guaranty and Collateral Requirements. The
                   Administrative Agent shall have received all items in
                   respect of the Property acquired in such Acquisition
                   required to be delivered by the terms of Section 5.1(l) and
                   (m);

                           (C)      Non-Hostile. In the case of an Acquisition
                   of the Capital Stock of another Person, the board of
                   directors (or other comparable governing body) of such other
                   Person shall have duly approved such Acquisition;

                           (D)      Pro Forma Compliance Certificate. With
                   respect to any Acquisition where the Aggregate Consideration
                   (as defined below) paid by the Company and its Consolidated
                   Subsidiaries for such Acquisition exceeds $50,000,000, the
                   Company shall have delivered to the Administrative Agent:

                                       50

                                    (I)      a pro forma compliance certificate
                           demonstrating that, upon giving effect to such
                           Acquisition on a Pro Forma Basis, the Credit Parties
                           would be in compliance with the financial covenants
                           set forth in Section 5.2(d) as of the most recent
                           fiscal quarter end with respect to which the
                           Administrative Agent has received the financial
                           information required pursuant to Section 5.1(a); and

                                    (II)     a certificate of a Responsible
                           Officer of the Borrower (1) demonstrating that, upon
                           giving effect to such Acquisition on a Pro Forma
                           Basis, at least 90% of Consolidated EBITDA for the
                           most recently ended fiscal year of the Company with
                           respect to which the Administrative Agent shall have
                           received the financial information required pursuant
                           to Section 5.1(a) has been calculated based on
                           financial information audited in accordance with GAAP
                           (in the case of the Company, as required by Section
                           5.1(a) and, in the case of the acquired Person or
                           Property, by independent certified public accountants
                           of recognized national standing reasonably acceptable
                           to the Administrative Agent (whose opinion shall not
                           be limited as to the scope or qualified as to going
                           concern status or any other material qualifications
                           or exceptions)) and (2) to the extent that audited
                           financial information for the acquired Person or
                           Property is required to meet the test set forth in
                           the foregoing clause (1), certifying that the
                           quarterly financial statements with respect to the
                           Person or Property acquired for each fiscal quarter
                           period ending after the date of the last audit and
                           immediately prior to the date of such Acquisition
                           have been prepared in accordance with GAAP (subject
                           to year-end adjustments) and reviewed by independent
                           certified public accountants of recognized national
                           standing reasonably acceptable to the Administrative
                           Agent;

                           (E)      Continued Accuracy of Representations and
                  Warranties. The representations and warranties made by the
                  Credit Parties in any Credit Document shall be true and
                  correct in all material respects at and as if made as of the
                  date of such Acquisition (after giving effect thereto)
                  except to the extent such representations and warranties
                  expressly relate to an earlier date (in which case they
                  shall be true and correct in all material respects as of
                  such earlier date);

                           (F)      Partnership Interests. If such transaction
                  involves the purchase of an interest in a partnership
                  between the Company (or a Subsidiary of the Company) as a
                  general partner and entities unaffiliated with the Company
                  or such Subsidiary as the other partners, such transaction
                  shall be effected by having such equity interest acquired by
                  a corporate holding company directly or indirectly
                  wholly-owned by the Company newly formed for the sole
                  purpose of effecting such transaction;

                           (G)      Aggregate Consideration. The aggregate
                  consideration (including cash and non-cash consideration,
                  any assumption of Indebtedness, any earn-out payments and
                  any consideration consisting of any Capital Stock of the
                  Company or any of its Subsidiaries issued to the seller of
                  the Capital Stock or Property

                                       51

                  acquired in such Acquisition) (such amount being referred to
                  in this Section 5.2(b)(ii) as the "Aggregate Consideration")
                  paid by the Company and its Consolidated Subsidiaries for all
                  such Acquisitions occurring in each fiscal year shall not
                  exceed (a) with respect to Acquisitions of assets and/or
                  Persons located in the United States, $300,000,000 and (b)
                  with respect to all other Acquisitions, $100,000,000;

                           (H)      Cash Consideration. The aggregate cash
                  consideration paid by the Company and its Consolidated
                  Subsidiaries for all such Acquisitions occurring in each
                  fiscal year shall not exceed (a) with respect to Acquisitions
                  of assets and/or Persons located in the United States,
                  $100,000,000 and (b) with respect to all other Acquisitions,
                  $50,000,000.

                  (iii)    Sale of Assets. It will not, and will not permit any
         of its Subsidiaries to, sell, lease or otherwise dispose of any of its
         assets, in a transaction or a series of related transactions unless
         (A) such transaction is not an Asset Disposition, or (B) the aggregate
         value of the assets sold, leased or disposed of in such transaction,
         when added to the aggregate value of all assets sold, leased or
         disposed of in all transactions permitted by this clause (B) at any
         time after the Closing Date, does not exceed $75,000,000; provided,
         however, that at least 85% of the consideration received by the
         Company and/or its Subsidiaries in connection with each such
         transaction shall be in cash or Cash Equivalents.

                  (iv)     Release of Guarantors and Collateral. Upon the sale
         of any Subsidiary (or dissolution thereof, via merger or otherwise) or
         Collateral permitted by this Section 5.2(b), the Collateral Agent
         shall (to the extent applicable) deliver to the Credit Parties, upon
         the Credit Parties' request and at the Credit Parties' expense, such
         documentation as is reasonably necessary to evidence the release of
         the Collateral Agent's security interest, if any, in such Collateral,
         including, without limitation, amendments or terminations of UCC
         financing statements, the release of Mortgages and the release of such
         Subsidiary from all of its obligations under the Credit Documents,
         including the release of such Subsidiary if it is a Guarantor
         hereunder, from its obligations under Section 3A hereof. Upon the
         release of a Guarantor the pledges and grants of security interests to
         the extent given by such Guarantor pursuant to the Security Agreement
         and the Mortgages, and the covenants and other agreements contained
         herein and therein, shall no longer be effective as to such Guarantor
         and shall otherwise cease and be of no further force and effect as to
         such Guarantor.

         (c)      LIMITATIONS ON SALE/LEASEBACK TRANSACTIONS.

         It will not, and will not permit any of the Subsidiaries to, sell or
transfer any Property to anyone (other than to the Company or to another Credit
Party) with the intention of taking back a lease of such Property or any similar
Property, except in connection with a lease for a temporary period during or at
the end of which it is intended that the use by the Company or its Subsidiary of
such Property will be discontinued.

         (d)      FINANCIAL COVENANTS.

                                       52

                  (i)      Leverage Ratio. It will not permit, as of the last
         day of any fiscal quarter, the Leverage Ratio to exceed the ratio set
         forth below for the applicable period:



                     Period                                     Maximum Leverage Ratio
                     ------                                     ----------------------
                                                             
Closing Date through and including June 30, 2003                     3.00 to 1.0
July 1, 2003 through and including December 31, 2003                 2.90 to 1.0
January 1, 2004 through and including June 30, 2004                  2.80 to 1.0
July 1, 2004 through and including December 31, 2004                 2.70 to 1.0
January 1, 2005 and thereafter                                       2.50 to 1.0


                  (ii)     Interest Coverage Ratio. It will not permit, as of
         the last day of any fiscal quarter, the Interest Coverage Ratio to be
         less than the ratio set forth below for the applicable period:



                     Period                              Minimum Interest Coverage Ratio
                     ------                              -------------------------------
                                                      
Closing Date through and including June 30, 2004                   2.00 to 1.0
July 1, 2003 through and including June 30, 2004                   2.10 to 1.0
July 1, 2004 through and including December 31, 2004               2.20 to 1.0
January 1, 2005 and thereafter                                     2.30 to 1.0


                  (iii)    Capital Expenditures. It will not permit Consolidated
         Capital Expenditures for any fiscal year to exceed the amount set
         forth below for the applicable fiscal year:



Fiscal Year                           Amount
- -----------                           ------
                                
   2002                            $ 75,000,000
   2003                            $ 85,000,000
   2004                            $ 90,000,000
   2005                            $ 95,000,000
   2006                            $100,000,000
   2007                            $ 60,000,000


         (e)      LIMITATIONS ON TRANSACTIONS WITH AFFILIATES.

         It will not, and will not permit any of its Subsidiaries to, enter into
any transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate other
than (a) advances of working capital to any Credit Party, (b) transfers of cash
and assets to any Credit Party, (c) intercompany transactions expressly
permitted by Section 5.2(b)(i), (d) normal compensation and reimbursement of
expenses of officers and directors, (e) transactions set forth on Schedule
5.2(e), (f) transactions among Credit Parties, and (g) except as otherwise
specifically limited by this Agreement, other transactions which are entered
into in the ordinary course of such Person's business upon fair and reasonable
terms no less favorable to such Person than it would obtain in a comparable
arm's length transaction with a Person which is not an Affiliate.

         (f)      LIMITATIONS ON INDEBTEDNESS.

                                       53

         It will not, nor will it permit any of the Subsidiaries to, contract,
create, incur, assume or permit to exist any Indebtedness, except:

                  (i)      Indebtedness (including the Incremental Term Loan)
         arising under this Agreement and the other Credit Documents;

                  (ii)     Indebtedness of the Company and its Subsidiaries set
         forth on Schedule 5.2(f) (and renewals, refinancings and extensions
         thereof on terms and conditions no less favorable to such Person than
         such existing Indebtedness; provided that the amount of such
         Indebtedness is not increased at the time of such refinancing,
         refunding, renewal or extension except by an amount equal to a
         reasonable premium or other reasonable amount paid, and fees and
         expenses reasonably incurred, in connection with such refinancing and
         by an amount equal to any existing commitments unutilized thereunder);

                  (iii)    obligations of the Company and its Subsidiaries in
         respect of Hedging Agreements entered into in order to manage existing
         or anticipated interest rate or exchange rate risks and not for
         speculative purposes; provided, however, that in no event shall the
         entering into of such Hedging Agreements cause more than 60% of all
         Indebtedness of the Company and its Subsidiaries to become,
         effectively, floating-rate Indebtedness.

                  (iv)     obligations of the Company and its Subsidiaries in
         connection with any Permitted Receivables Financing of up to
         $100,000,000 in Attributed Principal Amount, to the extent such
         obligations constitute Indebtedness;

                  (v)      intercompany Indebtedness owing by a Credit Party to
         another Credit Party;

                  (vi)     in addition to the Indebtedness otherwise permitted
         by this Section 5.2(f), other purchase money Indebtedness (including
         obligations in respect of Capital Leases or Synthetic Leases)
         hereafter incurred by the Company and its Subsidiaries to finance the
         purchase of fixed assets, provided that the aggregate outstanding
         principal amount of such Indebtedness shall not exceed $25,000,000 at
         any time; and

                  (vii)    other Indebtedness hereafter incurred by the Company
         or any of its Subsidiaries provided that (A) the loan documentation
         with respect to such Indebtedness shall not contain covenants or
         default provisions relating to the Company or any Consolidated
         Subsidiary that are more restrictive than the covenants and default
         provisions contained in the Credit Documents, (B) the Company shall
         have delivered to the Administrative Agent a pro forma compliance
         certificate demonstrating that, upon giving effect on a Pro Forma
         Basis to the incurrence of such Indebtedness and to the concurrent
         retirement of any other Indebtedness of the Company or any of its
         Consolidated Subsidiaries, the Credit Parties would be in compliance
         with the financial covenants set forth in Section 5.2(d) as of the
         most recent fiscal quarter end with respect to which the
         Administrative Agent has received the financial statements required to
         be delivered pursuant to Section 5.1(a) and (C) the aggregate
         principal amount of such Indebtedness shall not exceed $50,000,000 at
         any time.

                                       54

         (g)      FISCAL YEAR; ORGANIZATIONAL DOCUMENTS.

         It will not (i) without the prior written consent of the Required
Lenders, change its fiscal year or make any material change, or permit any of
the Subsidiaries to make any material change, to its accounting treatment and
reporting practices under GAAP (except as required by GAAP; notwithstanding the
foregoing, a Subsidiary that is not a Credit Party may change its fiscal year to
coincide with the fiscal year of the Company at any time without the consent of
the Required Lenders) or (ii) without the prior written consent of the
Administrative Agent, amend, modify or change its articles of incorporation (or
corporate charter or other similar organizational document) or bylaws (or other
similar document).

         (h)      LIMITATION ON RESTRICTED ACTIONS.

         It will not, and will not permit any of the Subsidiaries (other than a
Receivables Financing SPC in connection with a Permitted Receivables Financing)
to, directly or indirectly, create or otherwise cause, incur, assume, suffer or
permit to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of any such Person to (i) pay dividends or make any
other distribution on any of such Person's capital stock, (ii) pay any
Indebtedness owed to the Company or any other Credit Party, (iii) make loans or
advances to any Credit Party or (iv) transfer any of its property to any Credit
Party, except for encumbrances or restrictions existing under or by reason of
(A) customary non-assignment or net worth provisions in any lease governing a
leasehold interest, (B) any agreement or other instrument of a Person existing
at the time it becomes a Subsidiary of the Company; provided that such
encumbrance or restriction is not applicable to any other Person, or any
property of any other Person, other than such Person becoming a Subsidiary of
the Company and was not entered into in contemplation of such Person becoming a
Subsidiary of the Company, (C) this Agreement and the other Credit Documents,
(D) the High Yield Note Indenture, (E) the Senior Notes and (F) applicable
Requirements of Law.

         (i)      NO OTHER NEGATIVE PLEDGES.

         It will not, and will not permit any of the Subsidiaries to, enter
into, assume or become subject to any agreement prohibiting or otherwise
restricting the creation or assumption of any Lien upon its properties or
assets, whether now owned or hereafter acquired, or requiring the grant of any
security for such obligation if security is given for some other obligation,
except pursuant to (i) the documents executed in connection with any Permitted
Receivables Financing (but only to the extent that the related prohibitions
against other encumbrances pertain to the applicable transferred assets actually
sold, contributed, financed or otherwise conveyed or pledged pursuant to such
Permitted Receivables Financing), (ii) this Agreement and the other Credit
Documents, (iii) the High Yield Note Indenture and (iv) the Senior Notes.

         (j)      RESTRICTED PAYMENTS.

         It will not, nor will it permit any Subsidiary to, directly or
indirectly, declare, order, make or set apart any sum for or pay any Restricted
Payment, except that (i) any Preferred Stock SPC may make cash distributions on
the Preferred Securities issued by such Preferred Stock SPC (and

                                       55

the Company shall be permitted to make cash interest payments on the debentures
related to such Preferred Securities) in an amount consistent with the past
practices of the Company, (ii) the Company may make cash dividends on the
Company's common stock in an amount not to exceed in any fiscal year of the
Company (A) $5,000,000, if the Company is not rated Investment Grade at the time
any such dividend is declared and (B) $10,000,000, if the Company is rated
Investment Grade from both S&P and Moody's at the time any such dividend is
declared, (iii) the Company and its Subsidiaries may repurchase Capital Stock as
permitted pursuant to Section 5.2(k) and (iv) each Subsidiary may make
Restricted Payments to the Company and to wholly-owned Subsidiaries (and, in the
case of a Restricted Payment to a non-wholly-owned Subsidiary, to the Company
and any Subsidiary and to each other owner of capital stock or other equity
interests of such Subsidiary on a pro rata basis based on their relative
ownership interests).

         (k)      LIMITATION ON PREPAYMENT, REDEMPTION OR REPURCHASE OF
INDEBTEDNESS OR CAPITAL STOCK.

         It will not, nor will it permit any Subsidiary to,

                  (i)      amend, modify or refinance (or permit the amendment,
         modification, refinancing) of any Indebtedness for borrowed money or
         relating to Preferred Securities (other than Indebtedness evidenced by
         this Agreement) if such amendment, modification or refinancing would
         add or change any terms thereof in a manner that is more adverse to the
         issuer of such Indebtedness, or shorten the final maturity or average
         life to maturity thereof or require any payment thereof to be made
         sooner than originally scheduled or increase the interest rate
         applicable thereto or change any subordination provision thereof; or

                  (ii)     make (or give any notice with respect thereto) any
         voluntary or optional payment or prepayment or any redemption or
         acquisition for value, prior to the stated maturity, of (including,
         without limitation, by way of depositing money or securities with the
         trustee therefor before due for the purpose of paying when due) any
         Indebtedness for borrowed money or relating to Preferred Securities
         (other than Indebtedness evidenced by this Agreement and the
         $125,000,000 of 6.625% Senior Notes due 2003) or any Capital Stock
         except that, so long as (x) no Default or Event of Default exists or
         would result therefrom (on a Pro Forma Basis or otherwise) and (y) the
         Company can demonstrate that the Secured Leverage Ratio is less than or
         equal to 2.0 to 1.0 on a Pro Forma Basis:

                           (A)      to the extent the Company is rated
                  Investment Grade at the time of any such prepayment or
                  redemption, the Company may repurchase shares of its common
                  stock in an aggregate amount not to exceed $50,000,000 during
                  the term of this Agreement;

                           (B)      the Company may use Available Cash to
                  repurchase, repay or otherwise redeem Senior Notes in an
                  aggregate amount not to exceed (I) at any time when the
                  Secured Leverage Ratio is greater than 1.5 to 1.0 on a Pro
                  Forma Basis (as demonstrated in the officer's compliance
                  certificate most recently delivered to the Administrative
                  Agent pursuant to Section 5.1(b)), $50,000,000 in any fiscal
                  year, or (II) at any time when the Secured Leverage Ratio is
                  less than or equal to 1.5 to 1.0 on a Pro Forma

                                       56

                  Basis (as demonstrated in the officer's compliance
                  certificate most recently delivered to the Administrative
                  Agent pursuant to Section 5.1(b)), $50,000,000 in any fiscal
                  year, or (II) at any time when the Secured Leverage Ratio is
                  less than or equal to 1.5 to 1.0 on a Pro Forma Basis (as
                  demonstrated in the officer's compliance certificate most
                  recently delivered to the Administrative Agent pursuant to
                  Section 5.1(b)), $100,000,000 in any fiscal year; and

                           (C)      the Company may use Available Cash to
                  repurchase, repay or otherwise redeem the Preferred Securities
                  in an amount not to exceed (I) at any time when the Secured
                  Leverage Ratio is greater than 1.5 to 1.0 on a Pro Forma Basis
                  (as demonstrated in the officer's compliance certificate most
                  recently delivered to the Administrative Agent pursuant to
                  Section 5.1(b)), $20,000,000 in any fiscal year, or (II) at
                  any time when the Secured Leverage Ratio is less than or equal
                  to 1.5 to 1.0 on a Pro Forma Basis (as demonstrated in the
                  officer's compliance certificate most recently delivered to
                  the Administrative Agent pursuant to Section 5.1(b)),
                  $40,000,000 in any fiscal year; provided that in no event
                  shall the aggregate amount of the Preferred Securities
                  repurchased, repaid or otherwise redeemed pursuant to this
                  Section 5.2(k)(ii)(C) exceed $100,000,000;

         (l)      ADVANCES, INVESTMENTS AND LOANS.

         It will not, nor will it permit any Subsidiary to, lend money or extend
credit or make advances to any Person, or purchase or acquire any stock,
obligations or securities of, or any other interest in, or make any capital
contributions to, any Person except for Permitted Investments.

         (m)      ASBESTOS PAYMENT LIMITATIONS.

         It will not, nor will it permit any Subsidiary to, make cash payments
(net of direct insurance payments and cash payments received by the Company from
insurance proceeds and settlements) in connection with asbestos-related personal
injury and wrongful death lawsuits and claims (the "Asbestos Cash Payments") in
any fiscal year in an aggregate amount in excess of $30,000,000, plus the unused
amount available for Asbestos Cash Payments under this Section 5.2(m) for the
immediately preceding fiscal year (including any carry forward available from
any prior fiscal year).

         (n)      PLAN CONTRIBUTION LIMITATIONS.

         It will not, nor will it permit any Subsidiary to, make cash
contributions to the Company's Plans (including both domestic and foreign
Plans), which cash payments are in excess of those cash payments that are
included in the income statements of the Company and its Consolidated
Subsidiaries in accordance with GAAP and that are consistent with past practices
of the Company (i.e., true-up cash payments in connection with accrued Plan
liabilities), except to the extent such excess cash payments are in an aggregate
amount that does not exceed (i) $85,000,000 for the Company's 2002 fiscal year
and (ii) $50,000,000 per fiscal year for every

                                       57

other fiscal year thereafter plus the unused amount available for such excess
cash payments under this Section 5.2(n) for the immediately preceding fiscal
year (including any carry forward available from any prior fiscal year).

                           5.3.     INCORPORATION OF COVENANTS FROM HIGH YIELD
                                    NOTE INDENTURE.

         Reference is hereby made to the High Yield Note Indenture and the
covenants contained in Article 4 of the High Yield Note Indenture (hereinafter
referred to as the "Incorporated Covenants"). The Credit Parties agree with the
Administrative Agent and the Lenders that the Incorporated Covenants (and all
other relevant provisions of the High Yield Note Indenture, related thereto,
including without limitation the defined terms and other provisions contained in
Article 4 and Section 1.01 thereof which are used in the Incorporated Covenants,
hereinafter referred to as the "Additional Incorporated Terms") are hereby
incorporated by reference into this Agreement to the same extent and with the
same effect as if set forth herein and shall inure to the benefit of the
Administrative Agent and the Lenders, without giving effect to any waiver,
amendment, modification or replacement of the High Yield Note Indenture or any
term or provision of the Incorporated Covenants occurring subsequent to the
Closing Date, except to the extent otherwise specifically provided in the
following provisions of this paragraph. In the event a waiver is granted under
the High Yield Note Indenture or an amendment or modification is executed with
respect to the High Yield Note Indenture, and such waiver, amendment and/or
modification affects the Incorporated Covenants or the Additional Incorporated
Terms, then such waiver, amendment or modification shall be effective with
respect to the Incorporated Covenants and the Additional Incorporated Terms as
incorporated by reference into this Agreement. In the event of any replacement
of the High Yield Note Indenture with a similar indenture (the "New Indenture")
the covenants and additional terms contained in the New Indenture which
correspond to the covenants contained in Article 4, respectively, and such
additional terms contained in Article 4 and Section 1.01 (each of the foregoing
contained in the High Yield Note Indenture) shall become the Incorporated
Covenants and the Additional Incorporated Terms. In the event that the High
Yield Notes are repaid in full and all of the obligations under the High Yield
Note Indenture are terminated and not replaced or otherwise refinanced, the
terms of the Section 5.3 shall no longer apply. For purposes of the
incorporation of the Incorporated Covenants pursuant to this Section 5.3, all
references in the Incorporated Covenants to the "Trustee" shall be deemed to
refer to the Administrative Agent hereunder.

         SECTION 6. DEFAULTS.

                           6.1.     DEFAULTS; EVENTS OF DEFAULT; CERTAIN
                                    REMEDIES.

         If any of the following events shall occur and be continuing:

         (a)      (i) the Company shall fail to pay the principal amount of any
Loan, Note or any LOC Obligation when due and payable in accordance with the
terms thereof or hereof or (ii) any Credit Party shall fail to pay any
installment of interest on any Loan or Note or any Commitment Fee or other
amount payable hereunder or under any of the other Credit Documents and, in
connection with any such failure described in this clause (a)(ii), such amount
is not paid within three (3) days after the due date thereof;

                                       58

         (b)      any Credit Party shall (i) fail to perform or observe any
covenant contained in Sections 5.1(e), (h), (i) or (j) or Section 5.2 hereof or
(ii) fail to perform or observe any covenant contained in Sections 5.1(a),
(b)(i) and (c) hereof and such failure referred to in this Section 6.1(b)(ii)
shall continue unremedied for a period of five (5) days after the earlier of a
Responsible Officer of the Company becoming aware of such failure or written
notice specifying such failure and stating that such notice is a "Notice of
Default" hereunder is given, by registered or certified mail or by courier, to
the Company on behalf of the Credit Parties by the Administrative Agent or any
Lender;

         (c)      any Credit Party shall fail to perform or observe (i) any
term, covenant or agreement contained herein or in any Note (other than those
specified in clauses (a) or (b) above) and such failure shall continue
unremedied for a period of thirty (30) days after the earlier of a Responsible
Officer of the Company becoming aware of such failure or written notice
specifying such failure and stating that such notice is a "Notice of Default"
hereunder is given, by registered or certified mail or by courier, to the
Company on behalf of the Credit Parties by the Administrative Agent or any
Lender or (ii) any term, covenant or agreement contained in any other Credit
Document and such failure shall continue unremedied beyond any applicable grace
or cure period;

         (d)      any representation or warranty made or deemed made by a Credit
Party pursuant to this Agreement or in any other Credit Document or in any other
document or certificate delivered pursuant hereto shall prove to have been
incorrect or misleading in any material respect as of the date made or deemed
made;

         (e)      the Company or any Subsidiary shall fail to pay at maturity,
or within any applicable period of grace, any Indebtedness (other than the
Indebtedness referred to in clause (a) above) or any obligations under Hedging
Agreements, in each case with an outstanding principal or notional amount in
excess of $25,000,000, or fail to observe or perform any term, covenant or
agreement contained in any agreement by which it is bound governing, evidencing
or securing Indebtedness or any obligations under Hedging Agreements, in each
case with an outstanding principal or notional amount in excess of $25,000,000
for such period of time as would permit, or would have permitted (assuming the
giving of appropriate notice if required) the holder or holders thereof or of
any obligations issued thereunder (or a trustee or agent on behalf of such
holder or holders), to accelerate the maturity thereof, or of any such
obligation; or

         (f)      the Company or any Subsidiary shall (i) apply for or consent
to the appointment of, or the taking of possession by, a receiver,
administrator, custodian, trustee or liquidator of itself or of all or a
substantial part of its property, (ii) admit in writing its inability, or be
generally unable, to pay its debts as they become due, (iii) make a general
assignment for the benefit of its creditors, (iv) commence a voluntary case
under Debtor Relief Laws or any similar proceeding under applicable bankruptcy
laws of any jurisdiction, (v) be adjudicated as bankrupt or insolvent, (vi) file
a petition seeking to take advantage of any other law relating to bankruptcy,
insolvency, administration, reorganization, winding-up or composition or
adjustment of debts, (vii) fail to controvert in a timely and appropriate
manner, or acquiesce in writing to, any petition filed against it in an
involuntary case under such Debtor Relief Laws or any similar proceeding

                                       59

under applicable bankruptcy laws of any jurisdiction, or (viii) be authorized by
its Board of Directors to take any of the foregoing actions; or

         (g)      a proceeding or case shall be commenced, without the
application or consent of the Company, any other Credit Party or any Material
Subsidiary, in any court of competent jurisdiction, seeking (i) the liquidation,
administration, reorganization, dissolution or winding-up, or the composition or
readjustment of debts, of the Company, any other Credit Party or any Material
Subsidiary, (ii) the appointment of a trustee, receiver, administrator,
custodian, liquidator or the like of the Company, any other Credit Party or any
Material Subsidiary, or of all or any substantial part of its assets or (iii)
similar relief in respect of the Company, any other Credit Party or any Material
Subsidiary, under any Debtor Relief Laws or any other law relating to
bankruptcy, insolvency, administration, reorganization, winding-up or
composition or adjustment of debts, and such proceeding or case shall continue
undismissed, or an order, judgment or decree approving or ordering any of the
foregoing shall be entered and continue unstayed and in effect, in any such case
for a period of sixty (60) consecutive days, or an order for relief against the
Company, any other Credit Party or any Material Subsidiary, shall be entered in
an involuntary case under any Debtor Relief Laws or any similar proceeding under
applicable bankruptcy laws of any jurisdiction; or

         (h)      (i) Any Person shall engage in any "prohibited transaction"
(as defined in Section 406 of ERISA or Section 4975 of the Code) involving any
Plan, (ii) any "accumulated funding deficiency" (as defined in Section 302 of
ERISA), whether or not waived, shall exist with respect to any Plan or any Lien
in favor of the PBGC or a Plan shall arise on the assets of the Company, any
Subsidiary or any ERISA Affiliate, (iii) a Reportable Event shall occur with
respect to, or proceedings shall commence to have a trustee appointed, or a
trustee shall be appointed, to administer or to terminate, any Single Employer
Plan, which Reportable Event or commencement of proceedings or appointment of a
trustee is, in the reasonable opinion of the Required Lenders, likely to result
in the termination of such Plan for purposes of Title IV of ERISA, (iv) any
Single Employer Plan shall terminate for purposes of Title IV of ERISA, (v) the
Company, any Subsidiary or any ERISA Affiliate shall, or in the reasonable
opinion of the Required Lenders is likely to, incur any liability in connection
with a withdrawal from, or the Insolvency or Reorganization of, a Multiemployer
Plan or (vi) any other event or condition shall occur or exist with respect to a
Plan; and in each case in clauses (i) through (vi) above, such event or
condition, together with all other such events or conditions, if any, could
reasonably be expected to have a Material Adverse Effect; or

         (i)      One or more judgments or decrees shall be entered against the
Company or any Subsidiary, involving in the aggregate a liability (not paid or
fully covered by insurance) of $25,000,000 or more, and all such judgments or
decrees shall not have been vacated, discharged, stayed or bonded pending appeal
within 30 days from the entry thereof; or

         (j)      The Company or any Subsidiary becomes unable or admits in
writing its inability or fails generally to pay its debts as they become due, or
(ii) any writ or warrant of attachment or execution or similar process is issued
or levied against all or any material part of the property of any such Person
and is not released, vacated or fully bonded within 30 days after its issue or
levy;

                                       60

         (k)      There shall occur and be continuing any "Event of Default" (or
any comparable term) under, and as defined in, the High Yield Note Indenture;

         (l)      (i) This Agreement, any of the Notes or any other Credit
Document shall cease, for any reason, to be in full force and effect, or any
Credit Party shall so assert or any Credit Party shall disaffirm or deny any of
its obligations thereunder; or any Collateral Documents shall fail to create or
constitute a legal, valid, enforceable and perfected Lien in favor of the
Collateral Agent, as security for the principal of and interest on the Loans and
LOC Obligations and other obligations of the Credit Parties under the Credit
Documents, upon a material portion of the Collateral described therein as
subject thereto or encumbered thereby, or any Credit Party shall so assert; or
(ii) except as the result of or in connection with a dissolution, merger or
disposition of a Subsidiary not prohibited by Section 5.2(b)(iii), the Guaranty
given by any Guarantor hereunder or any Credit Document, at any time after its
execution and delivery and for any reason other than as expressly permitted
hereunder or satisfaction in full of all the Obligations, ceases to be in full
force and effect; or any Credit Party or any other Person contests in any manner
the validity or enforceability of any Credit Document; or any Credit Party
denies that it has any or further liability or obligation under any Credit
Document, or purports to revoke, terminate or rescind any Credit Document; or
(ii) except as the result of or in connection with a dissolution, merger or
disposition of a Subsidiary not prohibited by Section 5.2(b)(iii), the Guaranty
given by any Guarantor hereunder or any provision thereof shall cease to be in
full force and effect, or any Guarantor hereunder or any Person acting by or on
behalf of such Guarantor shall deny or disaffirm such Guarantor's obligations
under its Guaranty, or any Guarantor shall default in the due performance or
observance of any term, covenant or agreement on its part to be performed or
observed pursuant to its Guaranty; or

         (m)      Any Change of Control shall occur;

then, and in any such event, (A) if such event is an Event of Default specified
in paragraph (f) or (g) above, automatically (i) the Commitments shall
immediately terminate and the Loans hereunder (with accrued interest thereon)
and all other amounts owing under this Agreement, the Notes and the other Credit
Documents shall immediately become due and payable and (ii) the Credit Parties
shall immediately be required to pay to the Collateral Agent additional cash, to
be held by the Collateral Agent, for the benefit of the applicable Lenders, in a
cash collateral account as additional security for outstanding LOC Obligations
in respect of subsequent drawings under all then outstanding Letters of Credit
in an amount equal to the maximum aggregate amount which may be drawn under all
Letters of Credits then outstanding, and (B) if such event is any other Event of
Default, any or all of the following actions may, with the consent of the
Required Lenders, or shall, upon the request of the Required Lenders, be taken
by the Administrative Agent: (i) the Administrative Agent may or shall, as
applicable, by notice to the Company declare the Commitments to be terminated
forthwith, whereupon the Commitments shall immediately terminate; (ii) the
Administrative Agent may or shall, as applicable, declare the Loans hereunder
(with accrued interest thereon) and all other amounts owing under this
Agreement, the Notes and the other Credit Documents to be due and payable
forthwith, whereupon the same shall immediately become due and payable; (iii)
the Administrative Agent may or shall, as applicable, direct the Credit Parties
to pay (and the Credit Parties agree that upon

                                       61

receipt of such notice they will immediately pay) to the Collateral Agent
additional cash, to be held by the Collateral Agent, for the benefit of the
applicable Lenders, in a cash collateral account as additional security for the
LOC Obligations in respect of subsequent drawings under all then outstanding
Letters of Credit in an amount equal to the maximum aggregate amount which may
be drawn under all Letters of Credits then outstanding; and (iv) the
Administrative Agent and/or the Collateral Agent may or shall, as applicable,
enforce any and all rights and interests created and existing under the Credit
Documents including, without limitation, all rights and remedies existing under
the Collateral Documents, all rights and remedies against a Guarantor and all
rights of set-off. Except as expressly provided above in this Section,
presentment, demand, protest and all other notices of any kind are hereby
expressly waived.

         SECTION 7. DEFINITIONS AND ACCOUNTING TERMS.

                           7.1      DEFINITIONS.

         As used in this Agreement, the following terms shall have the following
meanings (and including the plural as well as the singular):

         "ABR": for any day, a rate per annum (rounded upwards, if necessary, to
the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on
such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2
of 1%. For purposes hereof: "Prime Rate" shall mean the rate of interest per
annum established from time to time by the Administrative Agent as its prime
rate in effect at its principal office in New York, New York (the Prime Rate not
being intended to be the lowest rate of interest charged by Credit Suisse First
Boston in connection with extensions of credit to debtors); and "Federal Funds
Effective Rate", shall mean, for any day, the weighted average of the rates on
overnight federal funds transactions with members of the Federal Reserve System
arranged by federal funds brokers, as published on the next succeeding Business
Day by the Federal Reserve Bank of New York, or, if such rate is not so
published for any day which is a Business Day, the average of the quotations for
the day of such transactions received by the Administrative Agent from three
federal funds brokers of recognized standing selected by it. If for any reason
the Administrative Agent shall have determined (which determination shall be
conclusive absent manifest error) that it is unable to ascertain the Federal
Funds Effective Rate for any reason, including the inability or failure of the
Administrative Agent to obtain sufficient quotations in accordance with the
terms thereof, the ABR shall be determined without regard to clause (b) of the
first sentence of this definition until the circumstances giving rise to such
inability no longer exist. Any change in the ABR due to a change in the Prime
Rate or the Federal Funds Effective Rate shall be effective as of the opening of
business on the effective day of such change in the Prime Rate or the Federal
Funds Effective Rate, respectively.

         "ABR Loans": Loans the rate of interest applicable to which is based
upon the ABR.

         "Acquisition": by any Person, the acquisition by such Person, in a
single transaction or in a series of related transactions, of all of the Capital
Stock or all or substantially all of the Property of, or business line of,
another Person, whether or not involving a merger or consolidation with such

                                       62

other Person and whether for cash, property, services, assumption of
Indebtedness, securities or otherwise.

         "Additional Credit Party": each Person that becomes a Guarantor after
the Closing Date, as provided in Section 5.1(l).

         "Administrative Agent": Credit Suisse First Boston, acting through its
Cayman Islands Branch, or any successor.

         "Affiliate": as to any specified Person, any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is controlled by,
or is under common control with, such Person. For purposes of this definition,
"control" of a specified Person means the power, directly or indirectly, either
to (a) vote 20% or more of the securities having ordinary voting power for the
election of directors of such Person or (b) direct or cause the direction of the
management and policies of such Person whether through the ownership of voting
securities, by contract or otherwise.

         "Agents": a collective reference to the Administrative Agent and the
Collateral Agent; "Agent" shall mean either one of them.

         "Agreement": this Agreement, as amended, supplemented, restated or
modified from time to time.

         "Applicable Margin": with respect to (a) Eurodollar Loans that are
Revolving Loans, (b) ABR Loans that are Revolving Loans and (c) the Commitment
Fee, for any fiscal quarter, the applicable rate per annum set forth in the
table below opposite the Leverage Ratio determined as of the last day of the
immediately preceding fiscal quarter:



- ----------------------------------------------------------------------------------------------------------------------------
                                                                                                Revolving Loans
                                                                                  ------------------------------------------
                                                      Applicable Margin for       Applicable Margin for        Applicable
Pricing Level              Leverage Ratio                Commitment Fees             Eurodollar Loans         Margin for ABR
                                                                                                                  Loans
                                                                                                  
- ----------------------------------------------------------------------------------------------------------------------------
      I                     > 3.25 x                         .50%                         3.25%                    2.25%
- ----------------------------------------------------------------------------------------------------------------------------
      II            > 2.75 x and < than = to 3.2             .50%                         3.00%                    2.00%
- ----------------------------------------------------------------------------------------------------------------------------
     III            > 2.25 x and < than = to 2.7             .50%                         2.75%                    1.75%
- ----------------------------------------------------------------------------------------------------------------------------
      IV            > 1.75 x and < than = to 2.2            .375%                         2.50%                    1.50%
- ----------------------------------------------------------------------------------------------------------------------------
      V                 < than = to 1.75 x                  .375%                         2.25%                    1.25%
- ----------------------------------------------------------------------------------------------------------------------------


         The Applicable Margins shall be determined and adjusted quarterly on
the date (each a "Rate Calculation Date") five Business Days after the date on
which the Company provides the quarterly officer's certificate to the
Administrative Agent regarding the Leverage Ratio in accordance with the
provisions of Section 5.1(b); provided, however, that (i) the Applicable Margins
as of the Closing Date shall be based on Pricing Level III (as shown above) and
shall remain at Pricing Level III until the first Rate Calculation Date
subsequent to June 30, 2003, and, thereafter, the Pricing Level shall be
determined by the then current Leverage Ratio, and (ii) if the Company fails to
provide the officer's certificate to the Administrative Agent for any fiscal
quarter as required by and within the time limits set forth in Section 5.1(b),
the Applicable Margins from the applicable date of such failure shall be based
on Pricing Level I until five

                                       63

Business Days after an appropriate officer's certificate is provided, whereupon
the Pricing Level shall be determined by the then current Leverage Ratio. Except
as set forth herein, each Applicable Margin shall be effective from one Rate
Calculation Date until the next Rate Calculation Date. All such determinations
by the Administrative Agent related to the Applicable Margins shall be
conclusive absent manifest error. All adjustments in the Applicable Margins
shall be effective as to existing Loans and Letters of Credit as well as any new
Loan made or Letter of Credit issued thereafter.

         "Approved Fund": as defined in Section 9.6(h).

         "Asset Disposition": the disposition of any or all of the assets
(including without limitation the Capital Stock of a Subsidiary) of the Company
or any of its Subsidiaries whether by sale, lease, transfer or otherwise
(including a disposition pursuant to any casualty or condemnation event, but
excluding a disposition pursuant to a Permitted Receivables Financing). The term
"Asset Disposition" shall not include (i) the sale of inventory in the ordinary
course of business, (ii) the sale or disposition of machinery, equipment and
personal property (each such item of personal property having a net book value
of $25,000 or less) no longer used or useful in the conduct of such Person's
business or (iii) any Equity Issuance by the Company, (iv) intercompany
transfers from a Credit Party or a wholly-owned Subsidiary of a Credit Party to
a Credit Party, or (v) intercompany transfers from any wholly-owned Subsidiary
of a Credit Party (which Subsidiary is not itself a Credit Party) to any
wholly-owned Subsidiary of a Credit Party.

         "Attributed Principal Amount": on any day, with respect to any
Permitted Receivables Financing entered into by the Company or any of its
Consolidated Subsidiaries, the aggregate amount (with respect to any such
transaction, the "Invested Amount") paid to, or borrowed by, such Person as of
such date under such Permitted Receivables Financing, minus the aggregate amount
received by the applicable Receivables Financier (as defined in the definition
of "Permitted Receivables Financing") and applied to the reduction of the
Invested Amount under such Permitted Receivables Financing.

         "Available Cash": collectively, (i) Cash of the Company and its
Consolidated Subsidiaries on hand as of the Closing Date, (ii) once released by
Bank of America, N.A., the Cash that, immediately prior to the Closing Date,
serves as cash collateral for outstanding letters of credit issued under the
Existing Credit Agreement, (iii) the Net Cash Proceeds of the Incremental Term
Loan and (iv) Excess Cash Flow for the Company's fiscal years ending 2003 and
later, to the extent the Company is not required to prepay the Loans and/or cash
collateralize LOC Obligations with such Excess Cash Flow pursuant to Section
2.6(b)(ii).

         "Borrowing Date": any Business Day specified in a notice pursuant to
Sections 2.3, 2.13(b), 2.14(b) or 2.15(b) as a date on which the Company
requests (i) the applicable Lender(s) to make Revolving Loans and/or Swingline
Loans hereunder or (ii) the Issuing Lender to issue or extend a Letter of Credit
hereunder.

         "Business Day": a day other than a Saturday, Sunday or other day on
which commercial banks in New York, New York are authorized or required by law
to close, except that, when used

                                       64

in connection with a Eurodollar Loan, such day shall also be a day on which
dealings between banks are carried on in Dollar deposits in the London interbank
market.

         "Businesses": as defined in Section 1.14(a)(i).

         "Capital Lease": any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.

         "Capital Stock": any and all shares, interests, participations or other
equivalents (however designated) of capital stock of a corporation, any and all
equivalent ownership interests in a Person (other than a corporation) and any
and all warrants or options to purchase any of the foregoing.

         "Cash":  money, currency or a credit balance in a deposit account.

         "Cash Equivalents": (i) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (provided that the full faith and credit of the United
States of America is pledged in support thereof) having maturities of not more
than twelve months from the date of acquisition ("Government Obligations"), (ii)
Dollar denominated time deposits, certificates of deposit, Eurodollar time
deposits and Eurodollar certificates of deposit of (y) any domestic commercial
bank of recognized standing having capital and surplus in excess of $250,000,000
or (z) any bank whose short-term commercial paper rating from S&P is at least
A-1 or the equivalent thereof or from Moody's is at least P-1 or the equivalent
thereof (any such bank being an "Approved Bank"), in each case with maturities
of not more than 364 days from the date of acquisition, (iii) commercial paper
and variable or fixed rate notes issued by any Approved Bank (or by the parent
company thereof) or any variable rate notes issued by, or guaranteed by any
domestic corporation rated A-1 (or the equivalent thereof) or better by S&P or
P-1 (or the equivalent thereof) or better by Moody's and maturing within one
year of the date of acquisition, (iv) repurchase agreements with a bank or trust
company (including a Lender) or a recognized securities dealer having capital
and surplus in excess of $500,000,000 for direct obligations issued by or fully
guaranteed by the United States of America, (v) obligations of any state of the
United States or any political subdivision thereof for the payment of the
principal and redemption price of and interest on which there shall have been
irrevocably deposited Government Obligations maturing as to principal and
interest at times and in amounts sufficient to provide such payment, and (vi)
auction preferred stock rated in the highest short-term credit rating category
by S&P or Moody's.

         "Change of Control": any of (i) any "person" or "group" (within the
meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934)
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934) of more than 30% of then outstanding voting stock of the
Company, or (ii) the Company shall merge or consolidate with any Person other
than in a transaction permitted under Section 5.2(b), or (iii) the first day on
which a majority of the members of the board of directors of the Company are not
Continuing Directors; or (iv) any Asset Disposition shall be made that (of
itself or when combined with any or all other Asset Dispositions) constitutes a
sale of all or substantially all of the assets of the Company or of the Company
and its Consolidated Subsidiaries, taken as a whole; or (v) any

                                       65

event shall occur that constitutes a "Change of Control" (as defined in the High
Yield Note Indenture); or (vi) any event shall occur that requires the Company
or any Subsidiary to repay, redeem, or repurchase (or to offer to repay, redeem
or repurchase) any Indebtedness outstanding in a principal amount in excess of
$25,000,000 by reason of any change of ownership or control affecting the
Company or such Subsidiary.

         "Closing Date": the first date all the conditions precedent in Section
4.1 are satisfied or waived in accordance with Section 4.1.

         "Code": the Internal Revenue Code of 1986, as amended from time to
time, and the rules and regulations issued thereunder as in effect from time to
time.

         "Collateral": all Property now owned or hereafter acquired by any and
all of the Credit Parties, upon which a Lien is required, intended or purported
to be granted pursuant to this Agreement or any of the Collateral Documents.

         "Collateral Agent": Credit Suisse First Boston, acting through its
Cayman Islands Branch (or any successor thereto) or any successor agent
appointed pursuant to Section 8.9, in its capacity as collateral agent for the
benefit of the Lenders and any other beneficiaries described in the Credit
Documents.

         "Collateral Documents": the Security Agreement and all joinders
therein, all Mortgages at any time executed and delivered by any Credit Party,
any and all other pledge or security agreements or collateral assignments
executed and delivered by any of the Credit Parties in favor of the Collateral
Agent, granting the Collateral Agent a Lien for the benefit of the Lenders and
any other beneficiaries described therein, to secure obligations of the Credit
Parties under the Credit Documents and such other obligations as are described
therein, each as amended, modified, supplemented, extended, renewed or replaced
from time to time.

         "Commitment": means, as to each Lender, the Revolving Commitment of
such Lender and/or the Term B Loan Commitment of such Lender and/or the
Incremental Term Loan Commitment of such Lender.

         "Commitment Fee": as defined in Section 2.4(a).

         "Commitment Period": the period from and including the Closing Date but
not including the Revolving Credit Termination Date or such earlier date on
which the Commitments shall terminate as provided herein.

         "Company": Hercules Incorporated, a Delaware corporation.

         "Consolidated Adjusted Interest Expense": for any fiscal period, the
amount of interest expense of the Company and its Consolidated Subsidiaries for
such period, determined on a consolidated basis in accordance with GAAP,
including in any event imputed interest expense paid in respect of Capital Lease
obligations and any cash distributions paid on the Preferred Securities and any
cash distributions paid on the Company's common stock that are tax

                                       66

deductible (such as dividends on the Preferred Securities or the Company's
common stock) (but, with respect to such dividends on the Preferred Securities,
without duplication to the extent a comparable amount is taken by the Company as
interest expense on the interest paid on the related subordinated debt to the
Preferred Stock SPC).

         "Consolidated Capital Expenditures": for any period for the Company and
its Consolidated Subsidiaries on a consolidated basis, all capital expenditures,
as determined in accordance with GAAP; provided, however, that Consolidated
Capital Expenditures shall not include (a) Eligible Reinvestments made with
proceeds of any Involuntary Disposition or (b) Acquisitions.

         "Consolidated Current Assets": as at any date of determination, the
total assets of the Company and its Subsidiaries on a consolidated basis which
may properly be classified as current assets in conformity with GAAP, excluding
Cash and Cash Equivalents.

         "Consolidated Current Liabilities": as at any date of determination,
the total liabilities of the Company and its Subsidiaries on a consolidated
basis which may properly be classified as current liabilities in conformity with
GAAP.

         "Consolidated EBITDA": for any fiscal period, (i) Consolidated Net
Income for such period, plus (ii) Consolidated Interest Expense for such period,
plus (iii) to the extent deducted in computing such Consolidated Net Income for
such period, the sum of (a) taxes, (b) depreciation, (c) amortization, (d) any
non-cash charges (other than (I) any such non-cash charge to the extent it
represents an accrual of or reserve for, or actually is funded as, a cash
expenditure in any future period, or (II) any such non-cash charge associated
with adjustments to Consolidated Working Capital) and (e) accruals relating to
(I) Restructuring Charges and (II) the net increase in the Company's asbestos
reserve in fiscal year 2002; provided that the accruals covered by this clause
(II) shall be in an aggregate amount not to exceed $68,000,000, minus (iv) any
extraordinary gains and noncash gains, minus (v) any cash amount paid to satisfy
a non-cash charge taken under clause (d) hereof.

         "Consolidated Interest Expense": for any fiscal period, the amount of
interest expense of the Company and its Consolidated Subsidiaries for such
period, determined on a consolidated basis in accordance with GAAP, including in
any event imputed interest expense paid in respect of Capital Lease obligations
and any cash distributions paid on the Preferred Securities that are tax
deductible (such as dividends on the Preferred Securities) (but, with respect to
such dividends on the Preferred Securities, without duplication to the extent a
comparable amount is taken by the Company as interest expense on the interest
paid on the related subordinated debt to the Preferred Stock SPC).

         "Consolidated Net Income": for any fiscal period, net income of the
Company and its Subsidiaries, determined on a consolidated basis in accordance
with GAAP.

         "Consolidated Subsidiary": any Subsidiary the results of whose
operations are, for financial accounting purposes, consolidated with the results
of operations of the Company and its other Consolidated Subsidiaries on the most
recent annual or quarterly financial statements of the Company and its
Consolidated Subsidiaries.

                                       67

         "Consolidated Working Capital": as at any date of determination, the
excess (or deficit) of Consolidated Current Assets over Consolidated Current
Liabilities.

         "Consolidated Working Capital Adjustment": for any period on a
consolidated basis, the amount (which may be a negative number) by which
Consolidated Working Capital as of the beginning of such period exceeds (or is
less than) Consolidated Working Capital as of the end of such period.

         "Continuing Director": as of any date of determination, any member of
the board of directors of the Company who (x) is a member of the board of
directors of the Company as of the Closing Date or (y) was nominated for
election or elected to such board of directors with the approval of a majority
of the Continuing Directors who were members of such board at the time of such
nomination or election.

         "Contractual Obligation": as to any Person, any provision of any
security issued by such Person or of any agreement, instrument or other
undertaking to which such Person is a party or by which it or any of its
property is bound.

         "Credit Documents": this Agreement, the Notes, any Joinder Agreements,
the Collateral Documents, any fee letters, any LOC Documents and all other
related agreements and documents issued, delivered or executed hereunder or
thereunder or pursuant hereto or thereto (in each case, as the same may be
amended, modified, restated, supplemented, extended, renewed or replaced from
time to time).

         "Credit Parties": the Company and the Guarantors.

         "CRESTS": 350,000 CRESTS Units issued by Hercules Trust II and due
2029.

         "Debt Issuance": the issuance of any Indebtedness for borrowed money
(including debt securities) by (and any refinancing thereof permitted hereunder)
the Company or any of its Consolidated Subsidiaries, other than (i) the Loans
(including the Incremental Term Loan), (ii) purchase money Indebtedness
permitted under Section 5.2(f) and (iii) the Permitted Receivables Financing.

         "Debtor Relief Laws": the Bankruptcy Code of the United States, and all
other liquidation, conservatorship, bankruptcy, assignment for the benefit of
creditors, moratorium, rearrangement, receivership, insolvency, reorganization,
or similar debtor relief Laws of the United States or other applicable
jurisdictions from time to time in effect and affecting the rights of creditors
generally.

         "Default": any event or condition that constitutes an Event of Default
or that, with the giving of any notice, the passage of time, or both, would be
an Event of Default.

         "Default Rate": an interest rate equal to (a) the ABR plus (b) the
Applicable Margin for ABR Loans of the relevant type or, if not applicable, the
Applicable Margin, if any, for ABR Loans that are Revolving Loans plus (c) 2%
per annum; provided, however, that with respect to a

                                       68

Eurodollar Rate Loan, the Default Rate shall be an interest rate equal to the
interest rate (including any Applicable Margin) otherwise applicable to such
Loan plus 2% per annum, in each case to the fullest extent permitted by
applicable Requirements of Law.

         "Defaulting Lender": any Lender that (a) has failed to fund any portion
of the Loans or participations in Swingline Loans or LOC Obligations required to
be funded by it hereunder within one Business Day of the date required to be
funded by it hereunder, (b) has otherwise failed to pay over to the
Administrative Agent or any other Lender any other amount required to be paid by
it hereunder within one Business Day of the date when due, unless the subject of
a good faith dispute, or (c) has been deemed insolvent or become the subject of
a bankruptcy or insolvency proceeding.

         "Differential Yield Amount": as defined in Section 2.16(b).

         "Dollars" and "$": dollars in lawful currency of the United States of
America.

         "Domestic Subsidiaries": each direct and indirect Subsidiary of the
Company that is domiciled, incorporated or organized under the laws of any State
of the United States or the District of Columbia.

         "Eligible Assignee": as defined in Section 9.6(h).

         "Eligible Reinvestment": an acquisition of assets that is (i) not
prohibited under Section 5.2(b)(ii) and (ii) an acquisition of another business
or any substantial part of another business or other long-term assets, in each
case, in, or used or useful in, the same or a similar line of business as the
Company and its Subsidiaries were engaged in on the Closing Date, or any
reasonable extensions or expansions thereof.

         "Environmental Laws": any and all lawful and applicable Federal, state,
local and foreign statutes, laws, regulations, ordinances, rules, judgments,
orders, decrees, permits, concessions, grants, franchises, licenses, agreements
or other governmental restrictions relating to the environment or to emissions,
discharges, releases or threatened releases of pollutants, contaminants,
chemicals, or industrial, toxic or hazardous substances or wastes into the
environment including, without limitation, ambient air, surface water, ground
water, or land, or otherwise relating to the manufacture, processing,
distribution, use, treatment, storage, disposal, transport, or handling of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes.

         "Equity Issuance": any issuance by the Company or any Consolidated
Subsidiary to any Person other than the Company or a Consolidated Subsidiary of
(a) shares of its Capital Stock, specifically including any hybrid equity
securities (e.g., trust preferred capital securities), (b) any shares of its
Capital Stock pursuant to the exercise of options or warrants or (c) any shares
of its Capital Stock pursuant to the conversion of any debt securities to
equity. The term "Equity Issuance" shall not include any Asset Disposition.

         "ERISA": the Employee Retirement Income Security Act of 1974, as
amended from time to time.

                                       69

         "ERISA Affiliate": any trade or business (whether or not incorporated)
under common control with the Company within the meaning of Section 414(b) or
(c) of the Code (and Sections 414(m) and (o) of the Code for purposes of
provisions relating to Section 412 of the Code).

         "Escrow Agreement": that certain Escrow Agreement dated as of the date
hereof by and among the Company, the Administrative Agent and PNC Bank, National
Association.

         "Eurocurrency Reserve Requirements": for any day as applied to a
Eurodollar Loan, the aggregate (without duplication) of the rates (expressed as
a decimal fraction) of reserve requirements in effect on such day (including,
without limitation, basic, supplemental, marginal and emergency reserves under
any regulations of the Board of Governors of the Federal Reserve System or other
Governmental Authority having jurisdiction with respect thereto) dealing with
reserve requirements prescribed for eurocurrency funding (currently referred to
as "Eurocurrency Liabilities" in Regulation D of such Board) maintained by a
member bank of such System.

         "Eurodollar Loans": Loans the rate of interest applicable to which is
based upon the Eurodollar Rate.

         "Eurodollar Rate": for the Interest Period for each Eurodollar Loan
comprising part of the same borrowing (including conversions, continuations and
renewals), a per annum interest rate determined pursuant to the following
formula:

                  Eurodollar Rate =         London Interbank Offered Rate
                                         -----------------------------------
                                         1 - Eurocurrency Reserve Requirements

         "Event of Default": any event specified in Section 6.1, provided that
any requirement therein designated for the giving of notice, the lapse of time,
or both, or any other condition, has been satisfied.

         "Excess Cash Flow": with respect to any fiscal year period of the
Company and its Consolidated Subsidiaries on a consolidated basis, an amount (if
positive) equal to

         (a) the sum, without duplication, of the amounts for such period of:

                  (i) Consolidated EBITDA; plus

                 (ii) the Consolidated Working Capital Adjustment; minus

         (b) the sum, without duplication (and to the extent not already
reducing Consolidated EBITDA), of the amounts for such period of:

                  (i) voluntary and scheduled permanent repayments of
         Indebtedness (other than repayments of Indebtedness hereunder pursuant
         to Section 2.6(b)(ii)) of the Company and its Consolidated Subsidiaries
         and/or redemptions of the Preferred Securities; plus

                                       70

                  (ii) Consolidated Capital Expenditures (net of any proceeds of
         any related financings with respect to such expenditures); plus

                  (iii) Consolidated Interest Expense, to the extent paid in
         cash; plus

                  (iv) taxes paid in cash by the Company and its Consolidated
         Subsidiaries; plus

                  (v) any cash consideration paid by the Company and/or its
         Consolidated Subsidiaries in connection with Permitted Investments
         (including without limitation any cash consideration paid in connection
         with Acquisitions permitted pursuant to Section 5.2(b)(ii)); plus

                  (vi) cash expenditures by the Company and/or its Consolidated
         Subsidiaries for pension payments of the sort limited by Section
         5.2(n); plus

                  (vii) cash Restructuring Charges for the fiscal year 2003 paid
         by the Company and/or its Consolidated Subsidiaries; plus

                  (viii) cash environmental and/or legal costs (including
         settlement of asbestos-related claims) paid by the Company and/or its
         Consolidated Subsidiaries.

         "Excluded Assets":  each of:

         (a)      any permit or license issued by any Governmental Authority, if
and to the extent that, and for as long as, the grant of a security interest
therein pursuant to the Collateral Documents is prohibited (notwithstanding the
intention of the holder to grant such security interests to the fullest extent
lawful) under any applicable law or judicial or administrative order, but not
including any proceeds of any sale, lease, transfer or other disposition of any
such permit or license;

         (b)      any right or interest under a lease of Property, an
intellectual property license agreement under which any Credit Party is the
licensee or any other agreement under which any Credit Party is entitled to the
performance of any material obligation other than the payment of money, to the
extent that, and for as long as, the grant of security interest therein pursuant
to the Collateral Documents is prohibited thereby, would constitute a breach
thereof or default thereunder, would give rise to any power of termination or
material penalty or claim against the Company or any Subsidiary thereunder, or
is subject to a required consent that has not been obtained, but not including
any right to the payment of money or any proceeds of any sale, lease, transfer
or other disposition of any such right or interest;

         (c)      any personal property (other than Investment Property and
Instruments, as such terms are defined in the Uniform Commercial Code) as to
which a Lien cannot be created by the grant of a security interest under the
Uniform Commercial Code, unless the Collateral Agent has requested the Company
to create a Lien as permitted under other applicable law and not otherwise an
Excluded Asset;

                                       71

         (d)      any interest in real property having a fair market value, net
of Liens other than Liens in favor of the Collateral Agent, that is less than
$5,000,000;

         (e)      any securities of any Subsidiary owned by a Credit Party, for
so long as the pledge of securities of any Subsidiary would subject the Company
to "collateral audit" requirements under Rule 3-16 of Regulation S-X promulgated
by the SEC, and in any interest in the voting Capital Stock of a Foreign
Subsidiary to the extent that such interest exceeds 65% of the voting Capital
Stock of such Foreign Subsidiary; and

         (f)      the assets listed on Schedule 7(b).

         "Excluded Inactive Subsidiaries": Subject to Section 5.1(p),
collectively, Hercules Energy Chemicals, Inc., Hercofina, and Hercules Chemical
Corporation and "Excluded Inactive Subsidiary" means any one of such Persons.

         "Existing Credit Agreement": that certain Amended and Restated Credit
Agreement by and among the Company, the credit parties from time to time party
thereto, the lenders from time to time party thereto, Bank of America, N.A., as
administrative agent, Bank of America N.A., as successor to Bank of America
Canada, as Canadian administrative agent, and The Chase Manhattan Bank, Morgan
Guaranty Trust Company of New York and Citibank, N.A., as co-syndication agents,
as amended by that First Amendment to Amended and Restated Credit Agreement
dated as of March 31, 2000, that Second Amendment to Amended and Restated Credit
Agreement dated as of July 26, 2000, that Third Amendment to Amended and
Restated Credit Agreement dated as of November 14, 2000, that Fourth Amendment
to Amended and Restated Credit Agreement dated as of July 17, 2001, that Fifth
Amendment to Amended and Restated Credit Agreement dated as of March 6, 2002 and
as may be otherwise amended, restated, modified or supplemented prior to the
Closing Date.

         "Fee Letter": that letter agreement dated as of December 18, 2002 by
and between the Administrative Agent and the Company.

         "Financing Lease": any lease of property, real or personal, the
obligations of the lessee in respect of which are required in accordance with
GAAP to be capitalized on a balance sheet of the lessee.

         "Flood Hazard Property": as defined in Section 4.1(d)(v).

         "Foreign Subsidiaries": all Subsidiaries of the Company that are not
Domestic Subsidiaries.

         "Fund": as defined in Section 9.6(h).

         "GAAP": generally accepted accounting principles in the United States
of America as in effect from time to time.

         "Government Act": as defined in Section 2.14(i).

                                       72

         "Governmental Authority": any nation or government, any state or other
political subdivision thereof and any entity exercising executive, legislative,
judicial, regulatory or administrative functions of or pertaining to government.

         "Granting Lender": as defined in Section 9.6(i).

         "Guarantor": each of the Domestic Subsidiaries (other than a
Receivables Financing SPC, a Preferred Stock SPC and the Excluded Inactive
Subsidiaries) and each Additional Credit Party which has executed a Joinder
Agreement, together with its successors and assigns.

         "Hazardous Materials": any substance, material or waste defined or
regulated in or under any Environmental Laws.

         "Hedging Agreements": interest rate protection agreements, foreign
currency exchange agreements, commodity purchase or option agreements or other
interest or exchange rate or commodity price hedging agreements, in each case
entered into by the Company or any of its Subsidiaries.

         "High Yield Notes": the $400 million 11.125% Senior Notes due 2007
issued pursuant to the High Yield Note Indenture.

         "High Yield Note Indenture": the Indenture dated as of November 14,
2000, between the Company and Wells Fargo Bank Minnesota, N.A., as trustee, as
the same may be amended, supplemented or otherwise modified from time to time.

         "Incremental Term Loan": as defined in Section 2.16(a).

         "Incremental Term Loan Acceptance": an Incremental Term Loan Acceptance
referenced in Section 2.16(b), substantially in the form of Exhibit I.

         "Incremental Term Loan Availability Expiration Date": the earlier of
(x) the third anniversary of the Closing Date and (y) the maturity (by
acceleration or otherwise) of the Term B Loan.

         "Incremental Term Loan Commitment": as to each Lender, its obligation
to make its Pro Rata Share of the Incremental Term Loan to the Company pursuant
to Section 2.16(a), in the principal amount set forth in any documentation
evidencing its commitment with respect to the Incremental Term Loan or in the
Assignment and Assumption pursuant to which such Lender becomes a party hereto.

         "Incremental Term Loan Excess Yield": (i) the Incremental Term Loan
Upfront Fee Percentage divided by (ii) four; provided that, in the event that
the stated maturity date with respect to the Incremental Term Loan is less than
four years from the Incremental Term Loan Funding Date, the Incremental Term
Loan Upfront Fee Percentage shall be divided by such lesser period of time
(expressed as a number of years rounded to one decimal place based on the total
number of months to such stated maturity date divided by 12).

                                       73

         "Incremental Term Loan Funding Date": as defined in Section 2.16(b).

         "Incremental Term Loan Upfront Fee Percentage": (i) the aggregate
amount of upfront fees payable with respect to the Incremental Term Loan
including, without limitation, contingent fees and original issue discount
(other than any arrangement, underwriting or other fees payable solely to any
arranger or arrangers with respect to the Incremental Term Loan) divided by (ii)
the aggregate amount of such Incremental Term Loan.

         "Incremental Term Loan Yield": the sum of (i) the margin for Eurodollar
Loans with respect to the Incremental Term Loan and/or the margin for ABR Loans
with respect to the Incremental Term Loan plus (ii) the Incremental Term Loan
Excess Yield.

         "Indebtedness": with respect to any Person, without duplication, (i)
all indebtedness for borrowed money created, incurred, assumed or guaranteed by
such Person, (ii) all amounts owing by such Person under purchase money
mortgages or other purchase money liens or conditional sales or other title
retention agreements, (iii) all indebtedness secured by mortgages, liens,
security interests, conditional sales or other title retention agreements upon
property owned by such Person (whether or not such Person has assumed or become
liable for the payment of such indebtedness), (iv) all obligations of such
Person in respect of Financing Leases and Synthetic Leases, (v) all guaranty
obligations of such Person with respect to Indebtedness of another Person, (vi)
Indebtedness of any partnership or unincorporated joint venture with respect to
which such Person is legally obligated or has a reasonable expectation of being
liable with respect thereto, (vii) the maximum amount of all letters of credit
issued (other than such letters of credit which are fully cash collateralized)
or bankers' acceptance facilities created for the account of such Person and,
without duplication, all drafts drawn thereunder (to the extent unreimbursed),
(viii) the principal amount of subordinated notes or debentures issued by such
Person to a Preferred Stock SPC in connection with hybrid equity securities
(e.g., trust preferred capital securities), (ix) the outstanding attributed
principal amount under any receivables financing program, and (x) all net
obligations of such Person under Hedging Agreements.

         "Insolvency": with respect to any Multiemployer Plan, the condition
that such Plan is insolvent within the meaning of Section 4245 of ERISA.

         "Insolvent": pertaining to a condition of Insolvency.

         "Interest Coverage Ratio": with respect to the Company and its
Consolidated Subsidiaries for the twelve month period ending on the last day of
any fiscal quarter of the Company, the ratio of (a) Consolidated EBITDA for such
period to (b) Consolidated Adjusted Interest Expense for such period.

         "Interest Payment Date": (a) as to any ABR Loan, the last day of each
March, June September and December, the date of repayment of principal of such
Loan and the relevant Termination Date, (b) as to any Eurodollar Loan, the last
day of each applicable Interest Period, the date of repayment of principal of
such Loan and the applicable final maturity date specified in Section 2.15(d) or
Section 2.16(d), as applicable, and in addition as to any such Eurodollar Loan
having an Interest Period longer than three months, each day which is three
months after the first day of such Interest Period.

                                       74

         "Interest Period": (i) with respect to any Eurodollar Loan:

                  (a)      initially, the period commencing on the borrowing or
         conversion date, as the case may be, with respect to such Eurodollar
         Loan and ending, subject to availability, one, two, three or six months
         thereafter, as selected by the Company in its notice of borrowing or
         notice of conversion, as the case may be, given by the Company with
         respect thereto; and

                  (b)      thereafter, each period commencing on the last day of
         the next preceding Interest Period applicable to such Eurodollar Loan
         and ending, subject to availability, one, two, three or six months
         thereafter, as selected by the Company through irrevocable notice from
         the Company to the Administrative Agent not less than three Business
         Days prior to the last day of the then current Interest Period with
         respect thereto;

and (ii) with respect to any Swingline Loan, a period commencing in each case on
the date of the borrowing and ending on the date agreed to by the Company and
the Swingline Lender in accordance with the provisions of Section 2.15(b)(iii).

provided that, all of the foregoing provisions relating to Interest Periods are
subject to the following:

                  (1)      if any Interest Period pertaining to a Loan would
         otherwise end on a day that is not a Business Day, such Interest Period
         shall be extended to the next succeeding Business Day unless the result
         of such extension would be to carry a Eurodollar Loan Interest Period
         into another calendar month in which event such Interest Period shall
         end on the immediately preceding Business Day;

                  (2)      any Interest Period that would otherwise extend
         beyond the Termination Date shall end on the Termination Date; and

                  (3)      any Interest Period pertaining to a Eurodollar Loan
         that begins on the last Business Day of a calendar month (or on a day
         for which there is no numerically corresponding day in the calendar
         month at the end of such Interest Period) shall end on the last
         Business Day of a calendar month.

         "Investment Grade": the Company currently maintains a rating of BBB- or
better from S&P and a rating of Baa3 or better from Moody's.

         "Involuntary Disposition": as defined in Section 5.1(f)(iii).

         "Issuing Lender": Wachovia Bank, National Association, and any
successor thereto.

         "Joinder Agreement": a Joinder Agreement referenced in Section 5.1(l),
a form of which is attached as Exhibit C.

                                       75

         "Lenders": the several banks and other financial institutions from time
to time party to this Agreement.

         "Letter of Credit": any letter of credit issued by the Issuing Lender
for the account of the Company in accordance with the terms of Section 2.14.

         "Letter of Credit Fee": as defined in Section 2.4(c).

         "Leverage Ratio": with respect to the Company and its Consolidated
Subsidiaries for the twelve month period ending on the last day of any fiscal
quarter, the ratio of (a) Indebtedness of the Company and its Consolidated
Subsidiaries on the last day of such period minus the principal amount of
subordinated notes or debentures issued by the Company to a Preferred Stock SPC
in connection with the Preferred Securities minus the principal amount
outstanding on the Company's 6.625% Senior Notes due 2003, to the extent the
Company has deposited an amount sufficient to satisfy the principal amount when
due into an escrow account, pursuant to the terms of the Escrow Agreement, to
(b) Consolidated EBITDA for such period.

         "Lien": any mortgage, pledge, hypothecation, assignment, deposit
arrangement, encumbrance, lien (statutory or other), charge or other security
interest to any preference, priority or other security agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement and any Financing Lease
having substantially the same economic effect as any of the foregoing).

         "Loan": any loan made by any Lender pursuant to this Agreement.

         "LOC Commitment": the commitment of the Issuing Lender to issue Letters
of Credit in an aggregate face amount at any time outstanding (together with the
amounts of any unreimbursed drawings thereon) of up to the excess of (i) the LOC
Committed Amount over (ii) the aggregate outstanding face amount of the Letters
of Credit.

         "LOC Committed Amount": as defined in Section 2.14.

         "LOC Documents": with respect to any Letter of Credit, such Letter of
Credit, any amendments thereto, any documents delivered in connection therewith,
any application therefor, and any agreements, instruments, guarantees or other
documents (whether general in application or applicable only to such Letter of
Credit) governing or providing for (i) the rights and obligations of the parties
concerned or at risk or (ii) any collateral security for such obligations.

         "LOC Obligations": at any time, the sum of (i) the maximum amount which
is, or at any time thereafter may become, available to be drawn under Letters of
Credit then outstanding, assuming compliance with all requirements for drawings
referred to in such Letters of Credit plus (ii) the aggregate amount of all
drawings under Letters of Credit honored by the Issuing Lender but not
theretofore reimbursed by the Company.

         "London Interbank Offered Rate": with respect to any Eurodollar
Borrowing for any Interest Period, the rate per annum determined by the
Administrative Agent at approximately

                                       76

11:00 a.m. (London time) on the date which is two Business Days prior to the
beginning of such Interest Period by reference to the British Bankers'
Association Interest Settlement Rates for deposits in Dollars (as set forth by
any service selected by the Administrative Agent which has been nominated by the
British Bankers' Association as an authorized information vendor for the purpose
of displaying such rates) for a period equal to such Interest Period; provided
that, to the extent that an interest rate is not ascertainable pursuant to the
foregoing provisions of this definition the "London Interbank Offered Rate"
shall be the interest rate per annum determined by the Administrative Agent to
be the average of the rates per annum at which deposits in Dollars are offered
for such Interest Period to major banks in the London interbank market in
London, England by the Administrative Agent at approximately 11:00 a.m. (London
time) on the date which is two (2) Business Days prior to the beginning of such
Interest Period. Each determination by the Administrative Agent pursuant to this
definition shall be conclusive absent manifest error.

         "Material Adverse Effect": a material adverse effect on (i) the
operations, business, property or assets, or condition (financial or otherwise)
of the Company and its Consolidated Subsidiaries taken as a whole or (ii) the
validity or enforceability of this Agreement and the other Credit Documents or
the rights and remedies of the Lenders hereunder or thereunder.

         "Material Subsidiary": as of any date of determination, any Domestic
Subsidiary or any Foreign Subsidiary that (a) is a Credit Party, (b) together
with its Subsidiaries on a consolidated basis, during the twelve months
preceding such date of determination accounts for (or to which may be
attributed) 5% or more of the net income or assets (determined on a consolidated
basis) of the Company and its Subsidiaries or (c) is otherwise necessary for the
ongoing business operations of the Company and its Subsidiaries taken as a
whole.

         "Moody's": Moody's Investors Services, Inc. or any successor thereto.

         "Mortgages": any and all mortgages, deeds of trust, assignments of
rents or leases, or other security agreements, covering any interest in real
property, executed and delivered by any of the Credit Parties in favor of the
Collateral Agent, granting the Collateral Agent a Lien for the benefit of the
Lenders and any other beneficiaries described therein, to secure obligations of
the Credit Parties under the Credit Documents and any other obligations
described therein in each case as amended, modified, supplemented, extended,
renewed or replaced from time to time.

         "Mortgage Policy": as defined in Section 4.1(d)(iv).

         "Mortgaged Properties": as defined in Section 4.1(d)(i).

         "Multiemployer Plan": a Plan which is a multiemployer plan as defined
in Section 4001(a)(3) of ERISA, to which the Company or any ERISA Affiliate
makes or is obligated to make contributions, or during the preceding five plan
years, has made or been obligated to make contributions.

         "Net Cash Proceeds": the aggregate cash proceeds received by the
Company or any of its Consolidated Subsidiaries in respect of any Asset
Disposition, Involuntary Disposition, Equity

                                       77

Issuance, Debt Issuance or Permitted Receivables Financing, net of (a) direct
costs (including, without limitation, legal, accounting and investment banking
fees, and sales commissions) and (b) taxes paid or payable as a result thereof;
it being understood that "Net Cash Proceeds" shall include, without limitation,
any cash received upon the sale or other disposition of any non-cash
consideration received by the Company or any of its Consolidated Subsidiaries in
any Asset Disposition, Involuntary Disposition, Equity Issuance, Debt Issuance
or Permitted Receivables Financing.

         "Non-Excluded Taxes": as defined in Section 2.12.

         "Note": as defined in Section 2.2.

         "Obligations": without duplication, all advances to, and debts,
liabilities, obligations, covenants and duties of, any Credit Party arising
under any Credit Document or otherwise with respect to any Loan or Letter of
Credit, whether direct or indirect (including those acquired by assumption),
absolute or contingent, due or to become due, now existing or hereafter arising
and including interest and fees that accrue after the commencement by or against
any Credit Party or any Affiliate thereof of any proceeding under any Debtor
Relief Laws naming such Person as the debtor in such proceeding, regardless of
whether such interest and fees are allowed claims in such proceeding. The
foregoing shall also include any Hedging Agreement of any Credit Party to which
a Lender or any Affiliate of such Lender is a party.

         "Participant": as defined in Section 9.6(b).

         "Participation Interest": a purchase by a Lender of a risk
participation in Swingline Loans as provided in Section 2.13(b), in LOC
Obligations as provided in Section 2.14(c) or in outstanding Revolving Loans of
other Lenders as provided in Section 6.1.

         "PBGC": the Pension Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA.

         "Permitted Investments":

                  (i)      cash and Cash Equivalents;

                  (ii)     receivables owing to the Company or any of its
         Subsidiaries or any receivables and advances to suppliers, in each case
         if created, acquired or made in the ordinary course of business and
         payable or dischargeable in accordance with customary trade terms;

                  (iii)    investments in and loans to any Credit Parties;

                  (iv)     loans and advances to officers, directors, employees
         and Affiliates in an aggregate amount not to exceed $1,000,000 at any
         time outstanding;

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                  (v)      investments (including debt obligations) received in
         connection with the bankruptcy or reorganization of suppliers and
         customers and in settlement of delinquent obligations of, and other
         disputes with, customers and suppliers arising in the ordinary course
         of business;

                  (vi)     investments, acquisitions or transactions permitted
         under Section 5.2(b)(ii);

                  (vii)    additional investments, provided that such
         investments made pursuant to this clause (vii) shall not exceed an
         aggregate amount of $5,000,000 at any time outstanding;

                  (viii)   investments existing on the date hereof and set forth
         on Schedule 7.1(c) attached hereto;

                  (ix)     investments by the Company in Hedging Agreements
         permitted under Section 5.2(f)(iii);

                  (x)      investments by Foreign Subsidiaries in other Foreign
         Subsidiaries;

                  (xi)     investments by Credit Parties in Foreign
         Subsidiaries, provided that such investments made pursuant to this
         clause (xi) shall not exceed an aggregate amount of $10,000,000 at any
         time outstanding; and

                  (xii)    Acquisitions permitted pursuant to Section
         5.2(b)(ii).

         As used herein, "investment" means all investments, in cash or by
delivery of property made, directly or indirectly in, to or from any Person,
whether by acquisition of shares of Capital Stock, property, assets,
indebtedness or other obligations or securities or by loan advance, capital
contribution or otherwise.

         "Permitted Lien": (i) purchase money security arrangements upon
Property acquired subsequent to the date of this Agreement, provided that each
such security arrangement does not exceed 80% of the cost or fair value of the
Property acquired and is a lien only on such Property, or renewals or extensions
of any such security arrangement upon the same Property and not in a greater
amount; (ii) Liens on Property in favor of, or any conditional sale or title
retention agreement relating to any Property with, the United States of America
or any State thereof, or any department, agency or instrumentality or political
subdivision of the United States of America or any such political subdivision,
or any agent or trustee acting on behalf of any of the foregoing, or any agent
or trustee acting on behalf of the holders of obligations issued by any of the
foregoing, to secure partial, progress, advance or other payments pursuant to
any agreement, understanding, contract, lease or statute (including, but not
limited to, agreements, understandings, contracts, leases or statutes that
require the construction of Property and sale thereof to any of the named
departments, agencies or political divisions, as a part of the lease or
installment purchase of such Property by the Company or any Subsidiary) or to
secure any indebtedness incurred for the purpose of financing all or any part of
the purchase price or the

                                       79

cost of construction of the Property subject to such Liens; (iii) any
reservation or exception contained in any instrument under which the Company or
any Subsidiary owns or shall acquire any Property and under the terms of which
any vendor, lessor or assignor reserves or excepts an interest in oil, gas or
any other mineral or the proceeds thereof; (iv) any conveyance or assignment
under the terms of which the Company or any Subsidiary conveys or assigns an
interest in oil, gas or any other mineral or the proceeds thereof whether or not
such conveyance or assignment is in connection with or substantially
simultaneous with an extension of credit to the grantee or assignee thereunder
on a basis providing for repayment of all or substantially all of such advance
out of such proceeds or out of production from such interest; (v) any lien upon
any Property owned by the Company or any Subsidiary or in which the Company or
any Subsidiary owns an interest to secure payment of its proportionate part of
the expenses of developing or conducting operations for the recovery, storage,
transportation or sale of the mineral resources of such Property (or Property
with which it is unitized); (vi) easements, rights-of-way, restrictions and
other similar encumbrances incurred in the ordinary course of business which, in
the aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or materially
interfere with the ordinary conduct of the business of the Company or such
Subsidiary; (vii) Liens (not otherwise permitted hereunder) which secure
indebtedness for borrowed money not exceeding (as to the Company and all
Subsidiaries) $10,000,000 in aggregate amount at any time outstanding, together
with Indebtedness outstanding permitted under Section 5.2(f)(vi) not to exceed a
total amount of $25,000,000 as set forth in Section 5.2(f)(vi); (viii) Liens for
taxes not yet due or that are being contested in good faith and by appropriate
proceedings; (ix) carriers', warehousemen's, mechanic's, materialmen's,
repairmen's or other like Liens arising in the ordinary course of business; (x)
pledges and deposits made in the ordinary course of business in compliance with
workmen's compensation, unemployment insurance and other social security laws or
regulations; (xi) deposits to secure the performance of bids, trade contracts,
leases, statutory obligations, surety and appeal bonds, performance bonds and
other obligations of a like nature incurred in the ordinary course of business;
(xii) Liens in favor of customs revenue authorities arising as a matter of law
to secure payment of customs duties; (xiii) any extension, renewal or
replacement (or successive extensions, renewals or replacements), in whole or in
part of any lien referred to in the foregoing clauses (i) to (v), inclusive,
provided that the obligation secured thereby shall not exceed the obligation so
secured at the time of such extension, renewal or replacement, and that such
extension, renewal or replacement shall be limited to that portion of the
Property which secured the lien so extended, renewed or replaced (plus
improvements on such Property); (xiv) Liens in favor of the Collateral Agent
pursuant to the Collateral Documents and (xv) Liens (not otherwise permitted
hereunder) which are set forth on Schedule 7(d) attached hereto.

         "Permitted Receivables Financing": any one or more receivables
financings in which (i) the Company or any of its Consolidated Subsidiaries (a)
sells (as determined in accordance with GAAP) any accounts receivable, notes
receivable, rights to future lease payments or residuals (collectively, together
with certain related property relating thereto and the right to collections
thereon, being the "Transferred Assets") to any Person that is not a Subsidiary
or Affiliate of the Company (with respect to any such transaction, the
"Receivables Financier"), (b) borrows from such Receivables Financier and
secures such borrowings by a pledge of such Transferred Assets and/or (c)
otherwise finances its acquisition of such Transferred Assets and, in connection

                                       80

therewith, conveys an interest in such Transferred Assets to the Receivables
Financier or (ii) the Company or any of its Consolidated Subsidiaries sells,
conveys or otherwise contributes any Transferred Assets to a Receivables
Financing SPC, which Receivables Financing SPC then (a) sells (as determined in
accordance with GAAP) any such receivables (or an interest therein) to any
Receivables Financier, (b) borrows from such Receivables Financier and secures
such borrowings by a pledge of such receivables or (c) otherwise finances its
acquisition of such receivables and, in connection therewith, conveys an
interest in such receivables to the Receivables Financier, provided that (1)
such receivables financing shall not involve any recourse to the Company or any
of its Consolidated Subsidiaries for any reason other than (A) repurchases of
non-eligible receivables or (B) indemnification for losses other than credit
losses related to the receivables sold in such financing, (2) such receivables
financing shall not include any guaranty obligations of the Company or any of
its Consolidated Subsidiaries, (3) the Administrative Agent shall be reasonably
satisfied with the structure of and documentation for any such transaction and
that the terms of such transaction, including the discount at which receivables
are sold, the term of the commitment of the Receivables Financier thereunder and
any termination events, shall be (in the good faith understanding of the
Administrative Agent) consistent with those prevailing in the market for similar
transactions involving a receivables originator/servicer of similar credit
quality and a receivables pool of similar characteristics, (4) the
Administrative Agent shall have received evidence to its satisfaction that the
Collateral Agent shall have a first priority perfected pledge of the residual
value in the Receivables Financing SPC, and (5) the documentation for such
transaction shall not be amended or modified without the prior written approval
of the Administrative Agent.

         "Person": an individual, partnership, corporation, limited liability
company, business trust, joint stock company, trust, unincorporated association,
joint venture, Governmental Authority or other entity of whatever nature.

         "Plan" means any "employee benefit plan" (as such term is defined in
Section 3(3) of ERISA) established by the Company or, with respect to any such
plan that is subject to Section 412 of the Code or Title IV of ERISA, any ERISA
Affiliate.

         "Preferred Securities": collectively, the Trust Preferred Securities
and the CRESTS.

         "Preferred Stock SPC": with respect to the Trust Preferred Securities,
Hercules Trust I, a wholly-owned Subsidiary of the Company, and with respect to
the CRESTS, Hercules Trust II, a wholly-owned Subsidiary of the Company, in each
case as the context may require and in any event an entity that was formed for
the sole and exclusive purpose of engaging in activities in connection with the
issuance of the Preferred Securities.

         "Pro Forma Basis": with respect to any transaction, that such
transaction shall be deemed to have occurred (for purposes of calculating
compliance in respect of such transaction with each of the financial covenants
set forth in Section 5.2(d)) as of the first day of the four fiscal quarter
period ending as of the last day of the most recent fiscal quarter preceding the
date of such transaction with respect to which the Administrative Agent and the
Lenders shall have received the financial statements referred to in Section
5.1(a). As used herein, "transaction" means any corporate merger, amalgamation
or consolidation or any asset disposition or purchase as referred to in Section
5.2(b), (f) or (k) or Section 2.16. Any Indebtedness incurred or assumed by the

                                       81

Company or any of its Subsidiaries in order to consummate such transaction (i)
shall be deemed to have been incurred or assumed on the first day of the
applicable period and (ii) if such Indebtedness has a floating or formula rate,
then the implied rate of interest for such Indebtedness for the applicable
period for purposes of this definition shall be determined by utilizing the rate
which is or would be in effect with respect to such Indebtedness as at the
relevant date of determination.

         "Pro Rata Share": as to each Lender (a) with respect to such Lender's
Revolving Commitment at any time, a fraction (expressed as a percentage, carried
out to the ninth decimal place), the numerator of which is the amount of the
Revolving Commitment of such Lender at such time and the denominator of which is
the Revolving Committed Amount at such time; provided that if the commitment of
each Lender to make Revolving Loans and the obligation of the Issuing Lender to
issue Letters of Credit have been terminated pursuant to Section 6.1, then the
Pro Rata Share of such Lender shall be determined based on the Pro Rata Share of
such Lender immediately prior to such termination and after giving effect to any
subsequent assignments made pursuant to the terms hereof, (b) with respect to
such Lender's portion of the Term B Loan at any time, a fraction (expressed as a
percentage, carried out to the ninth decimal place), the numerator of which is
the principal amount of the Term B Loan held by such Lender at such time and the
denominator of which is the aggregate principal amount of the Term B Loan at
such time and (c) with respect to such Lender's portion of the Incremental Term
Loan at any time, a fraction (expressed as a percentage, carried out to the
ninth decimal place), the numerator of which is the principal amount of the
Incremental Term Loan held by such Lender at such time and the denominator of
which is the aggregate principal amount of the Incremental Term Loan at such
time. The initial Pro Rata Share of each Lender is set forth opposite the name
of such Lender on Schedule 7(a) or in the Assignment and Assumption pursuant to
which such Lender becomes a party hereto, as applicable.

         "Property": any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.

         "Prospective Lender": as defined in Section 2.16(b).

         "Real Properties": as defined in Section 1.14(a)(i).

         "Receivables Financing SPC": a special purpose entity that is a
Subsidiary or Affiliate of the Company and that is formed for the sole and
exclusive purpose of engaging in activities in connection with the purchase,
sale and financing of accounts receivable in connection with and pursuant to a
Permitted Receivables Financing.

         "Register": as defined in Section 9.6(d).

         "Regulation U": Regulation U of the Board of Governors of the Federal
Reserve System as in effect from time to time.

         "Reorganization": with respect to any Multiemployer Plan, the condition
that such plan is in reorganization within the meaning of Section 4241 of ERISA.

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         "Reportable Event": any of the events set forth in Section 4043(b) of
ERISA, other than those events as to which the thirty day notice period is
waived under Sections .13, .14, .16, .18, .19 or .20 of PBGC Reg. Section 2615.

         "Required Lenders": at any time, Lenders holding in the aggregate at
least a majority of (a) the unfunded Commitments (and participations therein)
and the outstanding Loans, LOC Obligations and participations therein or (b) if
the Commitments have been terminated, the outstanding Loans, LOC Obligations and
participations therein. The unfunded Commitments of, and the outstanding Loans
held or deemed held by, any Defaulting Lender shall be excluded for purposes of
making a determination of Required Lenders.

         "Requirement of Law": as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing documents of such
Person, and any law, treaty, rule or regulation or determination of an
arbitrator or a court or other Governmental Authority, in each case applicable
to or binding upon such Person or any of its property or to which such Person or
any of its property is subject.

         "Responsible Officer": when used with respect to the Company, the chief
executive officer, any vice president or equivalent officer, the corporate
secretary and the general counsel of the Company or, with respect to financial
matters, any vice president, the treasurer or the controller of the Company;
provided, however, that when used in the context of Section 5.2(b)(ii)(C), a
"Responsible Officer" shall include the vice president-tax of the Company as
well as the chief executive officer, any vice president or equivalent officer,
the corporate secretary and the general counsel of the Company or, with respect
to financial matters, any vice president, the treasurer or the controller of the
Company.

         "Restricted Payment": (i) any dividend or other payment or
distribution, direct or indirect, on account of any shares of any class of
Capital Stock of the Company or any of its Subsidiaries, now or hereafter
outstanding (including without limitation the Company or any of its
Subsidiaries), or to the holders, in their capacity as such, of any shares of
any class of Capital Stock of the Company or any of its Subsidiaries, now or
hereafter outstanding, except as provided in Section 5.2(k), (ii) any
redemption, retirement, sinking fund or similar payment, purchase or other
acquisition for value, direct or indirect, of any shares of any class of Capital
Stock of the Company or any of its Subsidiaries, now or hereafter outstanding
and (iii) any payment made to retire, or to obtain the surrender of, any
outstanding warrants, options or other rights to acquire shares of any class of
Capital Stock of any Consolidated Party, now or hereafter outstanding.

         "Restructuring Charges": (a) non-recurring restructuring charges in
connection with the Company's ongoing "Work Process Redesign" effort, including,
without limitation, business process redesign, cost compression (i.e.
elimination of management layers) and disposal of facilities, in an aggregate
amount not to exceed (i) $25,000,000 with respect to the Company's 2002 fiscal
year and (ii) $35,000,000 with respect to the Company's 2003 fiscal year and (b)
non-recurring restructuring charges in connection with the divestiture of the
BetzDearborn Water Treatment Business in 2002, to the extent taken in the first
three (3) fiscal quarters of the Company's 2002 fiscal year.

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         "Revolving Committed Amount": as defined in Section 2.1(a).

         "Revolving Commitment": as to each Lender, its obligation to (a) make
Revolving Loans to the Company pursuant to Section 2.1(a) and (b) purchase
participations in LOC Obligations and Swingline Loans, in an aggregate principal
amount at any one time outstanding not to exceed the amount set forth opposite
such Lender's name on Schedule 7(a) or in the Assignment and Assumption pursuant
to which such Lender becomes a party hereto, as applicable, as such amount may
be adjusted from time to time in accordance with this Agreement.

         "Revolving Loans": the loans made pursuant to Section 2.1.

         "Revolving Credit Termination Date": December 15, 2006.

         "S&P": Standard & Poor's Ratings Services, a division of The
McGraw-Hill Companies, Inc. or any successor thereto.

         "SEC": the Securities and Exchange Commission, or any Governmental
Authority succeeding to any of its principal functions.

         "Secured Leverage Ratio": with respect to the Company and its
Consolidated Subsidiaries for the twelve month period ending on the last day of
any fiscal quarter, the ratio of (a) secured Indebtedness of the Company and its
Consolidated Subsidiaries on the last day of such period minus the principal
amount outstanding on the Company's 6.625% Senior Notes due 2003, to the extent
the Company has deposited an amount sufficient to satisfy the principal amount
when due into an escrow account, pursuant to the terms of the Escrow Agreement,
to (b) Consolidated EBITDA for such period.

         "Security Agreement": the Security Agreement dated as of the Closing
Date executed by the Company and each of the other Guarantors and substantially
in the form of Exhibit G attached hereto, as amended, modified, supplemented,
extended, renewed or replaced from time to time.

         "Senior Notes": collectively, (i) the High Yield Notes, (ii) the
Company's 6.625% Senior Notes due 2003 in the aggregate principal amount of
$125,000,000 and (iii) the Company's 6.60% Senior Notes due 2027 in the
aggregate principal amount of $100,000,000.

         "Single Employer Plan": any Plan which is covered by Title IV of ERISA,
but which is not a Multiemployer Plan.

         "Solvent": with respect to any Person, in that Person's reasonable
belief and as of a particular date, that on such date (a) such Person is able to
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (b) such Person
does not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and liabilities
mature in their ordinary course, (c) such

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Person is not engaged in a business or a transaction, and is not about to engage
in a business or a transaction, for which such Person's assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practice in the industry in which such Person is engaged or is to engage, (d)
the fair value of the assets of such Person is greater than the total amount of
liabilities, including, without limitation, contingent liabilities, of such
Person and (e) the fair value of the assets of such Person is not less than the
amount that will be required to pay the estimable and probable liability of such
Person on its debts as they become absolute and matured. In computing the amount
of contingent liabilities at any time, it is intended that such liabilities will
be computed at the amount which, in light of all the facts and circumstances
existing at such time, represents the amount that can reasonably be expected to
become an actual or matured liability.

         "SPC": as defined in Section 9.6(i).

         "Subsidiary": as to any Person, a corporation, partnership or other
entity of which shares of stock or other ownership interests having ordinary
voting power (other than stock or such other ownership interests having such
power only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation, partnership or
other entity are at the time owned, or the management of which is otherwise
controlled, directly or indirectly through one or more intermediaries, or both,
by such Person. Unless otherwise qualified, all references to a "Subsidiary" or
to "Subsidiaries" in this Agreement shall refer to a Subsidiary or Subsidiaries
of the Company.

         "Swingline Committed Amount": as defined in Section 2.15(a).

         "Swingline Lender": Credit Suisse First Boston, acting through its
Cayman Islands Branch (or any successor thereto).

         "Swingline Loan": as defined in Section 2.15(a).

         "Syndication Agent": as defined in the preamble hereto.

         "Synthetic Lease": any synthetic lease, tax retention operating lease,
off-balance sheet loan or similar off-balance sheet financing product where such
transaction is considered borrowed money indebtedness for tax purposes but is
classified as an operating lease in accordance with GAAP.

         "Term B Excess Yield": (i) the Term B Upfront Fee Percentage divided by
(ii) four.

         "Term B Loan": as defined in Section 2.15(a).

         "Term B Loan Commitment": as to each Lender, its obligation to make its
Pro Rata Share of the Term B Loan to the Company pursuant to Section 2.15(a), in
the principal amount set forth opposite such Lender's name on Schedule 7(a) or
in the Assignment and Assumption pursuant to which such Lender becomes a party
hereto.

         "Term B Upfront Fee Percentage":  0.25%.

                                       85

         "Term B Yield": the sum of (i) the margin for Eurodollar Loans in
effect with respect to the Term B Loan and/or the margin for ABR Loans in effect
with respect to the Term B Loan plus (ii) the Term B Excess Yield.

         "Term Loans": a collective reference to the Term B Loan and the
Incremental Term Loan.

         "Termination Date": (a) for Revolving Loans, the Revolving Credit
Termination Date, (b) for the Term B Loan, May 15, 2007 and (c) for the
Incremental Term Loan, the date agreed to among the Company and the Lenders
making the Incremental Term Loan.

         "Title Insurance Company": as defined in Section 4.1(d)(iii).

         "Transferee": as defined in Section 9.6(f).

         "Trust Preferred Securities": the 9.42% Trust Originated Preferred
Securities issued by Hercules Trust I in an original issuance amount of
$362,000,000 due 2029.

         "Type": as to any Loan, its nature as an ABR Loan or a Eurodollar Loan.

         "Unfunded Pension Liability": the excess of a Pension Plan's benefit
liabilities under Section 4001(a)(16) of ERISA, over the current value of that
Pension Plan's assets, determined in accordance with the assumptions used for
funding the Pension Plan pursuant to Section 412 of the Code for the applicable
plan year.

         All accounting terms not otherwise defined herein shall have the
meanings assigned to them in accordance with GAAP.

                           7.2      ACCOUNTING TERMS.

         (a)      Except as otherwise specifically prescribed herein, all
accounting terms not specifically or completely defined herein shall be
construed in conformity with, and all financial data (including financial ratios
and other financial calculations) required to be submitted pursuant to this
Agreement shall be prepared in conformity with, GAAP applied on a consistent
basis, as in effect from time to time, applied in a manner consistent with that
used in preparing the financial statements referred to in Section 1.2(a);
provided, however, that calculations of the attributable amount of Indebtedness
under any Synthetic Lease or similar obligation or the implied interest
component of any Synthetic Lease or similar obligation shall be made by the
Company in accordance with accepted financial practice and consistent with the
terms of such Synthetic Lease or similar obligation.

         (b)      If at any time any change in GAAP would affect the computation
of any financial ratio or requirement set forth in any Credit Document, and
either the Company or the Required Lenders shall so request, the Administrative
Agent, the Lenders and the Company shall negotiate in good faith to amend such
ratio or requirement to preserve the original intent thereof in light of such
change in GAAP (subject to the approval of the Required Lenders); provided that,
until so amended, (i) such ratio or requirement shall continue to be computed in
accordance with GAAP prior to such change therein and (ii) the Company shall
provide to the Administrative Agent and

                                       86

the Lenders financial statements and other documents required under this
Agreement or as reasonably requested hereunder setting forth a reconciliation
between calculations of such ratio or requirement made before and after giving
effect to such change in GAAP.

         (c)      Notwithstanding the above, the parties hereto acknowledge and
agree that, for purposes of all calculations made under the financial covenants
set forth in Section 5.2(d) or otherwise hereunder (including without limitation
for purposes of the definitions of "Applicable Margin" and "Pro Forma Basis" set
forth in Section 7.1), (i) after consummation of any Asset Disposition (A)
income statement items (whether positive or negative) and capital expenditures
attributable to the Property disposed of shall be excluded and (B) Indebtedness
which is retired shall be excluded and deemed to have been retired as of the
first day of the applicable period and (ii) after consummation of any
Acquisition (A) income statement items (whether positive or negative) and
capital expenditures attributable to the Person or Property acquired shall, to
the extent not otherwise included in such income statement items for the Company
and its Consolidated Subsidiaries in accordance with GAAP or in accordance with
any defined terms set forth in Section 7.1(a), be included to the extent
relating to any period applicable in such calculations, (B) to the extent not
retired in connection with such Acquisition, Indebtedness of the Person or
Property acquired shall be deemed to have been incurred as of the first day of
the applicable period and (C) pro forma adjustments may be included to the
extent that such adjustments are satisfactory to the Administrative Agent and
would give effect to items that are (1) directly attributable to such
transaction, (2) expected to have a continuing impact on the Company and its
Consolidated Subsidiaries and (3) factually supportable.

                           7.3      ROUNDING.

         Any financial ratios required to be maintained by the Company pursuant
to this Agreement shall be calculated by dividing the appropriate component by
the other component, carrying the result to one place more than the number of
places by which such ratio is expressed herein and rounding the result up or
down to the nearest number (with a rounding-up if there is no nearest number).

                           7.4      REFERENCES TO AGREEMENTS AND REQUIREMENTS OF
                                    LAW.

         Unless otherwise expressly provided herein, (i) references to articles
of incorporation, by-laws, operating agreements or other similar organization
documents, agreements (including the Credit Documents) and other contractual
instruments shall be deemed to include all subsequent amendments, restatements,
extensions, supplements and other modifications thereto, but only to the extent
that such amendments, restatements, extensions, supplements and other
modifications are not prohibited by any Credit Document; and (ii) references to
any Requirement of Law shall include all statutory and regulatory provisions
consolidating, amending, replacing, supplementing or interpreting such
Requirement of Law.

                           7.5      TIMES OF DAY.

         Unless otherwise specified, all references herein to times of day shall
be references to Eastern time (daylight savings or standard, as applicable).

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                           7.6      LETTER OF CREDIT AMOUNTS.

         Unless otherwise specified, all references herein to the amount of a
Letter of Credit at any time shall be deemed to mean the maximum face amount of
such Letter of Credit after giving effect to all increases thereof contemplated
by such Letter of Credit or application for such Letter of Credit therefor,
whether or not such maximum face amount is in effect at such time.

         SECTION 8. THE AGENTS.

                           8.1.     APPOINTMENT.

         Each Lender hereby irrevocably designates and appoints Credit Suisse
First Boston, acting through its Cayman Islands Branch, as the Administrative
Agent and the Collateral Agent of such Lender under this Agreement and the other
Credit Documents, and each such Lender irrevocably authorizes Credit Suisse
First Boston, acting through its Cayman Islands Branch, as the Administrative
Agent and the Collateral Agent for such Lender, to take such action on its
behalf under the provisions of this Agreement and the other Credit Documents and
to exercise such powers and perform such duties as are expressly delegated to
the Administrative Agent or the Collateral Agent by the terms of this Agreement
and the other Credit Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement, the Agents shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Credit Document or otherwise exist against the Agents.

                           8.2.     DELEGATION OF DUTIES.

         Each of the Agents may execute any of its duties under this Agreement
and the other Credit Documents by or through agents or attorneys-in-fact and
shall be entitled to advice of counsel concerning all matters pertaining to such
duties. No Agent shall be responsible for the negligence or misconduct of any
agents or attorneys-in-fact selected by it with reasonable care.

                           8.3.     EXCULPATORY PROVISIONS.

         No Agent nor any of such Agent's officers, directors, employees,
agents, attorneys-in-fact or affiliates shall be (i) liable for any action
lawfully taken or omitted to be taken by it or such Person under or in
connection with this Agreement or any other Credit Document (except for its or
such Person's own gross negligence or willful misconduct) or (ii) responsible in
any manner to any of the Lenders for any recitals, statements, representations
or warranties made by the Company, any other Credit Party or any officer thereof
contained in this Agreement or any other Credit Document or in any certificate,
report, statement or other document referred to or provided for in, or received
by such Agent under or in connection with, this Agreement or any other Credit
Document or for the value, validity, effectiveness, genuineness, enforceability
or sufficiency of this Agreement or the other Credit Documents or for any
failure of the Company

                                       88

or any other Credit Party to perform its obligations hereunder or thereunder. No
Agent shall be under any obligation to any Lender to ascertain or to inquire as
to the observance or performance of any of the agreements contained in, or
conditions of, this Agreement or any other Credit Document, or to inspect the
properties, books or records of the Credit Parties.

                           8.4.     RELIANCE BY ADMINISTRATIVE AGENT AND THE
                                    COLLATERAL AGENT.

         The Agents shall be entitled to rely, and shall be fully protected in
relying, upon any Credit Document, writing, resolution, notice, consent,
certificate, affidavit, letter, telecopy, telex or teletype message, statement,
order or other document or conversation reasonably believed by it to be genuine
and correct and to have been signed, sent or made by the proper Person or
Persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Credit Parties), independent accountants and other
experts selected by the Agents. The Agents may deem and treat the payee of any
Note as the owner thereof for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Administrative Agent. The Agents shall be fully justified in failing or refusing
to take any action under this Agreement or any other Credit Document unless it
shall first receive such advice or concurrence of the Required Lenders as it
deems appropriate or it shall first be indemnified to its satisfaction by the
Lenders against any and all liability and expense which may be incurred by it by
reason of taking or continuing to take any such action. The Agents shall in all
cases be fully protected in acting, or in refraining from acting, under this
Agreement and the other Credit Documents in accordance with a request of the
Required Lenders, and such request and any action taken or failure to act
pursuant thereto shall be binding upon all the Lenders and all future holders of
the Notes.

                           8.5.     NOTICE OF DEFAULT.

         No Agent shall be deemed to have knowledge or notice of the occurrence
of any Default or Event of Default hereunder unless such Agent has received
notice from a Lender or the Company referring to this Agreement, describing such
Default or Event of Default and stating that such notice is a "notice of
default". In the event that an Agent receives such a notice, the Administrative
Agent shall give notice thereof to the Lenders and the other Agent. The Agents
shall take such action with respect to such Default or Event of Default as shall
be reasonably directed by the Required Lenders; provided that unless and until
an Agent shall have received such directions, such Agent may (but shall not be
obligated to) take such action, or refrain from taking such action, with respect
to such Default or Event of Default as it shall deem advisable in the best
interests of the Lenders.

                           8.6.     NON-RELIANCE ON AGENTS AND OTHER LENDERS.

         Each Lender expressly acknowledges that no Agent nor any of such
Agent's officers, directors, employees, agents, attorneys-in-fact or affiliates
has made any representations or warranties to it and that no act by an Agent
hereinafter taken, including any review of the affairs of the Credit Parties,
shall be deemed to constitute any representation or warranty by such Agent to
any Lender. Each Lender represents to the Agents that it has, independently and
without reliance upon the Agents or any other Lender, and based on such
documents and information as

                                       89

it has deemed appropriate, made its own appraisal of and investigation into the
business, operations, property, financial and other condition and
creditworthiness of the Credit Parties and made its own decision to make its
Loans hereunder and enter into this Agreement and the other Credit Documents.
Each Lender also represents that it will, independently and without reliance
upon the Agents or any other Lender, and based on such documents and information
as it shall deem appropriate at the time, continue to make its own credit
analysis, appraisals and decisions in taking or not taking action under this
Agreement and the other Credit Documents, and to make such investigation as it
deems necessary to inform itself as to the business, operations, property,
financial and other condition and creditworthiness of the Credit Parties. Except
for notices, reports and other documents expressly required to be furnished to
the Lenders by the Agents hereunder, no Agent shall not have any duty or
responsibility to provide any Lender with any credit or other information
concerning the business, operations, property, condition (financial or
otherwise), prospects or creditworthiness of the Credit Parties which may come
into the possession of an Agent or any of its officers, directors, employees,
agents, attorneys-in-fact or affiliates.

                           8.7.     INDEMNIFICATION.

         The Lenders agree to indemnify each Agent in its capacity as such (to
the extent not reimbursed by the Company or another Credit Party and without
limiting the obligation of the Company or another Credit Party to do so),
ratably according to their respective Pro Rata Shares in effect on the date on
which indemnification is sought under this subsection (or, if indemnification is
sought after the date upon which the Commitments shall have terminated and the
Loans shall have been paid in full, ratably in accordance with their Pro Rata
Shares immediately prior to such date), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments, suits,
costs, expenses or disbursements of any kind whatsoever which may at any time
(including, without limitation, at any time following the payment of the Notes)
be imposed on, incurred by or asserted against the Agent in any way relating to
or arising out of this Agreement, any of the other Credit Documents or any
documents contemplated by or referred to herein or therein or the transactions
contemplated hereby or thereby or any action taken or omitted by such Agent
under or in connection with any of the foregoing; provided that no Lender shall
be liable for the payment of any portion of such liabilities, obligations,
losses, damages, penalties, actions, judgments, suits, costs, expenses or
disbursements to the extent resulting from such Agent's gross negligence or
willful misconduct. The agreements in this subsection shall survive the payment
of the Notes and all other amounts payable hereunder or under the other Credit
Documents.

                           8.8.     AGENTS IN THEIR INDIVIDUAL CAPACITY.

         Each Agent and its affiliates may make loans to, accept deposits from
and generally engage in any kind of business with the Credit Parties as though
such Agent were not an Agent hereunder and under the other Credit Documents.
With respect to its Loans made or renewed by it and any Note issued to it, the
Agents shall have the same rights and powers under this Agreement and the Notes
as any Lender and may exercise the same as though it were not an Agent, and the
terms "Lender" and "Lenders" shall include each Agent in its individual
capacity.

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                           8.9.     SUCCESSOR AGENT.

         Any Agent may resign as an Agent upon 10 days' notice to the Lenders.
If an Agent shall resign as an Agent under this Agreement and the other Credit
Documents, then the Company shall appoint from among the Lenders a successor
agent for the Lenders, which successor agent shall be approved by the Required
Lenders (provided that if an Event of Default shall then exist, the Required
Lenders shall appoint such successor agent from among the Lenders without need
of the Company's consent or approval), whereupon such successor agent shall
succeed to the rights, powers and duties of the Administrative Agent or
Collateral Agent, as applicable, and the term "Administrative Agent" or
"Collateral Agent", as the case may be, shall mean such successor agent
effective upon such appointment and approval, and the former Agent's rights,
powers and duties as Agent shall be terminated, without any other or further act
or deed on the part of such former Agent or any of the parties to this Agreement
or any of the other Credit Documents or any holders of the Notes. After any
retiring Agent's resignation as Agent, the provisions of this subsection shall
inure to its benefit as to any actions taken or omitted to be taken by it while
it was Agent under this Agreement and the other Credit Documents.

                           8.10.    OTHER AGENTS, ARRANGERS AND MANAGERS.

         None of the Lenders or other Persons identified on the facing pages of
this Agreement as a "syndication agent," "documentation agent," "co-agent,"
"book manager," "lead manager," "arranger," "lead arranger," "co-arranger" or
"bookrunner" shall have any right, power, obligation, liability, responsibility
or duty under this Agreement other than, in the case of such Lenders, those
applicable to all Lenders as such. Without limiting the foregoing, none of the
Lenders or other Persons so identified shall have or be deemed to have any
fiduciary relationship with any Lender. Each Lender acknowledges that it has not
relied, and will not rely, on any of the Lenders or other Persons so identified
in deciding to enter into this Agreement or in taking or not taking action
hereunder.

         SECTION 9. MISCELLANEOUS

                           9.1.     AMENDMENTS AND WAIVERS.

         Neither this Agreement, any other Credit Document, nor any terms hereof
or thereof may be amended, supplemented or modified except in accordance with
the provisions of this subsection. The Required Lenders may, or, with the
written consent of the Required Lenders, the Administrative Agent may, from time
to time, (a) enter into with the Credit Parties written amendments, supplements
or modifications hereto and to the other Credit Documents for the purpose of
adding any provisions to this Agreement or the other Credit Documents or
changing in any manner the rights of the Lenders or of the Credit Parties
hereunder or thereunder or (b) waive, on such terms and conditions as the
Required Lenders or the Administrative Agent, as the case may be, may specify in
such instrument, any of the requirements of this Agreement or the other Credit
Documents or any Default or Event of Default and its consequences; provided,
however, that no such waiver and no such amendment, supplement or modification
shall (i) reduce the amount or extend the scheduled date of maturity (including
(x) in the case of the Term

                                       91

B Loan, any scheduled amortization payment required pursuant to Section 2.15(d)
and (y) in the case of the Incremental Term Loan, any scheduled amortization
payment required pursuant to Section 2.16(d), if any) of any Loan, or reduce the
stated rate of any interest or fee payable hereunder or thereunder or extend the
scheduled date of any payment thereof (excluding mandatory prepayments) or
increase the amount or extend the expiration date of any Lender's Commitment, in
each case without the consent of each Lender affected thereby, or (ii) amend,
modify or waive any provision of this subsection or reduce the percentage
specified in the definition of Required Lenders or consent to the assignment or
transfer by a Credit Party of any of its rights and obligations under this
Agreement and the Notes or, except as the result of or in connection with an
Asset Disposition permitted by Section 5.2(b), release all or substantially all
of the Collateral or, except as the result of or in connection with a
consolidation, merger or disposition of a Credit Party permitted under Section
5.2(b), release the Company or all or substantially all of the Guarantors from
its or their obligations under the Credit Documents, amend, modify or waive any
provision of Section 2.11 or this Section 9.1, in each case without the written
consent of all the Lenders, (iii) amend, modify or waive any provision of
Section 8 without the written consent of the then Administrative Agent. Any such
waiver and any such amendment, supplement or modification shall apply equally to
each of the Lenders and shall be binding upon the Credit Parties, the Lenders,
the Administrative Agent and all future holders of the Notes, (iv) amend, modify
or waive any provision of Section 2.14 without the written consent of the
Issuing Lender or (v) amend, modify or waive any provision of Section 2.13
without the written consent of the Swingline Lender. In the case of any waiver,
the Credit Parties, the Lenders and the Administrative Agent shall be restored
to their former position and rights hereunder and under the outstanding Notes,
and any Default or Event of Default waived shall be deemed to be cured and not
continuing; but no such waiver shall extend to any subsequent or other Default
or Event of Default, or impair any right consequent thereon.

         Without limiting the requirements set forth in this Section 9.1,
neither (A) the time for or the amount or the manner of application of proceeds
of any mandatory prepayment required by Section 2.6(b)(ii), (iii), (iv) or (v)
hereof, nor (B) any provision providing for the allocation of any payments to
the Term Loans, nor (C) any other amendment, modification, termination or waiver
of any provision of this Agreement that has the effect of disproportionately
disadvantaging any one Class (as defined below) relative to any other Class
shall be effective without the written concurrence of Requisite Class Lenders
(as defined below) of each affected Class (it being understood and agreed that
any amendment, modification, termination or waiver of any such provision which
only postpones or reduces any voluntary or mandatory prepayment, or Commitment
reduction from those set forth in Section 2.6 with respect to one Class but not
any other Class shall be deemed to disproportionately disadvantage such one
Class but not to affect or disproportionately disadvantage any such other
Class). For purposes hereof, "Class" shall mean, as applied to Lenders, each of
the following three classes of Lenders: (i) Lenders holding a Term B Loan
Commitment or portion of the Term B Loan, (ii) Lenders holding an Incremental
Term Loan Commitment or a portion of the Incremental Term Loan, and (iii)
Lenders holding a Revolving Commitment or any extension of credit with respect
thereto, and "Requisite Class Lenders" shall mean Lenders of such Class holding
in the aggregate (i) in the case of the Term B Loan, at least a majority of the
Term B Loan outstanding, (ii) in the case of the Incremental Term Loan, at least
a majority portion of the Incremental Term Loan, and (iii) in the

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case of Revolving Loans, at least a majority of the Revolving Loans outstanding
or at least a majority portion of the Revolving Committed Amount.

                           9.2.     NOTICES.

         All notices, requests and demands to or upon the respective parties
hereto to be effective shall be in writing (including by telecopy), and, unless
otherwise expressly provided herein, shall be deemed to have been duly given or
made when delivered by hand, or 3 days after being deposited in the mail,
postage prepaid, or, in the case of telecopy notice, when received, addressed as
follows in the case of the Company, the Credit Parties and the Administrative
Agent, and as set forth in Schedule 9.2 in the case of the other parties hereto,
or to such other address as may be hereafter notified by the respective parties
hereto and any future holders of the Notes:

         The Company                        Hercules Incorporated
         or any other                       Hercules Plaza
         Credit Party:                      Wilmington, Delaware 19894
                                            Attention:   Stuart Shears
                                            Telephone:   (302) 594-5300
                                            Telecopy:    (302) 594-5371

                                            with a copy to:

                                            Hercules Incorporated
                                            Hercules Plaza
                                            Wilmington, Delaware 19894
                                            Attention:   Israel J. Floyd
                                            Telephone:   (302) 594-5128
                                            Telecopy:    (302) 594-7252

         The Administrative Agent:          Credit Suisse First Boston, as
                                            Administrative Agent
                                            11 Madison Avenue
                                            New York, N.Y. 10010
                                            Attention:   Rob Loh, Agency
                                                         Group OMA-8
                                            Telephone:   (212) 538-1690
                                            Telecopy:    (212) 325-8304

         The Collateral Agent:              Credit Suisse First Boston, as
                                            Collateral Agent
                                            11 Madison Avenue
                                            New York, N.Y. 10010
                                            Attention:   Rob Loh, Agency
                                                         Group OMA-8
                                            Telephone:   (212) 538-1690
                                            Telecopy:    (212) 325-8304

         The Issuing Lender:                Wachovia Bank, National Association
                                            301 South College Street
                                            NC 0760

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                                            Charlotte, NC 28288-0760
                                            Attention:   George L. Woolsey
                                            Telephone:   (704) 374-7907
                                            Telecopy:    (704) 715-1117

provided that any notice, request or demand to or upon the Administrative Agent
or the Lenders pursuant to Section 2.3, 2.5, 2.6, 2.7, 2.11, 2.13, 2.14, 2.15 or
3A.9 shall not be effective until received.

         Documents required to be delivered pursuant to Section 5.1(a), Section
5.1(b)(vi) and Section 5.1(c) may be delivered electronically and if so
delivered, shall be deemed to have been delivered on the date on which such
documents are posted on the Company's behalf on IntraLinks/IntraAgency or
another relevant website, if any, to which each Lender and the Administrative
Agent have access (whether a commercial, third-party website or whether
sponsored by the Administrative Agent); provided that: (i) the Company shall
deliver paper copies of such documents to the Administrative Agent or any Lender
that requests the Company to deliver such paper copies until a written request
to cease delivering paper copies is given by the Administrative Agent or such
Lender and (ii) the Company shall notify (which may be by facsimile or
electronic mail) the Administrative Agent and each Lender of the posting of any
such documents and provide to the Administrative Agent by electronic mail
electronic versions (i.e., soft copies) of such documents. Notwithstanding
anything contained herein, in every instance the Company shall be required to
provide paper copies of the officer's compliance certificate required by Section
5.1(b)(i) to the Administrative Agent and each of the Lenders. Except for such
Compliance Certificates, the Administrative Agent shall have no obligation to
request the delivery or to maintain copies of the documents referred to above,
and in any event shall have no responsibility to monitor compliance by the
Company with any such request for delivery, and each Lender shall be solely
responsible for requesting delivery to it or maintaining its copies of such
documents.

                           9.3.     NO WAIVER; CUMULATIVE REMEDIES.

         No failure to exercise and no delay in exercising, on the part of the
Administrative Agent or the Collateral Agent, any Lender or any Credit Party,
any right, remedy, power or privilege hereunder or under the Notes shall operate
as a waiver thereof; nor shall any single or partial exercise of any right,
remedy, power or privilege hereunder or thereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or privilege.
The rights, remedies, powers and privileges herein provided are cumulative and
not exclusive of any rights, remedies, powers and privileges provided by law.

                           9.4.     SURVIVAL OF REPRESENTATIONS AND WARRANTIES.

         All representations and warranties made hereunder, in the Notes and in
any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Agreement,
the Notes and the other Credit Documents and the making of the Loans and the
issuance or extension of Letters of Credit hereunder.

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                           9.5.     PAYMENT OF EXPENSES AND TAXES.

         The Company agrees (a) to pay or reimburse each Agent for all its
reasonable out-of-pocket costs and expenses incurred in connection with the
development, preparation and execution of, and any amendment, supplement or
modification to, this Agreement, the Notes and the other Credit Documents and
any other documents prepared in connection herewith or therewith, and the
consummation and administration of the transactions contemplated hereby and
thereby, including, without limitation, the reasonable fees and disbursements of
counsel to each Agent, (b) to pay or reimburse each Lender and each Agent for
all its reasonable costs and expenses incurred in connection with the
enforcement, attempted enforcement or preservation of any rights under this
Agreement, the Notes, any other Credit Document and any such other documents
related thereto (including all such costs and expenses incurred during any
"workout" or restructuring in respect of the Obligations and during any legal
proceeding, including any proceeding under any Debtor Relief Law), including,
without limitation, the reasonable fees and disbursements of counsel to each
Agent and counsel to the several Lenders (including, without duplication, the
allocated costs of in-house counsel to any Lender), (c) to pay, indemnify, and
hold each Lender and each Agent harmless from, any and all recording and filing
fees and any and all liabilities with respect to, or resulting from any delay in
paying, stamp, excise and other taxes, if any, which may be payable or
determined to be payable in connection with the execution and delivery of, or
consummation or administration of any of the transactions contemplated by, or
any amendment, supplement or modification of, or any waiver or consent under or
in respect of, this Agreement, the Notes and any such other documents, and (d)
to pay, indemnify, and hold each Lender, each Agent and each of their respective
Affiliates, officers, directors, employees, counsel, agents and
attorneys-in-fact (each, an "indemnified person") harmless from and against any
and all other liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind or nature
whatsoever with respect to the execution, delivery, enforcement, performance and
administration of this Agreement, the Notes, the LOC Documents and the other
Credit Documents, the use of proceeds of the Loans and Letters of Credit and any
such other documents, including, without limitation, any of the foregoing
relating to the violation of, noncompliance with or liability under, any
environmental or other law applicable to the operations of the Company, any of
its Subsidiaries or any of the its respective properties (all the foregoing in
this clause (d), collectively, the "indemnified liabilities"); provided that the
Company shall have no obligation hereunder to any Agent or any Lender with
respect to indemnified liabilities which have been finally determined by a court
of competent jurisdiction to have arisen from the gross negligence, bad faith or
willful misconduct of such indemnified person. The agreements in this subsection
shall survive repayment of the Loans, the LOC Obligations and all other amounts
payable hereunder or under the other Credit Documents.

                           9.6.     SUCCESSORS AND ASSIGNS; PARTICIPATIONS AND
                                    ASSIGNMENTS.

         (a)      This Agreement shall be binding upon and inure to the benefit
of the Credit Parties, the Lenders, the Administrative Agent, the Collateral
Agent, all future holders of the Loans and their respective successors and
assigns, except that no Credit Party may assign or

                                       95

transfer any of its rights or obligations under this Agreement without the prior
written consent of each Lender.

         (b)      Any Lender may, without notice to or consent of the Borrower
or the Administrative Agent, in the ordinary course of its commercial banking
business and in accordance with applicable law, at any time sell to one or more
banks or other entities ("Participants") participating interests in any Loan
owing to such Lender, any Note held by such Lender, any Commitment of such
Lender, any Participation Interest of such Lender or any other interest of such
Lender hereunder, under the Notes or under any other Credit Document. In the
event of any such sale by a Lender of a participating interest to a Participant,
such Lender's obligations under this Agreement to the other parties to this
Agreement shall remain unchanged, such Lender shall remain solely responsible
for the performance thereof, such Lender shall remain the holder of any such
Note for all purposes under this Agreement and the other Credit Documents, and
the Credit Parties and the Administrative Agent shall continue to deal solely
and directly with such Lender in connection with such Lender's rights and
obligations under this Agreement and the Notes. The Credit Parties agree that if
amounts outstanding under this Agreement, the Notes or any other Credit Document
are due or unpaid, or shall have been declared or shall have become due and
payable upon the occurrence of an Event of Default, each Participant shall be
deemed to have the right of setoff in respect of its participating interest in
amounts owing under this Agreement, any Note or any other Credit Document to the
same extent as if the amount of its participating interest were owing directly
to it as a Lender under this Agreement, any Note or any other Credit Document,
provided that, in purchasing such participating interest, such Participant shall
be deemed to have agreed to share with the Lenders the proceeds thereof as
provided in Section 9.7(a) as fully as if it were a Lender hereunder.

         (c)      Any Lender may at any time assign to one or more Eligible
Assignees all or a portion of its rights and obligations under this Agreement
(including all or a portion of its Commitment and the Loans (including for
purposes of this subsection (b), participations in Swingline Loans and LOC
Obligations) at the time owing to it); provided that (i) except in the case of
an assignment of the entire remaining amount of the assigning Lender's
Commitment and the Loans at the time owing to it or in the case of an assignment
to a Lender or an Affiliate of a Lender or an Approved Fund (as defined in
subsection (h) of this Section) of any Lender, the aggregate amount of the
Commitment (which for this purpose includes Loans outstanding thereunder)
subject to each such assignment, determined as of the date the Assignment and
Assumption with respect to such assignment is delivered to the Administrative
Agent or, if "Trade Date" is specified in the Assignment and Assumption, as of
the Trade Date, shall not be less than $1,000,000 unless each of the
Administrative Agent and, so long as no Event of Default has occurred and is
continuing, the Company otherwise consents (each such consent not to be
unreasonably withheld or delayed); (ii) any assignment of a Revolving Commitment
must be approved by the Administrative Agent and the Issuing Lender (such
approval not to be unreasonably withheld or delayed) (whether or not the
proposed assignee would otherwise qualify as an Eligible Assignee); and (iii)
the parties to each assignment shall execute and deliver to the Administrative
Agent an Assignment and Assumption, together with a processing and recordation
fee of $3,500. Subject to acceptance and recording thereof by the Administrative
Agent pursuant to subsection (d) of this Section, from and after the effective
date specified in each Assignment and Assumption, the Eligible Assignee
thereunder shall be a party to this

                                       96

Agreement and, to the extent of the interest assigned by such Assignment and
Assumption, have the rights and obligations of a Lender under this Agreement,
and the assigning Lender thereunder shall, to the extent of the interest
assigned by such Assignment and Assumption, be released from its obligations
under this Agreement (and, in the case of an Assignment and Assumption covering
all of the assigning Lender's rights and obligations under this Agreement, such
Lender shall cease to be a party hereto but shall continue to be entitled to the
benefits of Sections 2.12, 3.3, 3.5, and 9.5 with respect to facts and
circumstances occurring prior to the effective date of such assignment). Upon
request, the Company (at its expense) shall execute and deliver a Note to the
assignee Lender. Any assignment or transfer by a Lender of rights or obligations
under this Agreement that does not comply with this subsection shall be treated
for purposes of this Agreement as a sale by such Lender of a participation in
such rights and obligations in accordance with subsection (d) of this Section.

         (d)      The Administrative Agent shall maintain at its address
referred to in Section 9.2 a copy of each Assignment and Assumption delivered to
it and a register (the "Register") for the recordation of the names and
addresses of the Lenders and the Commitment of, and principal amount of the
Loans owing to, each Lender from time to time. The entries in the Register shall
be conclusive, in the absence of manifest error, and the Credit Parties, the
Administrative Agent and the Lenders may treat each Person whose name is
recorded in the Register as the owner of the Loan recorded therein for all
purposes of this Agreement. The Register shall be available for inspection by
the Company or any Lender at any reasonable time and from time to time upon
reasonable prior notice.

         (e)      Upon its receipt of an Assignment and Assumption executed by
an assigning Lender and an Eligible Assignee (and, in the case of an Eligible
Assignee that is not then a Lender or an affiliate thereof, by the Company and
the Administrative Agent), together with payment by the assigning Lender to the
Administrative Agent of a registration and processing fee of $3,500, the
Administrative Agent shall (i) promptly accept such Assignment and Assumption
and (ii) on the effective date determined pursuant thereto record the
information contained therein in the Register and give notice of such acceptance
and recordation to the Lenders and the Company on behalf of the Company.

         (f)      Each Credit Party authorizes each Lender to disclose to any
Participant or Eligible Assignee (each, a "Transferee") and any prospective
Transferee any and all financial information in such Lender's possession
concerning such Credit Party and its affiliates which has been delivered to such
Lender by or on behalf of the Company pursuant to this Agreement or which has
been delivered to such Lender by or on behalf of the Company in connection with
such Lender's credit evaluation of the Company and its affiliates prior to
becoming a party to this Agreement.

         (g)      Any Lender may at any time pledge or assign a security
interest in all or any portion of its rights under this Agreement (including
under its Note, if any) to secure obligations of such Lender, including any
pledge or assignment to secure obligations to a Federal Reserve Bank; provided
that no such pledge or assignment shall release such Lender from any of its
obligations hereunder or substitute any such pledgee or assignee for such Lender
as a party hereto.

                                       97

         (h)      As used herein, the following terms have the following
meanings:

                  "Eligible Assignee" means (a) a Lender; (b) an Affiliate of a
         Lender; (c) an Approved Fund; and (d) any other Person (other than a
         natural person) approved by (i) the Administrative Agent (and in the
         case of assignments of Revolving Credit Commitments) the Issuing
         Lender, and (ii) unless an Event of Default has occurred and is
         continuing, the Company (each such approval not to be unreasonably
         withheld or delayed); provided that notwithstanding the foregoing,
         "Eligible Assignee" shall not include the Company or any of the
         Company's Affiliates or Subsidiaries.

                  "Fund" means any Person (other than a natural person) that is
         (or will be) engaged in making, purchasing, holding or otherwise
         investing in commercial loans and similar extensions of credit in the
         ordinary course of its business.

                  "Approved Fund" means any Fund that is administered or managed
         by (a) a Lender, (b) an Affiliate of a Lender or (c) an entity or an
         Affiliate of an entity that administers or manages a Lender.

         (i)      NOTWITHSTANDING ANYTHING TO THE CONTRARY CONTAINED HEREIN, ANY
LENDER (A "GRANTING LENDER") MAY GRANT TO A SPECIAL PURPOSE FUNDING VEHICLE
IDENTIFIED AS SUCH IN WRITING FROM TIME TO TIME BY THE GRANTING LENDER TO THE
ADMINISTRATIVE AGENT AND THE COMPANY (AN "SPC") THE OPTION TO PROVIDE ALL OR ANY
PART OF ANY LOAN THAT SUCH GRANTING LENDER WOULD OTHERWISE BE OBLIGATED TO MAKE
PURSUANT TO THIS AGREEMENT; PROVIDED THAT (i) NOTHING HEREIN SHALL CONSTITUTE A
COMMITMENT BY ANY SPC TO FUND ANY LOAN, AND (ii) IF AN SPC ELECTS NOT TO
EXERCISE SUCH OPTION OR OTHERWISE FAILS TO MAKE ALL OR ANY PART OF SUCH LOAN,
THE GRANTING LENDER SHALL BE OBLIGATED TO MAKE SUCH LOAN PURSUANT TO THE TERMS
HEREOF. EACH PARTY HERETO HEREBY AGREES THAT (i) NEITHER THE GRANT TO ANY SPC
NOR THE EXERCISE BY ANY SPC OF SUCH OPTION SHALL INCREASE THE COSTS OR EXPENSES
OR OTHERWISE INCREASE OR CHANGE THE OBLIGATIONS OF THE COMPANY UNDER THIS
AGREEMENT (INCLUDING ITS OBLIGATIONS UNDER SECTION 3.3), (ii) NO SPC SHALL BE
LIABLE FOR ANY INDEMNITY OR SIMILAR PAYMENT OBLIGATION UNDER THIS AGREEMENT FOR
WHICH A LENDER WOULD BE LIABLE, AND (iii) THE GRANTING LENDER SHALL FOR ALL
PURPOSES, INCLUDING THE APPROVAL OF ANY AMENDMENT, WAIVER OR OTHER MODIFICATION
OF ANY PROVISION OF ANY LOAN DOCUMENT, REMAIN THE LENDER OF RECORD HEREUNDER.
THE MAKING OF A LOAN BY AN SPC HEREUNDER SHALL UTILIZE THE COMMITMENT OF THE
GRANTING LENDER TO THE SAME EXTENT, AND AS IF, SUCH LOAN WERE MADE BY SUCH
GRANTING LENDER. IN FURTHERANCE OF THE FOREGOING, EACH PARTY HERETO HEREBY
AGREES (WHICH AGREEMENT SHALL SURVIVE THE TERMINATION OF THIS AGREEMENT) THAT,
PRIOR TO THE DATE THAT IS ONE YEAR AND ONE DAY AFTER THE PAYMENT IN FULL OF ALL
OUTSTANDING COMMERCIAL PAPER OR OTHER SENIOR DEBT OF ANY SPC, IT WILL NOT
INSTITUTE AGAINST, OR JOIN ANY OTHER PERSON IN INSTITUTING AGAINST, SUCH SPC ANY
BANKRUPTCY, REORGANIZATION, ARRANGEMENT, INSOLVENCY, OR LIQUIDATION PROCEEDING
UNDER THE LAWS OF THE UNITED STATES OR ANY STATE THEREOF. NOTWITHSTANDING
ANYTHING TO THE CONTRARY CONTAINED HEREIN, ANY SPC MAY (i) WITH NOTICE TO, BUT
WITHOUT PRIOR CONSENT OF THE COMPANY AND THE ADMINISTRATIVE AGENT AND WITHOUT
PAYING ANY PROCESSING FEE THEREFOR, ASSIGN ALL OR ANY PORTION OF ITS RIGHT TO
RECEIVE PAYMENT WITH RESPECT TO ANY LOAN TO THE GRANTING LENDER AND (ii)
DISCLOSE ON A CONFIDENTIAL BASIS

                                       98

ANY NON-PUBLIC INFORMATION RELATING TO ITS FUNDING OF LOANS TO ANY RATING
AGENCY, COMMERCIAL PAPER DEALER OR PROVIDER OF ANY SURETY OR GUARANTEE OR CREDIT
OR LIQUIDITY ENHANCEMENT TO SUCH SPC.

         (j)      Notwithstanding anything to the contrary contained herein, any
Lender that is a Fund may create a security interest in all or any portion of
the Loans owing to it and the Note, if any, held by it to the trustee for
holders of obligations owed, or securities issued, by such Fund as security for
such obligations or securities, provided that unless and until such trustee
actually becomes a Lender in compliance with the other provisions of this
Section 9.6, (i) no such pledge shall release the pledging Lender from any of
its obligations under the Credit Documents and (ii) such trustee shall not be
entitled to exercise any of the rights of a Lender under the Credit Documents
even though such trustee may have acquired ownership rights with respect to the
pledged interest through foreclosure or otherwise.

                           9.7.     ADJUSTMENTS; SET-OFF.

         (a)      If any Lender (a "benefited Lender") shall at any time receive
any payment of all or part of its Loans or Participation Interests, or interest
thereon, or receive any collateral in respect thereof (whether voluntarily or
involuntarily, by set-off, pursuant to events or proceedings of the nature
referred to in Sections 6(f) or (g), or otherwise), in a greater proportion than
any such payment to or collateral received by any other Lender, if any, in
respect of such other Lender's Loans or Participation Interests, or interest
thereon, such benefited Lender shall purchase for cash from the other Lenders a
participating interest in such portion of each such other Lender's Loan, or
shall provide such other Lenders with the benefits of any such collateral, or
the proceeds thereof, as shall be necessary to cause such benefited Lender to
share the excess payment or benefits of such collateral or proceeds ratably with
each of the Lenders; provided, however, that if all or any portion of such
excess payment or benefits is thereafter recovered from such benefited Lender,
such purchase shall be rescinded, and the purchase price and benefits returned,
to the extent of such recovery, but without interest.

         (b)      In addition to any rights and remedies of the Lenders provided
by law, each Lender shall have the right, without prior notice to any Credit
Party, any such notice being expressly waived by each Credit Party to the extent
permitted by applicable law, upon any amount becoming due and payable by such
Credit Party hereunder, under the Notes or under any other Credit Document
(whether at the stated maturity, by acceleration or otherwise) to set-off and
appropriate and apply against such amount any and all deposits (general or
special, time or demand, provisional or final), in any currency, and any other
credits, indebtedness or claims, in any currency, in each case whether direct or
indirect, absolute or contingent, matured or unmatured, at any time held or
owing by such Lender or any affiliate, branch or agency thereof to or for the
credit or the account of such Credit Party. Each Lender agrees promptly to
notify the Company on behalf of the respective Credit Party and the
Administrative Agent after any such set-off and application made by such Lender,
provided that the failure to give such notice shall not affect the validity of
such set-off and application.

                           9.8.     COUNTERPARTS.

                                       99

         This Agreement may be executed by one or more of the parties to this
Agreement on any number of separate counterparts (including by telecopy), and
all of said counterparts taken together shall be deemed to constitute one and
the same instrument. A set of the copies of this Agreement signed by all the
parties shall be lodged with the Company and the Administrative Agent.

                           9.9.     ADJUSTMENTS FOR CHANGES IN GAAP.

         In the event that a change in GAAP affects the terms of the covenants
contained in Section 5.2(d) hereof (including the related defined terms used
therein), the Company and the Required Lenders shall comply with the terms of
Section 7.2(b) and, if applicable, negotiate in good faith such amendments to
such covenant and related definitions as are necessary to reflect such changes
in GAAP and as are otherwise reasonably satisfactory to the Company and the
Required Lenders.

                           9.10.    SEVERABILITY; SECTION HEADINGS.

         (a)      Any provision of this Agreement which is prohibited or
unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective
to the extent of such prohibition or unenforceability without invalidating the
remaining provisions hereof, and any such prohibition or unenforceability in any
jurisdiction shall not invalidate or render unenforceable such provision in any
other jurisdiction.

         (b)      The Section and subsection headings and the Table of Contents
contained herein are for convenience of reference only and shall not affect the
construction hereof.

                           9.11.    INTEGRATION.

         This Agreement, the Notes and the other Credit Documents represent the
agreement of the Company, the other Credit Parties, the Administrative Agent and
the Lenders with respect to the subject matter hereof, and there are no
promises, undertakings, representations or warranties by the Administrative
Agent or any Lender relative to subject matter hereof not expressly set forth or
referred to herein, in the Notes or in the other Credit Documents.

                           9.12.    GOVERNING LAW.

         THIS AGREEMENT, THE NOTES AND, UNLESS OTHERWISE SPECIFICALLY PROVIDED
THEREIN, THE OTHER CREDIT DOCUMENTS AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES UNDER THIS AGREEMENT, THE NOTES AND SUCH OTHER CREDIT DOCUMENTS SHALL BE
GOVERNED BY, AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE
STATE OF NEW YORK.

                           9.13.    SUBMISSION TO JURISDICTION; WAIVERS.

         Each Credit Party hereby irrevocably and unconditionally:

                                      100

         (a)      submits for itself and its property in any legal action or
proceeding relating to this Agreement, the Notes and the other Credit Documents,
or for recognition and enforcement of any judgment in respect thereof, to the
non-exclusive general jurisdiction of the Courts of the State of New York, the
courts of the United States of America for the Southern District of New York,
and appellate courts from any thereof;

         (b)      consents that any such action or proceeding may be brought in
such courts and waives any objection that it may now or hereafter have to the
venue of any such action or proceeding in any such court or that such action or
proceeding was brought in an inconvenient court and agrees not to plead or claim
the same;

         (c)      agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or certified
mail (or any substantially similar form of mail), postage prepaid, to such
Credit Party at its address set forth in Section 9.2 or at such other address of
which the Administrative Agent shall have been notified pursuant thereto;

         (d)      agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the right
to sue in any other jurisdiction; and

         (e)      waives, to the maximum extent not prohibited by law, any right
it may have to claim or recover in any legal action or proceeding referred to in
this subsection any special, exemplary, punitive or consequential damages.

                           9.14.    ACKNOWLEDGMENTS.

         Each Credit Party hereby acknowledges that:

         (a)      it has been advised by counsel in the negotiation, execution
and delivery of this Agreement, the Notes and the other Credit Documents;

         (b)      neither the Administrative Agent nor any Lender has any
fiduciary relationship with or duty to such Credit Party arising out of or in
connection with this Agreement, any of the Notes or any of the other Credit
Documents, and the relationship between the Administrative Agent and Lenders, on
one hand, and such Credit Party, on the other hand, in connection herewith or
therewith is solely that of debtor and creditor; and

         (c)      no joint venture is created hereby, by the Notes or by any of
the other Credit Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Lenders or among such Credit Party and the
Lenders.

                           9.15.    WAIVER OF JURY TRIAL.

                  TO THE EXTENT PERMITTED BY LAW, EACH CREDIT PARTY, THE AGENTS
AND THE LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN
ANY LEGAL ACTION OR PROCEEDING RELATING

                                      101

TO THIS AGREEMENT OR THE NOTES AND FOR ANY COUNTERCLAIM THEREIN.

                           9.16.    CONFIDENTIALITY.

         The Administrative Agent and each Lender (each, a "Lending Party")
agrees to keep confidential any information furnished or made available to it by
the Credit Parties pursuant to this Agreement that is marked confidential;
provided that nothing herein shall prevent any Lending Party from disclosing
such information (a) to any other Lending Party or any Affiliate of any Lending
Party, or any officer, director, employee, agent, or advisor of any Lending
Party or Affiliate of any Lending Party, (b) to any other Person if reasonably
incidental to the administration of the credit facility provided herein, (c) as
required by any law, rule, or regulation, (d) upon the order of any court or
administrative agency, (e) upon the request or demand of any regulatory agency
or authority, (f) that is or becomes available to the public or that is or
becomes available to any Lending Party other than as a result of a disclosure by
any Lending Party prohibited by this Agreement, (g) in connection with any
litigation to which such Lending Party or any of its Affiliates may be a party,
(h) to the extent necessary in connection with the exercise of any remedy under
this Agreement or any other Credit Document, (i) to the National Association of
Insurance Commissioners or any similar organization or any nationally recognized
rating agency that requires access to information about a Lender's investment
portfolio in connection with ratings issued with respect to such Lender, (j) to
any direct or indirect contractual counterparty in swap agreements or such
contractual counterparty's professional advisor (so long as such contractual
counterparty or professional advisor to such contractual counterparty (i) has
been approved in writing by the Company and (ii) agrees in a writing enforceable
by the Company to be bound by the provisions of this Section 9.16) and (k)
subject to provisions substantially similar to those contained in this Section
9.16, to any actual or proposed participant or assignee.

                           9.17     BINDING EFFECT; FURTHER ASSURANCES.

         This Agreement shall become effective at such time, on or after the
Closing Date, that the conditions precedent set forth in Section 4.1 have been
satisfied and when it shall have been executed by each Credit Party and the
Administrative Agent, and the Administrative Agent shall have received copies
hereof (telefaxed or otherwise) which, when taken together, bear the signatures
of each Lender (including the Issuing Lender), and thereafter this Agreement
shall be binding upon and inure to the benefit of each Credit Party, each Lender
(including the Issuing Lender) and the Administrative Agent, together with their
respective successors and assigns.

                            (signature pages follow)

                                      102

         IN WITNESS WHEREOF, the parties hereto have caused this Credit
Agreement to be duly executed and delivered by their proper and duly authorized
officers as of the day and year first above written.

COMPANY:                          HERCULES INCORPORATED,
                                  a Delaware corporation

                                  By: /s/Stuart C. Shears
                                      --------------------------------
                                  Name: Stuart C. Shears
                                  Title: Duly Authorized Representative

SUBSIDIARY
GUARANTORS:                       AQUALON COMPANY,
                                      a Delaware general partnership
                                  EAST BAY REALTY SERVICES, INC.,
                                      a Delaware corporation
                                  HERCULES COUNTRY CLUB, INC.,
                                      a Delaware corporation
                                  HERCULES CREDIT, INC.,
                                      a Delaware corporation
                                  HERCULES EURO HOLDINGS, LLC,
                                      a Delaware limited liability company
                                  HERCULES FINANCE COMPANY,
                                      a Delaware general partnership
                                  HERCULES FLAVOR, INC.,
                                      a Delaware corporation
                                  HERCULES HYDROCARBON HOLDINGS, INC.,
                                      a Delaware corporation
                                  HERCULES INTERNATIONAL LIMITED, LLC,
                                      a Delaware limited liability company
                                  HERCULES PAPER HOLDINGS, INC.,
                                      a Delaware corporation
                                  HERCULES SHARED SERVICES CORPORATION,
                                      a Delaware corporation
                                  WSP, INC.,
                                      a Delaware corporation
                                  ATHENS HOLDINGS, INC.,
                                      a Delaware corporation
                                  COVINGTON HOLDINGS, INC.,
                                      a Delaware corporation
                                  FIBERVISIONS INCORPORATED,
                                      a Delaware corporation
                                  FIBERVISIONS, L.P.,
                                      a Delaware limited partnership
                                  FIBERVISIONS PRODUCTS, INC.,
                                      a Georgia corporation
                                  FIBERVISIONS, L.L.C.,
                                      a Delaware limited liability company

                                  By: /s/Stuart C. Shears
                                      --------------------------------
                                  Name: Stuart C. Shears
                                  Title: Duly Authorized Representative for each
                                  of the foregoing Subsidiary Guarantors

LENDERS:                          CREDIT SUISSE FIRST BOSTON, as Administrative
                                  Agent, Collateral Agent and Lender

                                  By: /s/James P. Moran
                                      --------------------------------
                                  Name: James P Moran
                                  Title: Director

                                  By: /s/Ian W. Nalitt
                                      --------------------------------
                                  Name: Ian W. Nalitt
                                  Title: Associate

                                  WACHOVIA BANK, NATIONAL ASSOCIATION

                                  By: /s/Chris Hetterly
                                      --------------------------------
                                  Name: Chris Hetterly
                                  Title: Director

                                  THE BANK OF NOVA SCOTIA

                                  By: /s/Todd S. Meller
                                      --------------------------------
                                  Name: Todd S. Meller
                                  Title: Managing Director

                                  PNC BANK, NATIONAL ASSOCIATION

                                  By: /s/Denise D. Killen
                                      --------------------------------
                                  Name: Denise D. Killen
                                  Title: Vice President

                                  MELLON BANK, N.A.

                                  By: /s/William M. Feathers
                                      --------------------------------
                                  Name: William M. Feathers
                                  Title: Vice President

                                  NATEXIS BANQUES POPULAIRES

                                  By: /s/Anne Ulrich
                                      --------------------------------
                                  Name: Anne Ulrich
                                  Title: Vice President

                                  By: /s/Pieter J. van Tulder
                                      --------------------------------
                                  Name: Pieter J. van Tulder
                                  Title: Vice President and Manager,
                                  Multinational Group

EX-23.1

HERCULES INCORPORATED

                                                                   EXHIBIT 23.01

                       CONSENT OF INDEPENDENT ACCOUNTANTS

We hereby consent to the incorporation by reference in the Registration
Statements of Hercules Incorporated on Form S-8 (Registration Nos. 33-37279,
33-21668, 33-21667, 33-47664, 33-51178, 33-66136, 33-62314, 33-65352, 333-38795,
333-38797 and 333-68863) and on Form S-3 (Registration Nos. 333-63423 and
333-29225) of our report dated March 26, 2003, relating to our audits of the
consolidated financial statements and financial statement schedules of Hercules
Incorporated and subsidiaries as of December 31, 2002 and December 31, 2001 and
for each of the three years in the period ended December 31, 2002, which report
is included in the Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 31, 2003.

/s/ PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 31, 2003

                                       92

EX-99.1

HERCULES INCORPORATED

                                                                    EXHIBIT 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Annual Report of Hercules Incorporated (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, William
H. Joyce, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material
     respects, the financial condition and results of operations of the Company.

/s/ William H. Joyce
- ------------------------------
William H. Joyce
Chief Executive Officer
March 31, 2003

                                       93

EX-99.2

HERCULES INCORPORATED

                                                                    EXHIBIT 99.2

                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

         In connection with the Annual Report of Hercules Incorporated (the
"Company") on Form 10-K for the period ended December 31, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Fred G.
Aanonsen, Vice President and Controller, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
that:

(1)  The Report fully complies with the requirements of Section 13(a) or 15(d)
     of the Securities Exchange Act of 1934; and

(2)  The information contained in the Report fairly presents, in all material
     respects, the financial condition and results of operations of the Company.

/s/ Fred G. Aanonsen
- ----------------------------------
Fred G. Aanonsen
Vice President and Controller
March 31, 2003

                                       94