Rohm & Haas (ROH) 10-K/A 2002 FY Annual report (amended)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K/A

Amendment No. 1

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

For the fiscal year ended December 31, 2002

or

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

For the transition period from         to
Commission file number 1-3507

ROHM AND HAAS COMPANY

(Exact name of registrant as specified in its charter)

DELAWARE
(State or other jurisdiction of
incorporation or organization) 23-1028370
(I.R.S. Employer Identification No.)

100 INDEPENDENCE MALL WEST, PHILADELPHIA, PA
(Address of principal executive offices)
Registrant’s telephone number, including area code:215-592-3000 19106
(Zip Code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
Common Stock of $2.50 par value Name of Each Exchange on
Which Registered
New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
NONE

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

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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes    [X]    No    [  ].

The aggregate market value of voting stock held by non-affiliates of the registrant as of June 30, 2002 was
$6,239,720,124.

The number of shares outstanding of the registrant’s common stock as of February 28, 2003 was
221,154,978 shares.

Documents incorporated by reference:
Part III- Definitive Proxy Statement to be filed with the Securities and Exchange Commission, except the Report on Executive Compensation, Graph titled “Cumulative Total Return to Shareholders” and Audit Committee Report included therein.

1

EXPLANATORY NOTE

This amendment to the Registrant’s Annual Report on Form 10-K for the fiscal year ended December 31, 2002 is being filed to correct typographical errors in data presented for 2001 as set forth in Note 10 of Item 8. Financial Statements and Supplementary Data. No revisions have been made to the Registrant’s financial statements or any other disclosures contained in such Annual Report.

2

Item 8. Financial Statements and Supplementary Data

	Page
Report of Independent Accountants	F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000	F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000	F-4
Consolidated Balance Sheets as of December 31, 2002 and 2001	F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000	F-6
Notes to Consolidated Financial Statements	F-7

3

Quarterly Results of Operations(unaudited)
2002 Quarterly Results

(in millions)		1st Quarter(1)			2nd Quarter			3rd Quarter			4th Quarter			Year 2002
Net sales		$	1,381		$	1,457		$	1,454		$	1,435		$	5,727
Gross profit			441			479			451			446			1,817
Provision for restructuring and asset impairments			(1	)		17			–			161			177
Earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change			84			93			77			(36	)		218
Income from discontinued line of business, net of income taxes			–			–			–			–			–
Loss on disposal of discontinued line of business, net of income taxes			–			(3	)		(4	)		–			(7	)
Net earnings (loss)			(694	)		89			73			(38	)		(570	)
Basic earnings (loss) per share, in dollars(3):
	From continuing operations(2)	$	.38		$	.42		$	.35		$	(.16	)	$	.99
	Net earnings (loss)		(3.15	)		.40			.33			(.17	)		(2.58	)
Diluted earnings (loss) per share, in dollars(3):
	From continuing operations(2)	$	.38		$	.42		$	.35		$	(.16	)	$	.98
	Net earnings (loss)		(3.13	)		.40			.33			(.17	)		(2.57	)
Cash dividends per common share, in dollars		$	.20		$	.20		$	.21		$	.21		$	.82

Quarterly Results of Operations(unaudited)
2001 Quarterly Results

(in millions)		1st Quarter		2nd Quarter			3rd Quarter		4th Quarter			Year 2001
Net sales		$	1,572	$	1,408		$	1,346	$	1,340		$	5,666
Gross profit			452		401			414		391			1,658
Provision for restructuring and asset impairments			–		330			–		(10	)		320
Earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change			48		(208	)		53		37			(70	)
Income from discontinued line of business, net of income taxes			17		23			–		–			40
Gain on disposal of discontinued line of business, net of income taxes			–		428			–		–			428
Net earnings			63		242			53		37			395
Basic and diluted earnings (loss) per share, in dollars(3):
	From continuing operations(2)	$	.22	$	(.94	)	$	.24	$	.17		$	(.31	)
	Net earnings		.29		1.09			.24		.17			1.79
Cash dividends per common share, in dollars		$	.20	$	.20		$	.20	$	.20		$	.80

(1)	Amounts differ from those disclosed in the quarterly report filed on Form 10-Q for the quarter ended March 31, 2002 due to the adoption of SFAS No. 142, which resulted in a cumulative effect of accounting change of $773 million after-tax and a loss per basic share of $3.50 and a loss per diluted share of $3.49.
(2)	Before extraordinary item and cumulative effect of accounting change.
(3)	Earnings (loss) per share for the year may not equal the sum of quarterly earnings (loss) per share due to changes in weighted average share calculations.

4

INDEX TO FINANCIAL STATEMENTS, SCHEDULE AND EXHIBITS

Report of Independent Accountants	F-2
Consolidated Financial Statements:
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000	F-3
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000	F-4
Consolidated Balance Sheets as of December 31, 2002 and 2001	F-5
Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2002, 2001 and 2000	F-6
Notes to Consolidated Financial Statements	F-7
Schedule II. Valuation and Qualifying Accounts Financial Statement Schedule	S-1

F-1

Report on Financial Statements

The financial statements of Rohm and Haas Company and subsidiaries were prepared by the Company in accordance with generally accepted accounting principles. The financial statements necessarily include some amounts that are based on the best estimates and judgments of the Company. The financial information in this annual report on Form 10-K is consistent with that in the financial statements.

The Company maintains accounting systems and internal accounting controls designed to provide reasonable assurance that assets are safeguarded, transactions are executed in accordance with the Company’s authorization and transactions are properly recorded. The accounting systems and internal accounting controls are supported by written policies and procedures, by the selection and training of qualified personnel and by an internal audit program. In addition, the Company’s code of business conduct requires employees to discharge their responsibilities in conformity with the law and with a high standard of business conduct.

The Company’s financial statements have been audited by PricewaterhouseCoopers LLP, independent accountants, as stated in their report below. Their audit was conducted in accordance with generally accepted auditing standards and included consideration of internal accounting controls to the extent necessary to determine the audit procedures required to support their opinion.

The audit committee of the board of directors, composed entirely of non-employee directors, recommends to the board of directors the selection of the Company’s independent accountants, approves their fees and considers the scope of their audits, audit results, the adequacy of the Company’s internal accounting control systems and compliance with the Company’s code of business conduct.
/s/ Raj L. Gupta
Raj L. Gupta
Chairman of the Board and Chief Executive Officer
/s/ Bradley J. Bell
Bradley J. Bell
Senior Vice President and Chief Financial Officer

Report of Independent Accountants

The Board of Directors and Shareholders of Rohm and Haas Company:

In our opinion, the consolidated financial statements listed in the index appearing under Item 8 present fairly, in all material respects, the financial position of Rohm and Haas Company and its subsidiaries at December 31, 2002 and December 31, 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 under Item 15(a) 2. 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 financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and 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 1, on January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” and effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 10, 2003

F-2

Rohm and Haas Company and Subsidiaries
Consolidated Statements of Operations

For the years ended December 31,		2002			2001			2000
(in millions, except per share amounts)
Net sales		$	5,727		$	5,666		$	6,349
Cost of goods sold			3,910			4,008			4,342
Gross profit			1,817			1,658			2,007
Selling and administrative expense			879			861			933
Research and development expense			260			230			224
Interest expense			132			182			241
Amortization of goodwill and other intangibles			69			156			159
Purchased in-process research and development			-			-			13
Provision for restructuring and asset impairments			177			320			13
Share of affiliate earnings, net			15			12			18
Other income, net			5			15			46
Earnings (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change			320			(64	)		488
Income taxes			102			6			192
Earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change		$	218		$	(70	)	$	296
Discontinued operations:
Income from discontinued line of business, net of $25 and $35 of income taxes in 2001 and 2000, respectively			-			40			58
Gain (loss) on disposal of discontinued line of business, net of $3 and $251 of income taxes in 2002 and 2001, respectively			(7	)		428			-
Earnings before extraordinary item and cumulative effect of accounting change		$	211		$	398		$	354
Extraordinary loss on early extinguishment of debt, net of $5 and $1 of income taxes in 2002 and 2001, respectively			(8	)		(1	)		-
Cumulative effect of accounting change, net of $57 and $1 of income taxes in 2002 and 2001, respectively			(773	)		(2	)		-
Net earnings (loss)		$	(570	)	$	395		$	354
Basic earnings (loss) per share (in dollars):
	From continuing operations	$	0.99		$	(0.31	)	$	1.34
	From discontinued operations		(0.03	)		2.12			0.27
	Extraordinary loss on early extinguishment of debt		(0.04	)		(0.01	)		-
	Cumulative effect of accounting change		(3.50	)		(0.01	)		-
Net earnings (loss) per share		$	(2.58	)	$	1.79		$	1.61
Diluted earnings (loss) per share (in dollars):
	From continuing operations	$	0.98		$	(0.31	)	$	1.34
	From discontinued operations		(0.03	)		2.12			0.27
	Extraordinary loss on early extinguishment of debt		(0.03	)		(0.01	)		-
	Cumulative effect of accounting change		(3.49	)		(0.01	)		-
Net earnings (loss) per share		$	(2.57	)	$	1.79		$	1.61
	Weighted average common shares outstanding - basic:		220.9			220.2			219.5
	Weighted average common shares outstanding - diluted:		221.9			220.2			220.5

See Notes to Consolidated Financial Statements

F-3

Rohm and Haas Company and Subsidiaries
Consolidated Statements of Cash Flows

For the years ended December 31,				2002			2001			2000
(in millions of dollars)
Cash Flows from Operating Activities
	Net earnings (loss)			$	(570	)	$	395		$	354
	Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
		Income from discontinued line of business, net of income taxes			-			(40	)		(58	)
		(Gain) loss on disposal of discontinued line of business, net of income taxes			7			(428	)		-
		Provision for allowance for doubtful accounts			16			25			14
		Provision for restructuring and asset impairments			177			320			13
		Purchased in-process research and development			-			-			13
		Depreciation			388			406			446
		Amortization of goodwill and other intangibles			69			156			159
		Cumulative effect of accounting change, net of income tax			773			2			-
	Changes in assets and liabilities, net of acquisitions and divestitures:
		Deferred income taxes			(33	)		(87	)		(37	)
		Accounts receivable			28			97			(183	)
		Inventories			(23	)		141			(100	)
		Prepaid expenses and other assets			61			(29	)		27
		Accounts payable, accrued interest and other accrued liabilities			45			(249	)		78
		Federal, foreign and other income taxes payable			73			(38	)		82
		Other, net			(36	)		(11	)		(94	)
			Net cash provided by continuing operations		975			660			714
			Net cash provided by discontinued operations		-			44			66
			Net cash provided by operating activities		975			704			780
Cash Flows from Investing Activities
	Acquisitions of businesses and affiliates, net of cash acquired				(149	)		(144	)		(390	)
	Proceeds from the disposal of discontinued line of business, net				23			834			-
	Proceeds from the sale of businesses				-			5			433
	Additions to land, buildings and equipment				(407	)		(401	)		(391	)
	Proceeds from/payments for hedge of net investments in foreign subsidiaries				(22	)		18			21
			Net cash provided (used) by investing activities		(555	)		312			(327	)
Cash Flows from Financing Activities
	Proceeds from issuance of long-term debt				156			-			447
	Repayments of long-term debt				(152	)		(159	)		(204	)
	Net change in short-term borrowings				(34	)		(675	)		(483	)
	Purchases of treasury shares				(1	)		(1	)		(1	)
	Payment of dividends				(181	)		(176	)		(171	)
	Other, net				(5	)		(5	)		(6	)
			Net cash used by financing activities		(217	)		(1,016	)		(418	)
Net increase in cash and cash equivalents					203			-			35
Cash and cash equivalents at the beginning of the year					92			92			57
Cash and cash equivalents at the end of the year				$	295		$	92		$	92
Supplemental Cash Flow Information
Cash paid during the year for:
	Interest, net of amounts capitalized			$	139		$	199		$	244
	Income taxes, net of refunds received				135			239			247

See Notes to Consolidated Financial Statements

F-4

Rohm and Haas Company and Subsidiaries
Consolidated Balance Sheets

December 31,		2002			2001
(in millions, except share data)
Assets
Cash and cash equivalents		$	295		$	92
Receivables, net			1,184			1,220
Inventories			765			712
Prepaid expenses and other current assets			299			397
	Total current assets		2,543			2,421
Land, buildings and equipment, net of accumulated depreciation			2,954			2,905
Investments in and advances to affiliates			170			152
Goodwill, net of accumulated amortization			1,617			2,159
Other intangible assets, net of accumulated amortization			1,861			2,257
Other assets			561			484
	Total Assets	$	9,706		$	10,378
Liabilities and Stockholders’ Equity
Liabilities
Short-term obligations		$	180		$	178
Trade and other payables			481			520
Accrued liabilities			682			560
Federal, foreign and other income taxes payable			278			340
	Total current liabilities		1,621			1,598
Long-term debt			2,872			2,748
Employee benefits			650			613
Deferred income taxes			1,186			1,278
Other liabilities			247			282
	Total Liabilities		6,576			6,519
Minority interest			11			18
Commitments and contingencies (Note 26)
Stockholders’ Equity
$2.75 cumulative convertible preferred stock; authorized- 2,846,061 shares;
	issued- no shares		–			–
Common stock; par value- $2.50; authorized- 400,000,000 shares;
	issued- 242,078,367 shares		605			605
Additional paid-in capital			1,971			1,961
Retained earnings			994			1,742
			3,570			4,308
Less: Treasury stock at cost (2002- 20,946,818 shares;
	2001- 21,651,545 shares)		200			208
Less: ESOP shares (2002- 11,100,462; 2001- 11,631,000)			107			113
Accumulated other comprehensive loss			(144	)		(146	)
	Total Stockholders’ Equity		3,119			3,841
	Total Liabilities and Stockholders’ Equity	$	9,706		$	10,378

See Notes to Consolidated Financial Statements

F-5

Rohm and Haas Company and Subsidiaries
Consolidated Statements of Stockholders’ Equity

For the years ended December 31, 2002, 2001 and 2000
(in millions, except per share amounts)

															Accumulated
				Additional											Other			Total		Total
		Common		Paid-in		Retained			Treasury						Comprehensive			Stockholders’		Comprehensive
		Stock		Capital		Earnings			Stock			ESOP			Income (Loss)			Equity		Income (Loss)
2000
Balance January 1, 2000		$	605	$	1,942	$	1,331		$	224		$	125		$	(54	)	$	3,475
Net earnings							354													$	354
Cumulative translation adjustment																(37	)				(37	)
Minimum pension liability																(2	)				(2	)
Total comprehensive income																				$	315
Common dividends ($.78 per share)							(171	)
Tax benefit on ESOP							4
Common stock issued:
	Under bonus plan				14					(10	)
	From ESOP												(6	)
Balance December 31, 2000		$	605	$	1,956	$	1,518		$	214		$	119		$	(93	)	$	3,653
2001
Net earnings							395													$	395
Transition adjustment as of January 1, 2001 (*)																6					6
Current period changes in fair value (*)																27					27
Reclassification to earnings, net (*)																(5	)				(5	)
Cumulative translation adjustment																(75	)				(75	)
Minimum pension liability																(6	)				(6	)
Total comprehensive income																				$	342
Common dividends ($.80 per share)							(176	)
Tax benefit on ESOP							5
Common stock issued:
	Under bonus plan				5					(6	)
	From ESOP												(6	)
Balance December 31, 2001		$	605	$	1,961	$	1,742		$	208		$	113		$	(146	)	$	3,841
2002
Net loss							(570	)												$	(570	)
Current period changes in fair value (*)																(81	)				(81	)
Reclassification to earnings, net (*)																(6	)				(6	)
Cumulative translation adjustment																139					139
Minimum pension liability																(50	)				(50	)
Total comprehensive loss																				$	(568	)
Common dividends ($.82 per share)							(181	)
Tax benefit on ESOP							3
Common stock issued:
	Under bonus plan				10					(8	)
	From ESOP												(6	)
Balance December 31, 2002		$	605	$	1,971	$	994		$	200		$	107		$	(144	)	$	3,119

See Notes to Consolidated Financial Statements

* See Note 7 in the Notes to Consolidated Financial Statements for changes within Accumulated Other Comprehensive Income (Loss), due to the use of derivative and non-derivative instruments qualifying as hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

F-6

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1: Organization and Summary of Significant Accounting Policies

Organization

Rohm and Haas Company and its subsidiaries (the Company), is a global specialty materials company that brings technology and innovation to the market that enhances the performance of end-use consumer products made by our customers. Our products are sold for use in the personal care, grocery, home and construction markets and the electronics industry. We operate in over 25 foreign countries.

Use of Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States of America (GAAP). In accordance with GAAP, we are required to make estimates and assumptions that affect the reported amounts of revenues and expenses, assets and liabilities and the disclosure of contingent assets and liabilities as of the financial statement dates. Actual results may differ from these estimates if different assumptions are made or if different conditions exist.

Reclassifications

Certain reclassifications have been made to prior year amounts to conform with the current year presentation.

Principles of Consolidation

The consolidated financial statements include all significant wholly-owned subsidiaries of our company. Our investments in companies in which we have the ability to exercise significant influence over operating and financial policies (generally 20-50% owned) are accounted for by the equity method. Accordingly, our share of the net earnings (losses) of these companies is included in our consolidated net earnings. Our investments in other companies (generally less than 20%) are carried at cost or fair value, as appropriate. All significant intercompany accounts, transactions and unrealized profits and losses on transactions within the consolidated group are eliminated in consolidation from our financial results, as appropriate.

Unconsolidated Entities

We have no controlling ownership in significant entities that are not consolidated. There are no significant contractual requirements to fund losses of unconsolidated entities.

Foreign Currency Translation

Foreign currency accounts are translated into U.S. dollars under the provisions of Statement of Financial Accounting Standards (SFAS) No. 52, “Foreign Currency Translation.” Through December 31, 2000, the U.S. dollar was the functional currency for approximately half of our international operations. Following our Morton and LeaRonal acquisitions in 1999, we completed a legal entity restructuring and business integration of foreign operations, primarily in Europe. Based on these significant operational changes, we determined that the functional currency of most of our foreign entities was the respective local currency. Consequently, we changed the functional currency for those international operations affected by the restructuring and business integration. Based on exchange rates as of January 1, 2001, a one-time write-down of fixed assets and inventories of approximately $50 million was recorded with a corresponding charge to other comprehensive income included in currency translation adjustment.

Foreign subsidiaries using their local currency as the functional currency translate their assets and liabilities into U.S. dollars using year-end exchange rates. Revenue and expense accounts are translated using the average exchange rates for the reporting period. Translation adjustments are recorded in accumulated other comprehensive income or loss, a separate component of shareholders’ equity.

Several foreign subsidiaries, primarily those in hyper-inflationary emerging market economies, continue to use the U.S. dollar as their functional currency.

In accordance with the accounting standards, foreign entities that continue to use the U.S. dollar as the functional currency translate (1) land, buildings and equipment along with related accumulated depreciation, inventories, goodwill and intangibles along with related accumulated amortization and

F-7

minority interest at historical rates of exchange; (2) all other assets and liabilities using exchange rates at the end of period; and (3) revenues, cost of goods sold and operating expenses other than depreciation and amortization of intangibles using the average rates of exchange for the reporting period. Foreign exchange adjustments, including recognition of open foreign exchange contracts, are charged or credited to income.

Revenue Recognition

We recognize revenue when the earnings process is complete. This generally occurs when products are shipped to the customer in accordance with the terms of the agreement, title and risk of loss have been transferred, collectibility is probable and pricing is fixed and determinable. Revenues from product sales, net of applicable allowances, are recognized upon transfer of product and title to the customer. The exception to this practice is shipments under supplier-owned and managed inventory (SOMI) arrangements. Revenue is recognized under SOMI arrangements when usage of finished goods is reported by the customer, generally on a weekly or monthly basis. Payments received from SOMI customers in advance of revenue recognition are recorded as deferred revenue.

At the time of sale, accruals are made for sales returns and other allowances based on our experience. We account for sales incentives as a reduction to revenue at the time revenue is recorded.

Amounts billed for shipping and handling fees are classified as net sales in the Consolidated Statements of Operations. Costs incurred for shipping and handling are classified as cost of goods sold.

Earnings (Loss) Per Share

Basic earnings (loss) per share is calculated by dividing net earnings by the weighted-average number of shares outstanding. Diluted earnings per share includes the dilutive effect of stock options. There is no dilutive effect of stock options if we report a loss from continuing operations.

Cash and Cash Equivalents

Cash and cash equivalents include cash, time deposits and readily marketable securities with original maturities of three months or less.

Inventories

Inventories are stated at the lower of cost or market. Cost of domestic inventory is determined under the last-in, first-out method.

Land, Buildings and Equipment and Related Depreciation

Land, buildings and equipment are carried at cost. Assets are depreciated over their estimated useful lives on the straight-line and accelerated methods. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. The cost and related accumulated depreciation of our assets are removed from the accounts when they are either retired or disposed. All gains or losses from the sale or disposition of these assets are reflected in our earnings.

Capitalized Software

We capitalize certain costs, such as software coding, installation and testing, that are incurred to purchase or create and implement internal use computer software in accordance with Statement of Position 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use.” The majority of our capitalized software relates to the implementation of our enterprise resource planning (ERP) system.

Goodwill and Indefinite-Lived Intangible Assets

Prior to January 1, 2002, goodwill was amortized on the straight-line basis over periods not greater than 40 years. Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with this statement, as of January 1, 2002, we ceased amortization of goodwill and indefinite-lived intangibles and reclassified certain intangible assets to goodwill. Under SFAS No. 142, goodwill and certain indefinite-lived intangible assets are reviewed for impairment at least annually and are written down only in periods in which it is determined that the fair value is less than the book value.

As a result of our impairment testing in connection with the adoption of SFAS No. 142, a non-cash charge of $830 million ($773 million after-tax) was reflected in 2002. The annual impairment review, required by

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SFAS No. 142, was completed as of May 31, 2002 with no additional impairments identified. The charge from adoption was reported as a Cumulative Effect of Accounting Change in the Consolidated Statement of Operations. Of the impairment, $668 million pertained to goodwill and $162 million ($105 million after-tax) related to indefinite-lived intangible assets within the Salt segment. The after-tax charge was as follows: Coatings - $42 million; Electronic Materials - $281 million; Performance Chemicals - $230 million; and Salt - $220 million. The impairment charges were primarily the result of the economic downturn over the past two years affecting growth assumptions in certain key markets. In addition, customer consolidation in some areas has led to downward pressure on pricing and volume.

Impairment of Long-Lived Assets

Our long-lived assets include land, buildings, equipment, long-term investments, goodwill, indefinite-lived intangible assets and other intangible assets. Long-lived assets, other than investments, goodwill and indefinite-lived intangible assets, are depreciated over their estimated useful lives, and are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” whenever changes in circumstances indicate the carrying value may not be recoverable. Such circumstances would include items, such as, a significant decrease in the market price of a long-lived asset, a significant adverse change in the manner the asset is being used or in its physical condition or a history of operating or cash flow losses associated with the use of the asset. When such events or changes occur, we estimate the future cash flows expected to result from the use and, if applicable, the eventual disposition of the assets. The key variables that we must estimate include assumptions regarding future sales volume, prices and other economic factors. Significant management judgment is involved in estimating these variables, and they include inherent uncertainties since they are frequently forecasting future events. The assumptions used are consistent with our internal planning, however, different assumptions would result in different estimates. Therefore, we periodically evaluate and update the estimates based on the conditions that influence these variables. If such assets are considered impaired, they are written down to fair value as appropriate.

The fair values of our long-term investments are dependant on the performance of the entities in which we invest, as well as volatility inherent in their external markets. In assessing potential impairment for these investments, we will consider these factors as well as the forecasted financial performance of the investment entities. If these forecasts are not met, we may have to record additional impairment charges not previously recognized.

Research and Development

We expense all research and development costs as incurred.

Litigation and Environmental Contingencies and Reserves

We are involved in litigation in the ordinary course of business including personal injury, property damage and environmental litigation. Additionally, we are involved in environmental remediation and spend significant amounts for both company-owned and third party locations. We are required to assess these matters to determine if a liability exists. If we believe that a liability is probable and if the loss can be reasonably estimated, we will record a liability. These estimates involve judgments we make after considering a broad range of information, including the claims, demands, settlement offers received from a governmental authority or private party, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute and our prior experience. If we believe that no best estimate exists, we accrue the minimum in a range of possible losses as we are required to do under GAAP. We review these judgments on a quarterly basis and revise our accruals and disclosures as new facts become available. The accruals we record are estimates and may differ materially from the ultimate outcome if our judgment and estimates turn out to be inaccurate.

Income Taxes

We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the estimated future consequences of temporary differences between the financial statement carrying value of assets and liabilities and their values as measured by tax laws. Valuation allowances are recorded to reduce deferred tax assets when it is more likely than not that a tax benefit will not be realized.

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Stock-Based Compensation

We apply the intrinsic value method in accordance with Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related Interpretations in accounting for stock compensation plans. Under this method, no compensation expense is recognized for fixed stock option plans since the exercise price is equal to the fair market value on the date of grant. We adopted the disclosure only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” which requires certain financial statement disclosures, including pro forma operating results as if we prepared our consolidated financial statements in accordance with the fair value based method of accounting for stock-based compensation. We use the Black-Scholes option pricing model to estimate the fair value of stock option grants. Pro forma results include stock-based compensation expense for options granted. Historically, we presented these pro forma results by immediately expensing the value of the current year grant. In preparation of the adoption of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” prior year presentations have been revised to expense the fair value of the options over their three-year vesting period. Effective January 1, 2003, we prospectively adopted the fair value method of recording stock-based compensation as defined in SFAS No. 123, in accordance with SFAS No. 148. All future employee stock option grants and other stock-based compensation will be expensed over their respective vesting periods. We expect the impact of adoption to increase stock-based compensation expense by approximately $.01 per share for new awards granted to employees after January 1, 2003. We also anticipate stock-based compensation expense to increase by approximately $.02 per share for restricted stock grants in 2003.

The following table illustrates the effect on net earnings (loss) and net earnings (loss) per share if we had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

(in millions, except per share amounts)		2002			2001			2000
Net earnings (loss), as reported		$	(570	)	$	395		$	354
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects			(21	)		(8	)		(5	)
Pro forma net earnings (loss)		$	(591	)	$	387		$	349
Net earnings (loss) per share:
	Basic, as reported	$	(2.58	)	$	1.79		$	1.61
	Basic, pro forma	$	(2.68	)	$	1.76		$	1.59
	Diluted, as reported	$	(2.57	)	$	1.79		$	1.61
	Diluted, pro forma	$	(2.66	)	$	1.76		$	1.58

Accounting for Derivative Instruments and Hedging Activities

We use derivative and non-derivative instruments to manage market risk arising out of changes in interest rates, foreign exchange rates and commodity prices. These instruments are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended by SFAS No. 137 and SFAS No. 138, which we adopted January 1, 2001. Additionally, in July 2001, we adopted the DIG Issue G20, “Assessing and Measuring the Effectiveness of a Purchased Option Used in a Cash Flow Hedge,” which permits an entity to assess hedge effectiveness based on the total changes in an option’s cash flows, that is, the hedging instrument’s entire change in fair value, not just the changes in intrinsic value.

The accounting standards require that all derivative instruments be reported on the balance sheet at their fair values. For derivative instruments designated as fair value hedges, changes in the fair value of the derivative instruments generally offset the changes in fair value of the hedged items in the Consolidated Statements of Operations. For derivative instruments designated as cash flow hedges to reduce the variability of future cash flows related to forecasted transactions, the effective portions of hedges are recorded in Accumulated Other Comprehensive Income (Loss) until the hedged items are realized and recorded in earnings. Any ineffective portions of all hedges are recognized in current period earnings.

Changes in value of derivative or non-derivative instruments, which are designated as and meet all of the criteria for hedges of net investments, are recorded in Accumulated Other Comprehensive Income (Loss) based on

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changes measured on a spot-to-spot basis of exchange rates. Ineffective portions of net investment hedges are charged to earnings.

Changes in the fair values are immediately recorded in current period earnings if derivative instruments were not designated as hedges or fail to meet the criteria as effective hedges under SFAS No. 133, as amended.

Cash flows resulting from our hedging activities are reported under operating activities in our Consolidated Statements of Cash Flows, except for cash flows from derivative hedges of net investments in foreign subsidiaries, which are reported separately under investing activities.

Note 2: Acquisitions and Dispositions of Assets

We completed the following significant acquisitions in 2002:

In September 2002, we acquired certain assets and liabilities of Ferro Corporation’s European Powder Coatings business for approximately $60 million. Ferro Corporation’s Powder Coatings business produces materials used mostly by manufacturers of metal products to finish materials like window frames and automotive wheels. We have not yet finalized the purchase price allocation for this acquisition.

In September 2002, we increased our ownership in Rodel at an additional cost of $22 million, retaining a 99% ownership. The additional cost was recorded as goodwill. Rodel is a leader in precision polishing technology serving the semiconductor, memory disk and glass polishing industries.

In December 2002, we acquired the global plastics additives business of our joint venture partner, Kureha Chemical for approximately $57 million. Included in the acquisition is the commercial operations throughout the Asia-Pacific region and other areas along with the manufacturing facilities and laboratories in Singapore, as well as technical service laboratories in Beijing. Additionally, we gained full control of manufacturing sites in Singapore and Grangemouth, Scotland, which were sites previously part of the joint venture. The acquisition effectively terminates our joint ventures with Kureha Chemical. We have not yet finalized the purchase price allocation for this acquisition.

We completed the following significant acquisitions and divestitures in 2001:

In 2001, we increased our ownership in Rodel from 90% to 99% at an additional cost of approximately $80 million. In the second quarter of 2000, we increased our ownership from 48% to approximately 90% at a cost of approximately $200 million. The financial statements reflect allocations of the purchase price amounts based on estimated fair values, and resulted in acquired goodwill of $110 million, which, until the adoption of SFAS No. 142, was amortized on a straight-line basis over 30 years. Prior to March 31, 2000 the investment had been accounted for under the equity method with our share of earnings reported as equity in affiliates. Since the second quarter of 2000, the results of Rodel’s operations were fully consolidated.

On June 1, 2001, we completed the sale of our Agricultural Chemicals business (Ag) to DAS, a wholly-owned subsidiary of the Dow Chemical Company, for approximately $1 billion, subject to a purchase price adjustment. We recorded a gain on the sale in the amount of $679 million pre-tax ($428 million or $1.94 per share, after-tax) in 2001. During 2002, we reduced this gain by approximately $7 million after-tax due to additional working capital adjustments. In February 2003, all remaining working capital disputes with DAS were resolved through a binding arbitration. No additional adjustment to the gain is expected. Under the terms of the agreement, the divestiture included fungicides, insecticides, herbicides, trademarks, and license to all agricultural uses of the Rohm and Haas biotechnology assets, as well as the agricultural business-related manufacturing sites located in Brazil, Colombia, France and Italy, our share of the Nantong, China joint venture and our assets in Muscatine, Iowa. We recorded the sale of Ag as discontinued operations in accordance with APB Opinion No. 30 “Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.”

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The operating results of Ag have been reported separately as discontinued operations in the Consolidated Statements of Operations for each year presented.

Net sales and income from discontinued operations are as follows:

(in millions)	2001		2000
Net sales	$	230	$	530
Operating income		65		93
Income tax expense		25		35
Income from discontinued operations		40		58

We completed the following acquisition and joint venture activities in 2000:

In the first quarter of 2000, we entered into a joint venture with Stockhausen GmbH & Co. KG (Stockhausen) of Germany to form a global partnership (StoHaas) for the manufacture of reliable, low cost supply of acrylic acid in North America and Europe. Under the terms of the joint venture both partners purchase acrylic acid from StoHaas for use as raw materials. Since StoHaas is not controlled by us its operations are not consolidated, instead, our investment in StoHaas is accounted and reported as an investment under the equity method. The earnings impact in 2002 and 2001 was minimal. We expect minimal earnings impact from operations of the joint venture in future years as well. In conjunction with the joint venture, we acquired Stockhausen’s merchant monomer business in Europe.

In the first quarter of 2000, we acquired 95% of Acima A.G. (Acima), a Swiss company specializing in biocidal formulations, polyurethane catalysts and other specialty chemicals and also acquired an 80% interest in Silicon Valley Chemical Laboratories, Inc. (SVC), a privately-held supplier of high technology products for the semiconductor industry. These transactions were accounted for using the purchase method.

In the second quarter of 2000, we acquired the photoresist business of Mitsubishi Chemical Corporation. Mitsubishi Chemical is a leading producer of G-line, I-line and deep UV photoresist chemistry used to make semiconductor chips. The transaction was accounted for using the purchase method.

We completed the following divestitures in 2000:

In the first quarter of 2000, we sold our Industrial Coatings business to BASF Corporation for approximately $169 million, net of working capital adjustments.

In the third quarter of 2000, we sold our Thermoplastic Polyurethane business to Huntsman Corporation for approximately $117 million, net of working capital adjustments.

In the fourth quarter of 2000, we sold our European Salt business, Salins-Europe, to a consortium, which includes management, led by Union d’Etudes et d’Investissements SA, a wholly-owned subsidiary of Credit Agricole, for approximately $270 million.

These three businesses were acquired by us in June 1999 as part of the acquisition of Morton and were recorded at fair value. Accordingly, no gain or loss was recorded on these transactions.

In the fourth quarter of 2000, we sold our 50% interest in TosoHaas to its joint venture partner, Tosoh Corporation.

Note 3: Investments

We maintain equity investments in companies having operations or technology in areas within our strategic focus. We apply the equity method of accounting for investments in which we own 20% to 50% and have the ability to exert significant influence over the operating and financial policies of the investee. Investments in which we own less than 20%, or in which significant influence cannot be exerted, are

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accounted for under the cost method. At December 31, 2002 and 2001, our investments in affiliates totaled $133 million and $109 million, respectively.

Our proportionate share of earnings or losses from investments accounted for under the equity method and any gain or loss on disposal is recorded in share of affiliate earnings, net in the Consolidated Statements of Operations. Investments are subject to a periodic impairment review, which includes the assessment of the investee’s financial condition, the existence of subsequent rounds of financing and the impact of any relevant contractual preferences, as well as the investee’s historical results of operations, projected results and cash flows.

Note 4: Purchased In-process Research and Development (IPR&D)

In acquisitions accounted for by the purchase method, IPR&D represents the value assigned to research and development projects of an acquired company where technological feasibility had not yet been established at the date of the acquisition, and which, if unsuccessful, have no alternative future use. Amounts assigned to IPR&D are charged to expense at the date of acquisition. Accordingly, we charged $13 million to expense in 2000 related to the Rodel acquisition. This IPR&D charge resulted from the allocation of the purchase price in the Rodel acquisition to projects under development related to chemical mechanical planarization (CMP) and surface preparation (SP) technologies which were commercialized in 2002.

Note 5: Provision for Restructuring and Asset Impairments

2002

In 2002, we recognized $177 million for restructuring and asset impairments. This charge is comprised of $191 million for the impairment of certain long-lived assets and costs associated with workforce reductions initiated in 2002. Offsetting this charge was $14 million of income resulting from pension settlement gains associated with individuals terminated from our pension plans and changes to estimates, both of which were in connection with our 2001 repositioning.

Of the total 2002 charges, $158 million was non-cash in nature and comprised of asset impairments recorded to reduce the carrying value of certain identified assets to their fair values, which were calculated using cash flow analyses. The assumptions used in the calculations were consistent with our internal planning process. The largest, single asset write-down was $121 million, recorded to write-down certain long-lived intangible and fixed assets of the Printed Wiring Board business in the Electronic Materials segment in accordance with SFAS No.144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The remaining $37 million of non-cash charges, recorded during 2002, related largely to the closure of two European plants and other building and equipment impairments.

In a continued effort to streamline operational efficiencies, approximately $20 million of expense was recognized for costs associated with a general reduction in force of over 200 positions throughout various functions of our organization. In most cases, separated employees were offered early termination benefits. The charge is based on actual amounts paid to employees as well as amounts expected to be paid upon termination. The anticipated annual costs savings from these efforts is approximately $25 million, primarily in compensation expense.

A summary of the 2002 repositioning reserves is summarized in the table below, and are included in Accrued Liabilities as of December 31, 2002 in the Consolidated Balance Sheet:

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2002 Repositioning Summary

								Balance
			Changes					December 31,
(in millions)	Expense		to estimates		Payments			2002
Severance and employee benefit costs	$	31	$	–	$	(2	)	$	29
Contract and lease termination and other costs	$	2		–	$	(1	)	$	1
Total	$	33	$	–	$	(3	)	$	30

2001

In 2001, we launched a repositioning initiative to enable several of our businesses to respond to structural changes in the global marketplace. In connection with these repositioning initiatives, we recognized a $330 million restructuring and asset impairment charge in the second quarter of 2001. Offsetting the charge of $330 million recorded in June 2001, was a pre-tax gain of $18 million from the recognition of settlement gains recorded for employees terminated from our pension plans in connection with restructuring activities and changes in estimates to restructuring liabilities established for the 2001 initiatives. Therefore, in total, we incurred charges of $312 million for our 2001 repositioning. The largest component of the 2001 repositioning charge related to the full and partial closure of certain manufacturing and research facilities across all business groups and included exit costs related to the liquid polysulfide sealants business in Adhesives and Sealants and part of the dyes business in Performance Chemicals. Approximately 75% of the asset write-downs were in the North American region.

As of December 31, 2002, all of the efforts have been materially completed, with related demolition and dismantlement activity to be completed by the second quarter of 2003.

By December 31, 2002, the majority of the plant closures identified in June 2001 were completed. As such, actual costs were compared to original estimates and excess reserves were reversed as actual expenses were finalized. In some cases employees affected by the workforce reductions were able to fill positions left vacant through natural attrition.

The remaining restructuring reserves of $4 million for the June 2001 charge are included in Accrued Liabilities as of December 31, 2002 in the Consolidated Balance Sheet. All remaining activities will be complete by December 31, 2003.

2001 Repositioning Summary

	Balance							Balance								Balance
	June 30,		Changes					December 31,		Changes						December 31,
(in millions)	2001		to estimates		Payments			2001		to estimates			Payments			2002
Severance and employee benefit costs	$	71	$	1	$	(35	)	$	37	$	(8	)	$	(26	)	$	3
Contract and lease terminations and other costs	$	11	$	–	$	(5	)	$	6	$	2		$	(7	)	$	1
Total	$	82	$	1	$	(40	)	$	43	$	(6	)	$	(33	)	$	4

As we completed each of the 112 initiatives, actual dollars spent for severance, contract and lease termination and other costs were compared to the corresponding liability established for each initiative in 2001. Any resulting adjustment was recorded to Provision for Restructuring and Asset Impairments in the

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Consolidated Statements of Operations and the restructuring liability in the Consolidated Balance Sheets was adjusted accordingly. In 2002, $14 million of income was recognized relating to 2001 initiatives. Of the total, $5 million was the reversal of original estimates, primarily for severance and $9 million was recorded for the recognition of pension settlement gains, net, recorded for employees terminated from our pension plans in connection with restructuring activities. It is our policy to recognize the settlement gains or losses at the time an employee’s pension liability is settled.

The 2001 restructuring charge included severance benefits for 1,860 employees. Employees receiving severance benefits include those affected by plant closings or capacity reductions, as well as various personnel in corporate, administrative and shared service functions. In 2002, we made revisions to the total number of positions to be affected by the original initiatives; the total number of positions was reduced by 300 due to subsequent changes in estimates. As previously mentioned, in some cases employees affected by the workforce reductions were able to fill positions left vacant through natural attrition throughout various functions.

The number of employees and sites affected by the 2001 repositioning efforts are as follows:

	Affected		Positions					Remaining to
	positions		eliminated		Adjustments			be eliminated
Number of employees		1,860		1,518		(300	)		42

			Sites closed at					Sites
			December 31,					remaining to
	Sites affected		2002		Adjustments			be closed
Full shutdowns		9		8		(1	)		–
Partial shutdowns		9		9		–			–

Note 6: Other Income, Net

We recorded other income, net of $5 million, $15 million and $46 million during 2002, 2001 and 2000. The major categories of our other income, net are summarized in the following table:

(in millions)	2002			2001			2000
Royalty income, net	$	15		$	13		$	15
Foreign exchange gains, net		3			10			26
Interest income		6			8			7
Other, net		(19	)		(16	)		(2	)
Total	$	5		$	15		$	46

Note 7: Financial Instruments

We utilize derivative and non-derivative instruments to manage market risk arising out of changes in foreign exchange rates, interest rates and commodity prices, which could have a material impact on our earnings, cash flows and fair values of assets and liabilities. We have established policies governing use of derivative and non-derivative hedging instruments. We do not use derivative instruments for trading or speculative purposes, nor are we a party to any leveraged derivative instruments or any instruments of which the values are not available from independent third parties. We manage counter-party risk by entering into derivative contracts only with major financial institutions of investment grade credit rating and by limiting the amount of exposure to each financial institution.

With the adoption of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” as amended, as of January 1, 2001, we recorded a $6 million after-tax cumulative income effect to Accumulated Other Comprehensive Income (Loss) and a charge to Net Earnings of $2 million, to recognize at fair value all derivative instruments.

Period changes, net of applicable income taxes, within Accumulated Other Comprehensive Income (Loss), due to the use of derivative and non-derivative instruments qualifying as hedges, are reconciled as follows:

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(in millions)	2002			2001
Accumulated derivatives gain at January 1	$	37		$	9
Transition adjustment as of January 1		–			6
Current period changes in fair value		(81	)		27
Reclassification to earnings, net		(6	)		(5	)
Accumulated derivatives (loss) / gain at December 31	$	(50	)	$	37

Currency Hedges

We enter into foreign exchange option and forward contracts to reduce the variability in the functional-currency-equivalent cash flows associated with foreign currency denominated forecasted transactions. These foreign exchange hedging contracts are designated as cash flow hedges to cover portions of our exposure over the next twelve-month period. The table below summarizes by currency the notional value of foreign currency cash flow hedging contracts in U.S. dollars:

(in millions)	2002		2001
Euro	$	146	$	132
Japanese yen		21		33
Australian dollar		7		9
Other		3		3
Total	$	177	$	177

Included in Accumulated Other Comprehensive Income (Loss) at December 31, 2002 and 2001 is a $4 million loss and a $3 million gain, net of income taxes, respectively, which represent the effective portion of foreign currency cash flow hedges and will be reclassified to earnings in the following twelve-month period. The actual amounts to be charged to earnings in the following twelve-month period will differ from those amounts as a result of changing market conditions. The amount reclassified to earnings out of Accumulated Other Comprehensive Income (Loss) was a $4 million loss in 2002 and a $12 million gain in 2001, net of income taxes. There was no amount charged to earnings in 2002 as an ineffective portion of changes in fair values of hedges while such ineffective portions amounted to $5 million, net of income taxes, in 2001. Both the effective and ineffective portions of cash flow hedges recorded in the Consolidated Statements of Operations are classified in Other Income, net.

We employ foreign exchange forward and swap contracts to reduce the exchange rate risk associated with recognized assets and liabilities denominated in non-functional currencies, including intercompany loans. These contracts generally require exchange of one foreign currency for another at a fixed rate at a future date. These contracts are designated as foreign currency fair value hedges with maturities generally less than twelve months. The carrying amounts of these contracts were adjusted to their market values at each balance sheet date and their related gains or losses are recorded in Other Income, net. The following table sets forth the foreign currency fair value hedges outstanding at December 31, 2002 and 2001:

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(in million U.S. dollars)
Buy Currency	Sell Currency	2002		2001
Euro	U.S. dollar	$	100	$	9
U.S. dollar	Euro		94		60
Euro	British pound		65		–
Euro	Canadian dollar		51		58
Euro	Japanese yen		39		73
Swiss franc	Euro		28		–
U.S. dollar	Japanese yen		24		24
Euro	Swedish krona		13		3
British pound	Euro		12		–
U.S. dollar	Brazilian real		10		5
Canadian dollar	Euro		6		–
Swedish krona	Euro		6		–
Swiss franc	U.S. dollar		–		31
U.S. dollar	British pound		–		52
Other	Other		9		7
Total		$	457	$	322

We utilize foreign exchange forward and currency collar contracts together with non-functional currency borrowings to hedge the foreign currency exposures of the net investments in foreign operating units in Europe and Japan. These transactions are designated as hedges of net investments. Accordingly, the effective portions of foreign exchange gains or losses are recorded as part of the Cumulative Translation Adjustment, which is part of Accumulated Other Comprehensive Income (Loss). At December 31, 2002 and 2001, the effective portion of changes in fair values of hedges, recorded within Accumulated Other Comprehensive Income (Loss) was a $49 million loss and a $38 million gain, net of income taxes, respectively. The amount that was considered ineffective on these net investment hedges increased interest expense by $1 million in 2002 but reduced interest expense by $8 million in 2001. The following table sets forth the derivative and non-derivative positions designated as hedges of net investments outstanding at December 31, 2002 and 2001:

	2002				2001
(in millions)	Derivative		Non- derivative		Derivative		Non- derivative
Euro	$	444	$	158	$	401	$	231
Japanese yen		63		169		194		–
Total	$	507	$	327	$	595	$	231

Interest Rate Hedges

We use interest swap agreements to optimize the worldwide financing costs by maintaining a desired level of floating rate debt. In 2001, we entered into interest swap agreements with a notional value of $950 million, which converted the fixed rate components of the $450 million notes due July 15, 2004 and the $500 million due July 15, 2009 to a floating rate based on 3 month LIBOR. Of these swap agreements, the $500 million notional value contracts maturing in 2009 and $75 million maturing in 2004 contain a credit clause where each counter-party has a right to settle at market price if the other party is downgraded below investment grade. These interest swap agreements are designated and accounted for as fair value hedges. The changes in fair values of interest rate swap agreements are marked to market through income together with the offsetting changes in fair value of underlying notes using the short cut method of measuring effectiveness. As a result, the carrying amount of these notes were increased by $94 million and $28 million at December 31, 2002 and 2001, respectively, while the fair value of swaps were reported as other long term assets in the same amount. The net credits reduced interest expense by $36 million and $13 million in 2002 and 2001, respectively.

Commodity Hedges

We use commodity swap, option, and collar contracts to reduce the effects of changing raw material prices. These contracts are designated and accounted for as cash flow hedges. Included in Accumulated Other

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Comprehensive Income (Loss) at December 31, 2002 and 2001 is a $2 million gain and a $4 million loss, net of income taxes, respectively, which represent the effective portion of cash flow hedges and will be reclassified to earnings in the following fifteen-month period. The actual amounts to be charged to earnings in the following fifteen-month period will differ from these amounts as a result of changing market conditions. The amount charged to earnings out of Accumulated Other Comprehensive Income (Loss) was a $2 million loss in 2002 and a $7 million loss in 2001, net of income taxes, which was recorded as a component of underlying Costs of Goods Sold. The following table sets forth the notional value of commodity hedges outstanding at December 31, 2002 and 2001:

(in millions)	2002		2001
Natural gas	$	30	$	22
Propylene		11		19
Ethylene		8		–
Total	$	49	$	41

No amounts were reclassified to earnings in 2002 and 2001 in connection with forecasted transactions that were no longer considered probable of occurring.

As of December 31, 2002 and 2001, we maintain hedge positions of immaterial amounts that are effective as hedges from an economic perspective but do not qualify for hedge accounting under SFAS No. 133, as amended. Such hedges consist primarily of emerging market foreign currency option and forward contracts, and have been marked to market through income, with an immaterial impact on earnings.

The fair value of financial instruments was estimated based on the following methods and assumptions:

Cash and cash equivalents, accounts receivable, accounts payable and notes payable — the carrying amount approximates fair value due to the short maturity of these instruments.

Short and long-term debt — quoted market prices for the same or similar issues at current rates offered to us for debt with the same or similar remaining maturities and terms.

Interest rate swap agreements — quoted market prices of the same or similar issues available.

Foreign currency option contracts — the market prices to be received or paid in order to terminate.

Foreign currency forward and swap agreements — the carrying value approximates fair value as these contracts are adjusted to their market value at each balance sheet date.

Commodity swap, option and collar contracts — the fair value is estimated based on the amount to be received or paid in order to terminate.

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The carrying amounts and fair values of material financial instruments at December 31, 2002 and 2001 are as follows:

		2002						2001
		Carrying			Fair			Carrying			Fair
(in millions)		Amount			Value			Amount			Value
	Asset (Liability)
Short-term debt		$	(180	)	$	(180	)	$	(178	)	$	(178	)
Long-term debt			(2,872	)		(3,310	)		(2,748	)		(2,921	)
Interest rate swap agreements			111			111			39			39
Foreign currency options			3			3			8			8
Foreign exchange forward and swap contracts			(28	)		(28	)		16			16
Natural gas swap agreements			2			2			(3	)		(3	)
Natural gas option and collar agreements			1			1			–			–
Ethylene swap agreements			1			1			–			–
Propylene swap agreement			–			–			(3	)		(3	)

Note 8: Income Taxes

Earnings (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change earned within or outside the United States are shown below:

(in millions)		2002		2001			2000
United States
	Parent and Subsidiaries	$	161	$	(177	)	$	187
	Affiliates		4		3			6
Foreign
	Subsidiaries		144		101			283
	Affiliates		11		9			12
Earnings (loss) from continuing operations before income taxes, extraordinary item and cumulative effect of accounting change		$	320	$	(64	)	$	488

The provision for income taxes from continuing operations before extraordinary item and cumulative effect of accounting change is composed of:

(in millions)			2002			2001			2000
Income taxes on U.S. earnings
	Federal
		Current	$	76		$	32		$	81
		Deferred		(34	)		(69	)		(2	)
				42			(37	)		79
	State and other			5			3			6
	Total taxes on U.S. earnings			47			(34	)		85
Taxes on foreign earnings
		Current		41			48			120
		Deferred		14			(8	)		(13	)
	Total taxes on foreign earnings			55			40			107
Total income taxes			$	102		$	6		$	192

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

(in millions)	2002			2001			2000
Income from discontinued line of business	$	–		$	25		$	35
Gain (loss) on disposal of discontinued line of business		(3	)		251			–
Extraordinary loss on early extinguishment of debt		(5	)		(1	)		–
Cumulative effect of accounting change		(57	)		(1	)		–

F-19

Deferred income taxes reflect temporary differences between the valuation of assets and liabilities for financial and tax reporting. Details at December 31, 2002 and 2001 were:

(in millions)			2002		2001
Deferred tax assets related to:
	Compensation and benefit programs		$	288	$	267
	Accruals for waste disposal site remediation			30		44
	Asset impairments and restructuring reserves			82		94
	All other			84		71
		Total deferred tax assets		484		476
Deferred tax liabilities related to:
	Intangible assets			626		831
	Tax depreciation in excess of book depreciation			476		492
	Pension			179		152
	All other			152		48
		Total deferred tax liabilities		1,433		1,523
		Net deferred tax liability	$	949	$	1,047

Deferred taxes, which are classified into a net current and non-current balance by tax jurisdiction, are presented in the balance sheet as follows:

(in millions)		2002		2001
Prepaid expenses and other current assets		$	237	$	231
Deferred income taxes			1,186		1,278
	Net deferred tax liability	$	949	$	1,047

The effective tax rate on pre-tax income differs from the U.S. statutory tax rate due to the following:

	2002			2001			2000
Statutory tax rate		35.0	%		(35.0	)%		35.0	%
U.S. tax credits		(3.8	)		(14.7	)		(2.6	)
Charge for IPR&D		–			–			0.9
Depletion		(1.8	)		(9.8	)		(1.1	)
Amortization of non-deductible goodwill		–			35.0			4.2
Non-deductible restructuring charge		0.6			33.0			–
Other, net		1.9			0.9			2.9
Effective tax rate		31.9	%		9.4	%		39.3	%

At December 31, 2002 and 2001, we provided deferred income taxes for the assumed repatriation of all unremitted foreign earnings. If the foreign subsidiary and affiliate earnings were remitted as dividends, the amount of additional U.S. income taxes, after applying statutory tax adjustments, would not be material.

Note 9: Segment Information

Based on realignment of internal management accountability, we revised our reportable business segments in accordance with SFAS No. 131, “Disclosures about Segments of an Enterprise and Related Information.” We operate six business segments: Coatings, Adhesives and Sealants, Electronic Materials, Performance Chemicals, Salt and Monomers. The Coatings, Electronic Materials and Performance Chemicals business segments aggregate operating segments. The Coatings segment sells a range of intermediate products and additives, as well as fully formulated paints for paint and coatings, textiles, non-woven and leather applications for use in the building and construction, home improvement, packaging, graphic arts, apparel and transportation markets. The Adhesives and Sealants segment sells a full-range of materials for use in the flexible and pressure sensitive packaging, building and construction and transportation markets. The Electronic Materials segment sells enabling technology for all aspects of the manufacture of printed wiring boards, integrated circuits and integrated circuit packaging for use in cellular phones, mainframe and personal computers, office equipment, home appliances, electronic games and automotive parts. The Performance Chemicals segment provides products that serve a diverse set of markets, from consumer products, to processing aids for manufacturing of plastics and vinyl products, to water treatment and

F-20

purification processes in food and pharmaceutical markets, to newsprint processing. The Salt segment sells salt in all forms including table, water conditioning, highway de-icing and chemical processing. The Monomers segment produces the starting material for acrylic products and specialty monomer products. Results of operations from prior years have been reclassified to conform to current year presentation.

The results for the year ended December 31, 2001, as reported in our Annual Report filed on Form 10-K with the SEC, were presented in the previously existing business segments. The following table provides a comparable view of the business segments applicable to 2001 versus those presented in 2002.

Business Segments at December 31, 2001				Business Segments at December 31, 2002
	Performance Polymers			Coatings
		Coatings		Architectural and Functional Coatings *
		Adhesives and Sealants		Automotive Coatings *
		Plastics Additives		Powder Coatings *
		Monomers
		Surface Finishes		Adhesives and Sealants *
			Automotive Coatings
			Powder Coatings	Electronic Materials
				Printed Wiring Board *
				Electronic and Industrial Finishes *
	Chemical Specialties			Microelectronics – Shipley *
		Consumer and Industrial Specialties		Microelectronics – Rodel *
		Inorganic and Specialty Solutions
		Ion Exchange Resins		Performance Chemicals
				Plastics Additives *
	Electronic Materials			Inorganic and Specialty Solutions *
		Shipley Ronal		Consumer and Industrial Specialties *
		Microelectronics		Ion Exchange Resins *
	Salt			Salt *
				Monomers *
				*Designates a reporting unit for SFAS No. 142 purposes

The table below presents net sales by business segment, as restated to conform to the new business segments for 2002, 2001 and 2000. Segment eliminations are presented for intercompany sales between segments.

		Net Sales
(in millions)		2002			2001			2000
	Coatings	$	1,866		$	1,753		$	1,870
	Adhesives and Sealants		592			661			704
	Electronic Materials		987			942			1,210
	Performance Chemicals		1,217			1,204			1,307
	Salt		706			749			876
	Monomers		970			946			1,003
	Elimination of Intersegment Sales		(611	)		(589	)		(621	)
Total		$	5,727		$	5,666		$	6,349

F-21

The table below presents summarized financial information about our reportable segments:

(in millions)

			Adhesives
			and			Electronic		Performance
2002	Coatings		Sealants			Materials		Chemicals		Salt		Monomers		Corporate (2)			Total
Earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change	$	187	$	(3	)	$	–	$	46	$	47	$	72	$	(131	)	$	218
Share of affiliate earnings, net		7		2			5		1		–		–		–			15
Depreciation		81		30			43		84		68		69		13			388
Segment assets		1,834		1,138			1,555		1,463		1,660		650		1,406			9,706
Capital additions		57		37			67		29		30		35		152			407

			Adhesives
			and			Electronic		Performance
2001(1)	Coatings		Sealants			Materials		Chemicals		Salt		Monomers		Corporate (2)			Total
Earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change	$	112	$	(71	)	$	1	$	10	$	13	$	41	$	(176	)	$	(70	)
Share of affiliate earnings, net		6		2			4		–		–		–		–			12
Depreciation		88		31			41		77		69		83		17			406
Segment assets		1,938		1,081			1,886		1,697		1,956		702		1,118			10,378
Capital additions		57		25			70		45		29		47		128			401

			Adhesives
			and		Electronic		Performance
2000(1)	Coatings		Sealants		Materials		Chemicals		Salt		Monomers		Corporate (2)			Total
Earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change	$	177	$	23	$	110	$	64	$	24	$	73	$	(175	)	$	296
Share of affiliate earnings, net		7		3		8		–		–		–		–			18
Depreciation		81		40		31		112		85		80		17			446
Segment assets		2,031		1,324		1,919		2,337		2,052		733		856			11,252
Capital additions		87		27		67		42		38		57		73			391

(1)	Reclassified to conform to current year presentation.
(2)	Corporate includes non-operating items such as interest income and expense and corporate governance costs.

F-22

The tables below present sales by geographic area. Sales are attributed to the United States and to all foreign countries combined based on customer location and not on the geographic location from which goods were shipped.

(in millions)	United States		Foreign		Consolidated
2002	$	3,180	$	2,547	$	5,727
2001	$	3,177	$	2,489	$	5,666
2000	$	3,418	$	2,931	$	6,349

Note 10: Pension Plans

We have noncontributory pension plans which provide defined benefits to domestic and non-U.S. employees meeting age and length of service requirements. The following disclosures include amounts for both the U.S. and significant foreign pension plans.

(in millions)	2002						2001						2000
	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
Components of net periodic pension (expense) income:
Service cost	$	(45	)	$	(11	)	$	(46	)	$	(11	)	$	(51	)	$	(9	)
Interest cost		(91	)		(19	)		(92	)		(17	)		(89	)		(15	)
Expected return on plan assets		149			25			169			23			169			21
Amortization of net gain existing at adoption of SFAS No. 87		–			–			7			–			7			–
Other amortization, net		1			(2	)		12			–			11			–
Net periodic pension (expense) income, excluding special items (1)	$	14		$	(7	)	$	50		$	(5	)	$	47		$	(3	)
Transfer to fund retiree medical expenses		–			–			(29	)		–			(27	)		–
Settlement and curtailment gains (losses)		–			–			3			–			22			10
Special termination benefits		(33	)		–			(30	)		–			(10	)		–
Special items (2)	$	(33	)	$	–		$	(56	)	$	–		$	(15	)	$	10
Net periodic pension (expense) income	$	(19	)	$	(7	)	$	(6	)	$	(5	)	$	32		$	7

(1)	Amount represents traditional net periodic pension (expense) income components.
(2)	Due to the historical over funded status of the U.S. and certain foreign pension plans, we have utilized excess pension assets to fund retiree medical expenses, settlement and curtailment gains (losses), and special termination benefits, which include severance and early retirement costs.

Pension income primarily reflects the recognition of favorable investment experience as stipulated by SFAS No. 87, “Employers’ Accounting for Pensions.”

The pension benefit payments in all three years included payments related to voluntary early retirement incentives and a severance benefit program. Severance costs related to formal restructuring plans are discussed in Note 5:Provision for Restructuring and Asset Impairments. It is our policy to recognize settlement gains and losses at the time an employee’s pension liability is settled. Special termination benefits, which include severance and early retirement costs, are recognized when the termination is probable and the amount of the benefit is reasonably estimable.

F-23

Plan activity and status as of and for the years ended December 31, were as follows:

(in millions)	2002						2001
	U.S.			Non-U.S.			U.S.			Non-U.S.
Change in pension benefit obligation:
Pension benefit obligation at beginning of year	$	1,321		$	304		$	1,323		$	303
Service cost, excluding expenses		40			11			40			11
Interest cost		91			19			92			17
Participant contributions		–			2			–			2
Amendments		2			2			20			–
Actuarial loss (gain)		81			23			(32	)		3
Benefits paid		(69	)		(16	)		(87	)		(15	)
Acquisitions, plan mergers		–			2			–			–
Settlements		(91	)		–			(65	)		(3	)
Special termination benefits		33			–			30			–
Foreign currency translation adjustment		–			27			–			(14	)
Pension benefit obligation at end of year	$	1,408		$	374		$	1,321		$	304
Change in plan assets:
Fair value of plan assets at beginning of year	$	1,639		$	289		$	1,897		$	334
Actual return on plan assets		(182	)		(30	)		(61	)		(23	)
Contributions		–			14			–			10
Transfer to fund retiree medical expenses		–			–			(29	)		–
Settlements		(91	)		–			(74	)		(3	)
Benefits paid		(69	)		(16	)		(87	)		(15	)
Trust expenses		(8	)		–			(7	)		–
Foreign currency translation adjustment		–			21			–			(14	)
Fair value of plan assets at end of year	$	1,289		$	278		$	1,639		$	289
Funded status	$	(119	)	$	(96	)	$	318		$	(15	)
Unrecognized transition asset		–			(2	)		–			(3	)
Unrecognized actuarial loss		399			105			(19	)		24
Unrecognized prior service cost		20			5			20			4
Net amount recognized	$	300		$	12		$	319		$	10
Amounts recognized in the statement of financial position consist of:
Prepaid pension cost	$	300		$	5		$	319		$	23
Accrued benefit liability		–			(48	)		–			(16	)
Intangible asset		–			5			–			–
Accumulated other comprehensive loss		–			50			–			3
Net amount recognized	$	300		$	12		$	319		$	10
Plans for which accumulated benefit obligation exceeds assets:
Projected benefit obligation	$	–		$	(330	)	$	–		$	(24	)
Accumulated benefit obligation		–			(276	)		–			(22	)
Fair value of plan assets		–			230			–			9

F-24

Net assets of the pension trusts, which primarily consist of common stocks and debt securities, were measured at market value. Significant actuarial assumptions are as follows:

	2002						2001
	U.S.			Non-U.S.			U.S.			Non-U.S.
Weighted-average assumptions as of December 31,
Discount rate		6.67	%		5.81	%		7.25	%		6.03	%
Expected return on plan assets		8.50	%		7.58	%		8.60	%		7.54	%
Rate of compensation increase		4.00	%		3.63	%		4.00	%		3.70	%

We have a noncontributory, unfunded pension plan which provides supplemental defined benefits primarily to U.S. employees whose benefits under the qualified pension plan are limited by the Employee Retirement Security Act of 1974 and the Internal Revenue Code. These employees must meet age and length of service requirements.

We have a nonqualified trust, referred to as a “rabbi” trust, to fund benefit payments under this pension plan. Rabbi trust assets are subject to creditor claims under certain conditions and are not the property of employees. Therefore, they are accounted for as corporate assets and are classified as other non-current assets. Assets held in trust at December 31, 2002 and 2001 totaled $45 million and $56 million, respectively.

(in millions)	2002			2001			2000
Components of net periodic pension (expense) income:
Service cost	$	(2	)	$	(2	)	$	(2	)
Interest cost		(9	)		(10	)		(9	)
Other amortization, net		(4	)		(5	)		(4	)
Net periodic pension (expense) income	$	(15	)	$	(17	)	$	(15	)

F-25

Plan activity and status as of and for the years ended December 31, were as follows:

(in millions)		2002			2001
Change in pension benefit obligation:
Pension benefit obligation at beginning of year		$	145		$	132
Service cost, excluding expenses			2			2
Interest cost			9			10
Amendments			(3	)		–
Actuarial loss			3			13
Benefits paid			(13	)		(12	)
Pension benefit obligation at end of year		$	143		$	145
Change in plan assets:
Fair value of plan assets at beginning of year		$	–		$	–
Employer contribution			12			12
Benefits paid			(12	)		(12	)
Fair value of plan assets at end of year		$	–		$	–
Funded status		$	(143	)	$	(145	)
Unrecognized actuarial loss			56			56
Unrecognized prior service cost			3			6
Net amount recognized		$	(84	)	$	(83	)
Amounts recognized in the statement of financial position:
	Accrued benefit liability	$	(130	)	$	(126	)
	Intangible asset		3			6
	Accumulated other comprehensive income		43			37
Net amount recognized		$	(84	)	$	(83	)

Pension benefit obligations for this plan were determined from actuarial valuations using an assumed discount rate of 6.67% and 7.25% at December 31, 2002 and 2001, respectively, and an assumed long-term rate of compensation increase of 4% in both 2002 and 2001, respectively.

In 1997, we instituted a non-qualified savings plan for eligible employees in the United States. The purpose of the plan is to provide additional retirement savings benefits beyond the otherwise determined savings benefits provided by the Rohm and Haas Company Employee Stock Ownership and Savings Plan (the Savings Plan.) Each participant’s contributions will be notionally invested in the same investment funds as the participant has elected for investment in his or her Savings Plan account. For most participants, we will contribute a notional amount equal to 60% of the first 6% of the amount contributed by the participant. Our matching contributions will be allocated to deferred stock units. At the time of distribution, each deferred stock unit will be distributed as one share of Rohm and Haas Company common stock. Contributions to this plan were $1 million in 2002 and $2 million in 2001.

Note 11: Employee Benefits

(in millions)	2002		2001
Postretirement health care and life insurance benefits	$	439	$	441
Unfunded supplemental pension plan		126		123
Long term disability benefit costs		28		28
Foreign pension liabilities		48		16
Other		9		5
Total	$	650	$	613

The accrued postretirement benefit cost, unfunded supplemental pension plan costs, and long term disability benefit costs are recorded in “accrued liabilities” (current) and “employee benefits” (non-current.)

F-26

We provide health care and life insurance benefits under numerous plans for substantially all of our domestic retired employees, for which we are self-insured. Retirees contribute toward the cost of such coverage. We also provide health care and life insurance benefits to some non-U.S. retirees.

The status of the plans at year end was as follows:

(in millions)	2002			2001
Change in benefit obligation:
Benefit obligation at beginning of year	$	462		$	394
Service cost		7			7
Interest cost		32			32
Contributions		6			2
Amendments		(14	)		3
Actuarial (gain) loss		38			64
Benefits paid		(52	)		(40	)
Foreign currency translation adjustment		1			–
Benefit obligation at end of year		480			462
Unrecognized prior service cost		19			7
Unrecognized actuarial loss		(38	)		5
Total accrued postretirement benefit obligation	$	461		$	474

Net periodic postretirement benefit cost includes the following components:

(in millions)	2002			2001			2000
Components of net periodic postretirement cost
Service cost	$	7		$	7		$	7
Interest cost		32			32			27
Net amortization		(1	)		(2	)		(3	)
Net periodic postretirement cost	$	38		$	37		$	31

The U.S. benefit obligation as of December 31, 2002 is based on a health care cost trend rate of 11% declining annually in 1% increments to a long term rate of 5%. Different trend rates are used for non-U.S. plans, which account for approximately 5% of the total benefit obligation. The U.S. plan generally limits our per-capita cost to double the 1992 cost. Different cost limits apply to some groups of participants, and there are some retirees to whom the limits do not apply. The limits greatly reduce the impact of health care cost trend rates on the benefit obligation and expense.

A one-percentage-point change in assumed health care cost trend rates would have approximately the following effects:

	1-Percentage				1-Percentage
	Point Increase				Point Decrease
(in millions)	2002		2001		2002			2001
Effect on total of service and interest cost components	$	1	$	1	$	(1	)	$	(1	)
Effect on postretirement benefit obligation		15		11		(14	)		(11	)

The weighted average discount rate used to compute the accumulated postretirement benefit obligation for the U.S. plans was 6.67% at December 31, 2002 and 7.25% at December 31, 2001.

F-27

Note 12: Receivables, net

(in millions)	2002		2001
Customers	$	1,078	$	1,045
Affiliates		18		52
Employees		6		5
Other		137		172
		1,239		1,274
Less: allowance for doubtful accounts		55		54
Total	$	1,184	$	1,220

Employee receivables are primarily comprised of relocation and education reimbursements.

Note 13: Inventories

(in millions)	2002		2001
Finished products and work in-process	$	591	$	550
Raw materials		133		119
Supplies		41		43
Total	$	765	$	712

Inventories amounting to $445 million and $439 million were valued using the last-in, first-out (LIFO) method at December 31, 2002 and 2001, respectively. The excess of current cost over the stated amount for inventories valued under the LIFO method approximated $47 million and $38 million at December 31, 2002 and 2001, respectively. Liquidation of prior years’ LIFO inventory layers did not materially affect cost of goods sold in 2002, 2001 or 2000.

Note 14: Prepaid Expenses and Other Current Assets

(in millions)	2002		2001
Deferred tax assets	$	237	$	231
Prepaid expenses		48		98
Notes receivable from third parties		5		43
Other current assets		9		25
Total	$	299	$	397

Note 15: Land, Building and Equipment, net

(in millions)	2002		2001
Land	$	142	$	114
Buildings and improvements		1,541		1,421
Machinery and equipment		4,926		4,482
Capitalized interest		292		272
Construction in progress		345		318
		7,246		6,607
Less: accumulated depreciation		4,292		3,702
Total	$	2,954	$	2,905

The principal lives (in years) used in determining depreciation rates of various assets are: buildings and improvements (10-50); machinery and equipment (5-20); automobiles, trucks and tank cars (3-10); furniture and fixtures, laboratory equipment and other assets (5-10); capitalized interest (11).

Gross book values of assets depreciated by accelerated methods totaled $772 million and $708 million at December 31, 2002 and 2001, respectively. Assets depreciated by the straight-line method totaled $5,987 million and $5,467 million at December 31, 2002 and 2001, respectively.

F-28

In 2002, 2001 and 2000, respectively, interest expenses of $20 million, $17 million and $14 million were capitalized and added to the gross book value of land, buildings and equipment. Amortization of capitalized interest included in depreciation expense was $14 million in 2002 and $15 million in 2001 and 2000.

Depreciation expense was $388 million, $406 million and $446 million in 2002, 2001 and 2000, respectively.

Note 16: Goodwill and Other Intangible Assets, net

Adoption of SFAS No. 142

Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with this statement, as of January 1, 2002, we ceased amortization of goodwill and intangible assets deemed to have indefinite lives, and reclassified certain intangible assets to goodwill, net of deferred taxes. Under SFAS No. 142, goodwill and certain indefinite-lived intangible assets are no longer amortized but instead are reviewed for impairment at least annually and are written down only in periods in which it is determined that their fair value is less than the book value.

As a result of our impairment testing in connection with the adoption of SFAS No. 142, a non-cash charge of $830 million ($773 million after-tax), was reflected in the results for 2002. The annual impairment review, required by SFAS No. 142, was completed as of May 31, 2002 with no additional impairments identified. The charge from adoption was reported as a Cumulative Effect of Accounting Change in the Consolidated Statement of Operations. Of the impairment, $668 million pertained to goodwill and $162 million ($105 million after-tax) related to indefinite-lived intangible assets within the Salt segment. The after-tax charge is as follows: Coatings – $42 million; Electronic Materials – $281 million; Performance Chemicals – $230 million; and Salt – $220 million. The impairment charges are primarily the result of the economic downturn over the past two years affecting growth assumptions in certain key markets. In addition, customer consolidation in some areas has led to downward pressure on pricing and volume.

Goodwill

SFAS No. 142 requires the transitional impairment review for goodwill, as well as an annual impairment review, to be performed on a reporting unit basis. We have identified each of our reporting units as designated in Note 9:Segment Information. When evaluating goodwill for impairment, SFAS No. 142 requires us to first compare a reporting unit’s book value of net assets, including goodwill, to its fair value. Fair value was estimated based upon discounted cash flow analyses. To the extent that the book value exceeded fair value, we were required to perform a second step to measure the amount of the impairment loss. In the second step, we determined “implied goodwill” by determining the fair value for the assets and liabilities of its reporting units. To the extent that a reporting unit’s book value of goodwill exceeded its implied fair value, impairment existed and was recognized.

Our previous business combinations were accounted for using the purchase method of accounting. As of December 31, 2002 and 2001, accumulated amortization of goodwill was $180 million.

F-29

The changes in the carrying amount of goodwill for the year ended December 31, 2002, by business segment, are as follows:

				Adhesives			Electronic			Performance
(in millions)	Coatings			and Sealants			Materials			Chemicals			Salt			Total
Balance as of January 1, 2002	$	330		$	458		$	529		$	393		$	449		$	2,159
Reclassification of workforce intangible assets, net of amortization and deferred taxes		11			9			18			7			37			82
Impairment losses		(42	)		–			(281	)		(230	)		(115	)		(668	)
Goodwill related to acquisitions		11			–			22			6			–			39
Currency effects		4			6			2			3			–			15
Settlement of pre-acquisition tax contingencies		(2	)		(2	)		(1	)		(1	)		(2	)		(8	)
Other		(1	)		–			17			(17	)		(1	)		(2	)
Balance as of December 31, 2002	$	311		$	471		$	306		$	161		$	368		$	1,617

Other Intangible Assets

Indefinite-lived Intangible Assets

In connection with the adoption of SFAS No. 142, effective January 1, 2002, we identified certain intangible assets with indefinite lives. Prior to 2002, these intangible assets were amortized and are included in the table of finite-lived intangible assets shown below and accordingly, there is no comparative presentation for these assets. Indefinite-lived intangibles are no longer subject to amortization. As part of the SFAS No. 142 adoption, a transitional impairment review was performed in a manner similar to Goodwill and we recognized an impairment loss of $162 million ($105 million after-tax).

The following table provides information regarding our indefinite-lived intangible assets, which all pertain to our Salt segment, as of December 31, 2002:

				Strategic
(in millions)	Tradename			Location *			Total
Balance as of January 1, 2002	$	408		$	114		$	522
Impairment loss		(108	)		(54	)		(162	)
Balance as of December 31, 2002	$	300		$	60		$	360

* Strategic location is a specific customer-related asset that recognizes the intangible value of our supply source in relation to a customer’s location.

Finite-lived Intangible Assets

Finite-lived intangible assets are long-lived intangible assets, other than investments, goodwill and indefinite-lived intangible assets. They are amortized over their useful lives and are reviewed for impairment in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” In 2002, we recognized $121 million to write-down certain long-lived intangible and fixed assets of the Printed Wiring Board business in the Electronic Materials segment in accordance with SFAS No. 144. The non-cash charge was recorded to reduce the carrying value of the assets to their fair values, which were calculated using cash flow analyses. The charge was recorded as Provision for Restructuring and Asset Impairments in the Consolidated Statement of Operations.

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The following table provides information regarding our finite-lived intangible assets:

	At December 31, 2002							At December 31, 2001
	Gross carrying		Accumulated					Gross carrying		Accumulated
(in millions)	amount		amortization			Net		amount		amortization			Net
Customer list	$	986	$	(95	)	$	891	$	1,158	$	(83	)	$	1,075
Tradename		177		(22	)		155		649		(46	)		603
Developed technology		458		(95	)		363		451		(69	)		382
Workforce		–		–			–		148		(24	)		124
Patents, license agreements and other		142		(50	)		92		101		(28	)		73
Total	$	1,763	$	(262	)	$	1,501	$	2,507	$	(250	)	$	2,257

Amortization expense for finite-lived intangible assets was $69 million for the year ended December 31, 2002 compared to $156 million and $159 million for the years ended December 31, 2001 and 2000, respectively, for goodwill and other intangible assets. Estimated amortization expense for 2003 and the five succeeding fiscal years will be approximately $65 million per year.

As described above, the decrease in gross carrying amount of our finite-lived intangible assets from December 31, 2001 is primarily attributable to: (1) the reclassification of tradename and strategic location intangible assets related to our Salt segment to indefinite-lived intangible assets; (2) the reclassification of workforce to goodwill; (3) impairment charges, of which the majority related to the Printed Wiring Board business in Electronic Materials; all of which were partially offset by (4) additions from our current year acquisitions.

F-31

A reconciliation of reported earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change and reported net earnings (loss), as adjusted to reflect the adoption of SFAS No. 142 is as follows:

	For the years ended December 31,
(in millions, except per share amounts)	2002			2001(1,2)			2000
Reported earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change	$	218		$	(70	)	$	296
Add back: Amortization of goodwill and indefinite-lived Intangibles		–			79			78
Adjusted earnings (loss) from continuing operations before extraordinary item and cumulative effect of accounting change	$	218		$	9		$	374
Reported net earnings (loss)	$	(570	)	$	395		$	354
Add back: Amortization of goodwill and indefinite-lived intangibles		–			79			78
Adjusted net earnings (loss)	$	(570	)	$	474		$	432
Reported basic earnings (loss) per share from continuing operations before extraordinary item and cumulative effect of accounting change	$	.99		$	(.31	)	$	1.34
Add back: Amortization of goodwill and indefinite-lived intangibles		–			.36			.36
Adjusted basic earnings (loss) per share from continuing operations before extraordinary item and cumulative effect of accounting change	$	.99		$	.05		$	1.70
Reported diluted earnings (loss) per share from continuing operations before extraordinary item and cumulative effect of accounting change	$	.98		$	(.31	)	$	1.34
Add back: Amortization of goodwill and indefinite-lived intangibles		–			.35			.35
Adjusted diluted earnings (loss) per share from continuing operations before extraordinary item and cumulative effect of accounting change	$	.98		$	.04		$	1.69
Reported basic earnings (loss) per share	$	(2.58	)	$	1.79		$	1.61
Add back: Amortization of goodwill and indefinite-lived intangibles		–			.36			.36
Adjusted basic earnings (loss) per share	$	(2.58	)	$	2.15		$	1.97
Reported diluted earnings (loss) per share	$	(2.57	)	$	1.79		$	1.61
Add back: Amortization of goodwill and indefinite-lived intangibles		–			.35			.35
Adjusted diluted earnings (loss) per share	$	(2.57	)	$	2.14		$	1.96

(1)	Reported diluted loss per share for 2001 was calculated using 220.2 million weighted average shares outstanding. There is no dilutive effect of stock options if we report a loss from continuing operations.
(2)	Adjusted diluted earnings per share for 2001 was calculated using 221.2 million weighted average shares outstanding, reflecting the effect of dilutive securities.

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Note 17: Other Assets

(in millions)	2002		2001
Prepaid pension cost (see Note 10)	$	305	$	342
Rabbi trust assets (see Note 10)		45		56
Other employee benefit assets		15		8
Fair market value of interest rate swaps (see Note 7)		94		28
Other non-current assets		102		50
Total	$	561	$	484

Note 18: Short-Term Obligations

(in millions)	2002		2001
Other short-term borrowings	$	132	$	167
Current portion of long-term debt		48		11
Total	$	180	$	178

Generally, our short-term borrowings consist of bank loans with an original maturity of twelve months or less. As of December 31, 2002, we had uncommitted credit arrangements with financial institutions to provide local credit facilities to our foreign subsidiaries for working capital needs. At December 31, 2002 and 2001, $109 million and $141 million, respectively, was outstanding under such arrangements. The weighted-average interest rate of short-term borrowings was 3.4% and 4.7% at December 31, 2002 and 2001, respectively.

During 2002, we maintained an unused revolving credit agreement which was reduced from $901 million to $500 million in April 2002. This remaining credit commitment of $500 million, which expires in April 2004, carries various interest rates and fees and is maintained for general corporate purposes including support for any future issuance of commercial paper. No compensating balance is required for this revolving credit agreement.

Note 19: Long-Term Debt

The following table illustrates the carrying value of long-term debt included in the Consolidated Balance Sheets at December 31, 2002 and 2001.

	2002							2001
(in millions)	Principal		Other *		Total			Principal		Other *		Total
7.85% debentures due 2029	$	882	$	–	$	882		$	957	$	–	$	957
7.40% notes due 2009		500		70		570			500		14		514
6.95% notes due 2004		451		24		475			451		14		465
6.0% notes due 2007 (denominated in Euro)		420		–		420			356		–		356
3.50% notes due 2032 (denominated in Yen)		169		–		169			–		–		–
9.65% debentures due 2020		145		22		167			145		24		169
9.80% notes due 2020		118		–		118			125		–		125
8.74% obligation due through 2012		28		–		28			45		–		45
9.50% notes due 2021 (callable 2002 at 104.75%)		–		–		–			38		–		38
1.55% notes due 2003 (denominated in Yen)		29		–		29			22		–		22
Other		18		44		62			16		52		68
		2,760		160		2,920			2,655		104		2,759
Less current portion						(48	)						(11	)
Total long-term debt					$	2,872						$	2,748

* Other is defined as fair value adjustments, unamortized debt issuance costs and hedge proceeds.

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On February 27, 2002, we issued 20 billion yen-denominated 3.5% notes due 2032 with interest payable semi-annually every March 29th and September 29th. The notes are callable annually after March 2012. Proceeds from the issuance were used for general corporate purposes.

During 2002, we retired approximately $76 million of the 7.85% debentures due 2029, $38 million of the 9.50% notes due 2021 and $15 million of the obligation due 2012. These debt retirements resulted in an after-tax charge of $8 million.

In 2001, we retired $43 million of 7.85% debentures due 2029 and $49 million of 6.95% notes due 2004, resulting in an after-tax extraordinary loss of $1 million.

We use interest rate swap agreements to convert substantial portions of certain fixed rate notes into floating rates based on 3 month LIBOR. Under GAAP, the LIBOR-components of these notes are adjusted to fair market value while the swaps are recognized at fair market value in an offsetting amount as either an asset or liability. See Note 7:Financial Instrumentsfor a more complete discussion of interest rate swap agreements. At December 31, 2002 and 2001, aggregate fair market value adjustments for these notes was $94 million and $28 million, respectively, and are included in Other Assets in the Consolidated Balance Sheets (see Note 17:Other Assets).

The 9.65% debentures due 2020, previously issued by Morton, are credit sensitive unsecured obligations of the Company (Debentures). The coupon interest rate on the Debentures is subject to adjustment upon changes in the debt rating of the Debentures as determined by Standard and Poor’s Corporation or Moody’s Investors Service. The 40 basis-point increase in the coupon rate of the Debentures resulting from the November 2002 downgrade by Standard and Poor’s is not significant to us. Upon acquiring Morton, we recorded a fair market value adjustment on the Debentures, which is being amortized ratably over the remaining life of the Debentures.

Our revolving credit and other loan agreements require that EBITDA, excluding unusual items, exceed 3.5 times consolidated interest expense on a rolling four-quarter basis. There are no restrictions on the payment of dividends.

During 2002, 2001 and 2000, we made interest payments, net of capitalized interest, of $139 million, $199 million and $244 million, respectively.

Aggregate debt maturities at December 31, 2002 were: $48 million in 2003, $461 million in 2004, $10 million in 2005, $10 million in 2006, $447 million in 2007 and $1,784 million thereafter.

Note 20: Accrued Liabilities

(in millions)	2002		2001
Salaries and wages	$	141	$	99
Interest		94		94
Sales incentive programs and other selling accruals		91		73
Taxes, other than income taxes		42		65
Employee benefits		51		46
Reserve for restructuring (see Note 5)		34		43
Insurance and legal		18		36
Reserve for environmental remediation (see Note 26)		26		20
Other		185		84
Total	$	682	$	560

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Note 21: Other Liabilities

(in millions)	2002		2001
Reserves for environmental remediation (Note 26)	$	97	$	136
Deferred revenue on supply contracts		63		49
Other		87		97
Total	$	247	$	282

Note 22: Stockholders’ Equity

Dividends paid on ESOP shares, used as a source of funds for meeting the ESOP financing obligation, were $12.8 million, $13.8 million and $13.2 million in 2002, 2001 and 2000, respectively. These dividends were recorded net of the related U.S. tax benefits. The number of ESOP shares not allocated to plan members at December 31, 2002 and 2001 were 11.1 million and 11.6 million, respectively.

We recorded compensation expense of $6 million in 2002, 2001 and 2000 for ESOP shares allocated to plan members. We expect to record annual compensation expense at approximately this level over the next 18 years as the remaining $107 million of ESOP shares are allocated. The allocation of shares from the ESOP is expected to fund a substantial portion of our future obligation to match employees savings plan contributions as the market price of Rohm and Haas stock appreciates.

We repurchased an insignificant number of shares in 2002, 2001 and 2000.

The reconciliation from basic to diluted earnings (loss) per share is as follows:

	Earnings
	(Loss)			Shares		Per-Share
(in millions, except per share amounts)	(Numerator)			(Denominator)		Amount
2002
Net loss available to shareholders	$	(570	)		220.9	$	(2.58	)
Dilutive effect of options(a)		–			1.0
Diluted loss per share	$	(570	)		221.9	$	(2.57	)
2001
Net earnings available to shareholders	$	395			220.2	$	1.79
Dilutive effect of options(a)		–			–
Diluted earnings per share	$	395			220.2	$	1.79
2000
Net earnings available to common shareholders	$	354			219.5	$	1.61
Dilutive effect of options(a)		–			1.0
Diluted earnings per share	$	354			220.5	$	1.61

(a) For the year ended December 31, 2002, 1.1 million shares attributable to stock options were excluded from the calculation of diluted earnings per share as the exercise price of the stock options was greater than the average market price. For the year ended December 31, 2001, 4.6 million shares attributable to stock options were excluded from the calculation of diluted earnings per share given the loss from continuing operations. No shares attributable to stock options were excluded for the year ended December 31, 2000.

Shareholders’ Rights Plan

In 2000, we adopted a shareholders’ rights plan under which the Board of Directors declared a dividend of one preferred stock purchase right (Right) for each outstanding share of our common stock held of record as of the close of business on November 3, 2000. The Rights initially are deemed to be attached to the common shares and detach and become exercisable only if (with certain exceptions and limitations) a person or group has obtained or attempts to obtain beneficial ownership of 15% or more of the outstanding shares of our common stock or is otherwise determined to be an “acquiring person” by the Board of Directors. Each Right, if and when it becomes exercisable, initially will entitle holders of the Rights to purchase one one-thousandth (subject to adjustment) of a share of Series A Junior Participating Preferred

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Stock for $150 per one one-thousandth of a Preferred Share, subject to adjustment. Each holder of a Right (other than the acquiring person) is entitled to receive a number of shares of our common stock with a market value equal to two times the exercise price, or $300. The Rights expire, unless earlier exercised or redeemed, on December 31, 2010.

Note 23: Accumulated Other Comprehensive Income (Loss)

The components of Accumulated Other Comprehensive Income (Loss) are as follows:

(in millions)	2002			2001			2000
Foreign currency translation adjustments	$	(10	)	$	(149	)	$	(74	)
Minimum pension liability adjustments		(75	)		(25	)		(19	)
Net gain (loss) on derivative instruments		(59	)		28			–
Accumulated other comprehensive income (loss)	$	(144	)	$	(146	)	$	(93	)

Note 24: Stock Compensation Plans

As permitted under SFAS No. 123, “Accounting for Stock-Based Compensation,” we continue to apply the provisions of APB Opinion No. 25. Accordingly, no compensation expense has been recognized for the fixed stock option plans since the exercise price is equal to the fair market value on the date of grant. Effective January 1, 2003, we adopted the fair value method of recording stock-based compensation as defined in SFAS No. 123 for all stock options awarded to employees after the date of adoption. All future employee stock option grants and other stock-based compensation will be expensed over the vesting period based on the fair value at the date the stock-based compensation is granted. Under the provisions of SFAS No. 148, “Accounting for Stock-Based Compensation-Transition and Disclosure,” we were permitted to choose from three alternative methods when transitioning to the fair value method of accounting for stock-based compensation. We evaluated the alternatives and will account for stock-based compensation under the prospective method beginning in 2003. In addition, beginning in 2003, the level of stock options will decrease and be replaced with additional restricted stock grants. For restricted stock awards, compensation expense, equal to the fair value of the stock on the date of the grant, is recognized over the five-year vesting period. Total compensation expense for restricted stock was $3 million, $3 million and $2 million in 2002, 2001 and 2000, respectively.

1999 Stock Plan

Under this plan, as amended in 2001, we may grant as options or restricted stock up to 19 million shares of common stock with no more than 3 million of these shares granted to any employee as options over a five-year period. No more than 50% of the shares in this plan can be issued as restricted stock. Awards under this plan may be granted only to our employees. Options granted under this plan in 2002, 2001 and 2000 were granted at the fair market value on the date of grant and generally vest over three years expiring within 10 years of the grant date. Shares of restricted stock issued in 2002 totaled 21,494 at a weighted average grant-date fair value of $36.70 per share.

Non-Employee Directors’ Stock Plan of 1997

Under the 1997 Non-Employee Directors Stock Plan, directors receive half of their annual retainer in deferred stock. Each share of deferred stock represents the right to receive one share of our common stock upon leaving the board. Directors may also elect to defer all or part of their cash compensation into deferred stock. Annual compensation expense is recorded equal to the number of deferred stock shares awarded multiplied by the market value of our common stock on the date of award. Additionally, directors receive dividend equivalents on each share of deferred stock, payable in deferred stock, equal to the dividend paid on a share of common stock.

Rohm and Haas Company Non-Qualified Savings Plan

Under this plan, as amended in 2003, employees above a certain level can add to their retirement savings by deferring compensation into the plan. We match 60% of participant’s contributions, up to 6% of the participant’s compensation in Rohm and Haas Stock Units which are rights to acquire shares of Rohm and Haas Company common stock. Participants can also make an irrevocable election to convert restricted stock on which restrictions are about to lapse into Rohm and Haas Stock Units. We do not match these elections.

F-36

Restricted Stock Plan of 1992

Under this plan, executives were paid some or all of their bonuses in shares of restricted stock instead of cash. Most shares vest after five years. The plan covers an aggregate 450,000 shares of common stock. In 1999, 73,105 shares of restricted stock were granted at weighted-average grant-date fair values of $31 per share.

Fixed Stock Option Plans

We have granted stock options to key employees under our Stock Option Plans of 1984 and 1992. Options granted pursuant to the plans are priced at the fair market value of the common stock on the date of the grant. Options vest after one year and most expire 10 years from the date of grant. No further grants can be made under either plan.

The status of our stock options as of December 31 is presented below:

	2002						2001						2000
					Weighted						Weighted						Weighted
					Average						Average						Average
	Shares				Exercise		Shares				Exercise		Shares				Exercise
	(000s)				Price		(000s)				Price		(000s)				Price
Outstanding at beginning of year		8,035			$	30.60		5,696			$	28.56		5,419			$	25.26
Granted		4,466				38.88		2,910				33.19		1,061				40.64
Forfeited		(222	)			37.01		(117	)			35.44		(51	)			34.65
Exercised		(693	)			21.80		(454	)			20.37		(733	)			20.39
Outstanding at end of year		11,586				34.19		8,035				30.60		5,696				28.56
Options exercisable at year end		5,470				30.64		4,612				27.75		4,655				25.86
Weighted-average fair value of options granted during the year			$	13.12					$	10.74					$	12.62

The Black-Scholes option pricing model was used to estimate the fair value for each grant made under the Rohm and Haas plan during the year. The following are the weighted-average assumptions used for all shares granted in the years indicated:

	2002			2001
Dividend yield		2.17	%		2.42	%
Volatility		33.18			33.82
Risk-free interest rate		5.03			4.95
Time to exercise		6 years			6 years

The following table summarizes information about stock options outstanding and exercisable at December 31, 2002:

	Options Outstanding				Options Exercisable
			Weighted-		Weighted-				Weighted-
Range	Number		Average		Average		Number		Average
Of	Outstanding		Remaining		Exercise		Exercisable		Exercise
Exercise Prices	(000s)		Life (Years)		Price		(000s)		Price
$17 to 25		1,136		2.4	$	21.73		1,136	$	21.73
$25 to 37		5,238		6.6	$	31.73		3,442	$	30.95
$37 to 45		5,212		8.8	$	39.39		892	$	40.80
		11,586						5,470

Note 25: Leases

We lease certain properties and equipment used in our operations, primarily under operating leases. Most lease agreements require minimum lease payments and may include a contingent rental based on equipment

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usage and escalation factors. Total net rental expense incurred under operating leases amounted to $65 million in 2002, $73 million in 2001 and $80 million in 2000.

Total future minimum lease payments under the terms of non-cancelable operating leases are as follows:

(in millions)
2003	$	41		2006	$	27
2004		37		2007		20
2005		30	Thereafter			58

Note 26: Contingent Liabilities, Guarantees and Commitments

Environmental

There is a risk of environmental impact in chemical manufacturing operations. Our environmental policies and practices are designed to ensure compliance with existing laws and regulations and to minimize the possibility of significant environmental impact.

The laws and regulations under which we operate require significant expenditures for capital improvements, the operation of environmental protection equipment and remediation. Future developments and even more stringent environmental regulations may require us to make additional unforeseen environmental expenditures. Our major competitors are confronted by substantially similar environmental risks and regulations.

We are a party in various government enforcement and private actions associated with former waste disposal sites, many of which are on the U.S. Environmental Protection Agency’s (EPA) National Priority List, and we have been named a potentially responsible party (PRP) at approximately 140 inactive waste sites where remediation costs have been or may be incurred under the Federal Comprehensive Environmental Response, Compensation and Liability Act and similar state statutes. In some of these cases we may also be held responsible for alleged property damage. We have provided for future costs at certain of these sites. We are also involved in corrective actions at some of our manufacturing facilities.

We consider a broad range of information when we determine the amount necessary for remediation accruals, including available facts about the waste site, existing and proposed remediation technology and the range of costs of applying those technologies, prior experience, government proposals for this or similar sites, the liability of other parties, the ability of other PRPs to pay costs apportioned to them and current laws and regulations. We assess the accruals quarterly and update as additional technical and legal information becomes available. However, at certain sites, we are unable, due to a variety of factors, to assess and quantify the ultimate extent of our responsibility for study and remediation costs. Among the sites for which we have accrued liabilities are both non-company-owned Superfund sites and company facilities. Our significant sites are described in more detail below.

Whitmoyer Site

The Whitmoyer site, located in Jackson Township, Lebanon County, Pennsylvania, was the location of a veterinary pharmaceutical manufacturing facility. When Rohm and Haas acquired the site in 1964, it discovered arsenic contamination and we voluntarily undertook extensive remedial measures with the guidance of the Pennsylvania Department of Health. In 1978, we sold the site to Beecham, Inc., which in turn sold the site to Stafford Laboratories in 1982. GlaxoSmithKline is the successor entity to Beecham, Inc., and the only other solvent known PRP for this site. Remediation on the site has been completed except for ongoing groundwater remediation. In January 2003, the Company settled litigation with GlaxoSmithKline out of court and based on this settlement adjusted the accrual as of December 31, 2002 to reflect the agreed-upon allocation of the remediation costs.

Woodlands’ Sites

The Woodlands’ sites include two separate locations in the New Jersey Pinelands near Chatsworth, New Jersey. The other known PRPs share remedial costs with Rohm and Haas. These PRPs are performing a groundwater treatment program at these sites that is expected to be completed in 3 to 4 years. Once the

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groundwater treatment program is completed, the PRPs are required to monitor a downgradient groundwater plume.

Kramer Landfill

During the 1970’s, our manufacturing waste and that of numerous other known PRPs was disposed of at the Kramer Landfill located in Mantua Township, New Jersey. Rohm and Haas and other PRPs entered into a Consent Decree with the New Jersey Department of Environmental Protection and the EPA in March 1998. All remedial tasks have been completed except for groundwater remediation. The PRPs are currently operating the groundwater treatment facility at the site. The groundwater treatment program is expected to continue for an indeterminate time.

Wood-Ridge Site

In Wood-Ridge, New Jersey, Morton and Velsicol Chemical Corporation (Velsicol) have been held jointly and severally liable for the cost of remediation of environmental problems associated with a mercury processing plant (Site) subsequently acquired by Morton. As of the date we acquired Morton, Morton disclosed and accrued for certain ongoing studies related to the Site. Additional data gathering has delayed completion of these studies until 2003 or later. In our allocation of the purchase price of Morton, we accrued for additional study costs as of December 31, 1999 and additional remediation costs in the first half of 2000 based on the ongoing studies.

Our exposure at the Site will depend on the results of attempts to obtain contributions from others believed to share responsibility. A cost recovery action against certain parties is pending in federal court. This action has been stayed pending future regulatory developments and the appeal of a summary judgment ruling in favor of one of the defendants. Settlements have been reached with some defendants for de minimis claims associated with the Site.

Our exposure will also depend upon the continued ability of Velsicol to contribute to remediation costs. In 2001, Velsicol stopped paying its share of expenses. Velsicol’s indemnitor, Fruit of the Loom, Inc., has been reorganized under Chapter 11 bankruptcy and was discharged of its responsibility for this Site after a payment to us of approximately $1 million. In 2002, the bankruptcy court approved a government settlement entered into with Velsicol, Fruit of the Loom, and other parties, which created a fund to be used to respond to the Velsicol liabilities at several sites, including Wood-Ridge. Morton has contractual rights against Velsicol for payment of a share of remedial costs. These rights are not affected by the government settlement.

We also agreed to fund up to $225,000 for the EPA to develop a workplan for a separate study of contamination in Berry’s Creek, which runs near the Site, and of the surrounding wetlands. In October, 2002, the EPA requested information relating to sources of contamination in Berry’s Creek; we understand this request was sent to over ninety potentially responsible parties. The estimated costs of any resulting remediation of Berry’s Creek were not considered in the allocation of the Morton purchase price. There is much uncertainty as to what will be required to address Berry’s Creek, but cleanup costs could be very high and our share of these costs could be material to the results of our operations, cash flows and consolidated financial position.

Moss Point

During 1996, the EPA notified Morton of possible irregularities in water discharge monitoring reports filed by its Moss Point, Mississippi plant in early 1995. Morton investigated and identified other environmental issues at the plant. Although at the date of acquisition Morton had accrued for some remediation and legal costs, we revised these accruals as part of the allocation of the purchase price of Morton based on our discussions with the authorities and on the information available as of June 30, 2000. In 2000, we reached agreement with the EPA, the Department of Justice and the State of Mississippi, resolving these historical environmental issues. The agreement received court approval in early 2001. The final settlement included payment of $20 million in civil penalties, which were paid in the first quarter of 2001, $2 million in criminal penalties, which were paid in the fourth quarter of 2000, and $16 million in various Supplemental Environmental Projects. The accruals established for this matter were sufficient to cover these and other related costs of the settlement. In December 2001, we closed the chemicals portion of the Moss Point facility. Although we have not yet been served, in December 2002 a complaint was filed in Mississippi on

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behalf of over 700 plaintiffs against Morton International, Rohm and Haas, Joseph Magazzu and the Mississippi Department of Environmental Quality alleging personal injury and property damage caused by environmental contamination. At this time, we see no basis for these claims and we will defend this case vigorously.

Houston Plant

Our Houston plant is an approximately 900 acre facility located in Deer Park, Texas. The Texas Commission on Environmental Quality (TCEQ) issued a Resource Conservation and Recovery Act (RCRA) Part B Permit and a Compliance Plan calling for a RCRA Facility Investigation for certain Solid Waste Management Units (SWMU’s) and remediation of other units. Pursuant to the Compliance Plan and subsequent investigations, the facility continues to operate groundwater recovery systems at two units, has investigated and continues to monitor one unit, will prepare a Corrective Measures Study for another unit, and has submitted the Affected Property Assessment Report (APAR) concluding that no further action is required for four units. Final approval of the APAR is pending TCEQ’s review.

Paterson Site

We closed the former Morton plant at Paterson, New Jersey in December 2001, and are currently undertaking remediation of the site under New Jersey’s Industrial Site Recovery Act. Investigation of contamination of shallow soils and groundwater is nearly complete, with further investigation of deeper groundwater ongoing. Remediation systems for product and shallow groundwater recovery are in place and awaiting authorization from New Jersey Authorities to operate, and soil remediation measures are undergoing evaluation. An accrual was recorded for known remediation activities in September 2000, and revised in September 2002, to address information obtained during the ongoing site investigation.

Other Environmental Matters

The amount charged to earnings pre-tax for environmental remediation was $3 million, $28 million and immaterial for the years ended December 31, 2002, 2001 and 2000, respectively. The reserves for remediation were $123 million and $150 million at December 31, 2002 and 2001, respectively, and are recorded as liabilities (current and long-term) in the Consolidated Balance Sheets. These reserves include amounts resulting from the allocation of the purchase price of Morton. We are pursuing lawsuits over insurance coverage for certain environmental liabilities. It is our practice to reflect environmental insurance recoveries in results of operations for the quarter in which the litigation is resolved through settlement or other appropriate legal processes. Resolutions typically resolve coverage for both past and future environmental spending. We settled with several of our insurance carriers and recorded income pre-tax of approximately $76 million, $13 million and $1 million for the years ended December 31, 2002, 2001 and 2000, respectively.

In addition to accrued environmental liabilities, we have reasonably possible loss contingencies related to environmental matters of approximately $70 million and $73 million at December 31, 2002 and December 31, 2001, respectively. We have reserved for the costs we believe are probable and estimable and other costs which have not met the definition of probable have been included in our disclosure of reasonably possible loss contingencies. Further, we have identified other sites, including our larger manufacturing facilities, where additional future environmental remediation may be required, but these loss contingencies cannot reasonably be estimated at this time. These matters involve significant unresolved issues, including the number of parties found liable at each site and their ability to pay, the outcome of negotiations with regulatory authorities, the alternative methods of remediation and the range of costs associated with those alternatives. We believe that these matters, when ultimately resolved, which may be over an extended period of time, will not have a material adverse effect on our consolidated financial position or consolidated cash flows, but could have a material adverse effect on consolidated results of operations or cash flows in any given period.

Capital spending for new environmental protection equipment was $23 million in 2002 versus $26 million in 2001 and $27 million in 2000. Spending for 2003 and 2004 is expected to be $25 million and $31 million, respectively. Capital expenditures in this category include projects whose primary purposes are pollution control and safety, as well as environmental aspects of projects in other categories that are intended primarily to improve operations or increase plant efficiency. We expect future capital spending for environmental protection equipment to

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be consistent with prior-year spending patterns. Capital spending does not include the cost of environmental remediation of waste disposal sites.

Cash expenditures for waste disposal site remediation were $30 million in 2002, $51 million in 2001 and $33 million in 2000. The expenditures for remediation are charged against accrued remediation reserves. The cost of operating and maintaining environmental facilities was $101 million, $129 million and $114 million in 2002, 2001 and 2000 respectively, and was charged against current-year earnings.

Other Litigation

In February 2003, we were served with European Commission Decisions requiring submission to investigations in France and the United Kingdom, a search permit in Japan from the Japanese Fair Trade Commission, an order for the production of records and information in Canada and two grand jury records subpoenas in the United States all relating to a global antitrust investigation of the Plastics Additives industry. We are cooperating fully with all governmental authorities.

There has been increased publicity about asbestos liabilities faced by manufacturing companies. As a result of the bankruptcy of most major asbestos producers, plaintiffs’ attorneys are increasing their focus on peripheral defendants, including the Company. We believe that we have adequate reserves and insurance and do not believe we have a material asbestos exposure.

There are pending lawsuits filed against Morton related to employee exposure to asbestos at a manufacturing facility in Weeks Island, Louisiana with additional lawsuits expected. We expect that most of these cases will be dismissed because they are barred under worker’s compensation laws; however, cases involving asbestos-caused malignancies may not be barred under Louisiana law. Subsequent to the Morton acquisition, we commissioned medical studies to estimate possible future claims and recorded accruals based on the results. Morton has also been sued in connection with the former Friction Division of the former Thiokol Corporation, which merged with Morton in 1982. Settlement amounts to date have been minimal and many cases have closed with no payment. We estimate that all costs associated with future claims, including defense costs, will be well below our insurance limits. In addition, like most manufacturing companies, we have been sued, generally as one of many defendants, by non-employees who allege exposure to asbestos on company premises. We do not believe that it is reasonably possible that a material loss will be incurred in excess of the amounts recorded for all pending cases.

We are also parties to litigation arising out of the ordinary conduct of our business. Recognizing the amounts reserved for such items and the uncertainty of the ultimate outcomes, it is our opinion that the resolution of all these pending lawsuits, investigations and claims will not have a material adverse effect, individually or in the aggregate, upon our results of operations, cash flows or our consolidated financial position.

Indemnifications

In connection with the divestiture of several of our operating businesses, we have agreed to retain, and/or indemnify the purchaser against certain liabilities of the divested business, including liabilities relating to defective products sold by the business or environmental contamination arising or taxes accrued prior to the date of the sale. Our indemnification obligations with respect to these liabilities may be indefinite as to duration and may or may not be subject to a deductible, minimum claim amount or cap. As such, it is not possible for us to predict the likelihood that a claim will be made or to make a reasonable estimate of the maximum potential loss or range of loss. No assets are held as collateral and no specific recourse provisions exist.

Note 27: New Accounting Pronouncements

Goodwill and Other Intangible Assets

Effective January 1, 2002, we adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” See Note 16:Goodwill and Other Intangible Assets, net for information related to the adoption.

Asset Retirement Obligations

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In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” This statement requires the fair value of liabilities associated with the retirement of long-lived assets to be recognized when a legal obligation to incur such costs arises as a result of the acquisition, construction, development and/or the normal operation of a long-lived asset. This statement also requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred, if a reasonable estimate of fair value can be made. These asset retirement costs are included as part of the carrying asset and subsequently allocated to expense over the asset’s useful life similar to depreciation. SFAS No. 143 is effective for fiscal years beginning after December 15, 2002. We adopted this statement effective January 1, 2003 and will recognize expense for asset retirement obligation liabilities for assets already in place as of January 1, 2003. Based on our evaluation to date, the adoption of SFAS No. 143 is expected to result in a charge of approximately $.02 to $.04 per share, after-tax that will be reported as a Cumulative Effect of Accounting Change in the first quarter of 2003.

Debt Extinguishment, Intangible Assets of Motor Carriers and Lease Accounting

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement amends SFAS No. 13, “Accounting for Leases,” and other existing authoritative pronouncements in order to make various technical corrections, clarify meanings, or describe their applicability under changed conditions and also limits the classification of debt extinguishments as extraordinary items. SFAS No. 145 is effective for years beginning after May 15, 2002. We will adopt the provisions of SFAS No. 145 during the first quarter of year 2003. For the year ended December 31, 2002, we recorded extraordinary losses on early extinguishment of debt of $8 million after-tax. These losses will be reclassified to continuing operations in 2003 after adopting SFAS No. 145, to maintain comparability for the reported periods.

Guarantor’s Accounting

In November 2002, the FASB issued FASB Interpretation No. (FIN) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantees. FIN 45 also requires additional disclosure requirements about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements are effective for financial statement periods ending after December 15, 2002. We do not expect the adoption of this statement to have a material impact on our financial statements.

Stock-Based Compensation

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation -Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based compensation. The statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. While SFAS No. 148 does not amend SFAS No. 123 to require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The transition guidance and annual disclosure provisions of SFAS No. 148 are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for interim periods beginning after December 15, 2002. We adopted the annual disclosure provisions as of December 31, 2002 and the interim disclosure provisions will be adopted during the first quarter of 2003. Effective January 1, 2003, we prospectively adopted the fair value method of recording stock-based compensation as defined in SFAS No. 123 for stock options awarded to employees after the date of adoption. We expect the impact of adoption to increase stock-based compensation expense in 2003 by approximately $.01 per share, after-tax. Under the prospective method, the initial year impact is roughly one-third (based on our vesting policy) of the estimated fair value of the 2003 grants. The annual impact of adopting this pronouncement will further increase expense in subsequent years until a full “run rate” of expense is achieved.

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Variable Interest Entities

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” FIN No. 46 requires a variable interest to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Management is currently assessing the impact of the new standard on our financial statements.

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