Rohm & Haas (ROH) 10-Q 2006 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

or

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

100 INDEPENDENCE MALL WEST, PHILADELPHIA, PA	19106
(Address of principal executive offices)	(Zip Code)

Registrant’s telephone number, including area code:(215) 592-3000

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.
Yesþ Noo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filerþ       Accelerated filero       Non-accelerated filero

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yeso Noþ

Common stock outstanding at October 20, 2006: 218,427,697 shares

ROHM AND HAAS COMPANY AND SUBSIDIARIES
FORM 10-Q

INDEX

Management’s discussion of market risk is incorporated herein by reference to Item 7a of its Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 2, 2006.

Item 1A. Risk Factors

Management’s discussion of risk factors is incorporated herein by reference to Item 1a of its Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 2, 2006.

 Certification Pursuant to Rule 13a-14(a)/15d-14(a)

 Certification Pursuant to Rule 13a-14(a)/15d-14(a)

 Certification Furnished Pursuant to 18 U.S.C. Section 1350

1

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Rohm and Haas Company and Subsidiaries

Consolidated Statements of Operations

	Three Months Ended						Nine Months Ended
(in millions, except per share amounts)	September 30,						September 30,
(unaudited)	2006			2005			2006			2005
Net sales	$	2,065		$	1,927		$	6,204		$	5,898
Cost of goods sold		1,463			1,357			4,331			4,140
Gross profit		602			570			1,873			1,758
Selling and administrative expense		247			234			745			730
Research and development expense		71			66			213			194
Interest expense		21			28			73			92
Amortization of intangibles		15			14			42			42
Restructuring and asset impairments		6			(2	)		10			27
Loss on early extinguishment of debt		—			—			—			17
Share of affiliate earnings, net		2			3			7			6
Other (income), net		(17	)		(11	)		(33	)		(23	)
Earnings from continuing operations before income taxes and minority interest		261			244			830			685
Income taxes		69			77			232			190
Minority interest		3			4			10			7
Earnings from continuing operations	$	189		$	163		$	588		$	488
(Loss) earnings from discontinued operation		(3	)		6			(29	)		18
Net earnings	$	186		$	169		$	559		$	506
Basic earnings per share (in dollars):
Earnings from continuing operations	$	0.87		$	0.74		$	2.68		$	2.19
(Loss) earnings from discontinued operation		(0.01	)		0.02			(0.13	)		0.08
Net earnings per share	$	0.86		$	0.76		$	2.55		$	2.27
Diluted earnings per share (in dollars):
Earnings from continuing operations	$	0.86		$	0.73		$	2.65		$	2.17
(Loss) earnings from discontinued operation		(0.01	)		0.03			(0.13	)		0.08
Net earnings per share	$	0.85		$	0.76		$	2.52		$	2.25
Weighted average common shares outstanding — basic:		217.6			220.9			219.5			222.4
Weighted average common shares outstanding — diluted:		219.6			222.8			221.7			224.6

See Notes to Consolidated Financial Statements

2

Rohm and Haas Company and Subsidiaries

Consolidated Statements of Cash Flows

	Nine Months Ended
(in millions)	September 30,
(unaudited)	2006			2005
Cash Flows from Operating Activities
Net earnings	$	559		$	506
Adjustments to reconcile net earnings to net cash provided by operating activities:
Loss (gain) on asset disposals		6			(6	)
Provision for allowance for doubtful accounts		4			8
Provision for deferred taxes		(1	)		(51	)
Restructuring and asset impairments		17			27
Depreciation		303			319
Amortization of finite-lived intangibles		44			45
Share-based compensation		36			42
Loss on extinguishment of debt		—			17
Premium paid on debt retirement		(6	)		(46	)
Changes in assets and liabilities, net of acquisitions and divestitures:
Accounts receivable		(76	)		(67	)
Inventories		(93	)		(14	)
Prepaid expenses and other current assets		(2	)		(4	)
Accounts payable and accrued liabilities		(72	)		(195	)
Federal, foreign and other income taxes payable		(55	)		54
Other, net		18			31
Net cash flow provided by operating activities		682			666
Cash Flows from Investing Activities
Acquisitions of businesses and affiliates		(35	)		(7	)
Decrease in restricted cash		1			45
Proceeds from the sale of land, buildings and equipment		7			16
Additions to land, buildings and equipment		(236	)		(195	)
Proceeds for hedge of net investment in foreign subsidiaries		—			6
Net cash flow used in investing activities		(263	)		(135	)
Cash Flows from Financing Activities
Repayments of long-term debt		(177	)		(407	)
Issuance of long-term debt		—			73
Purchase of common stock		(264	)		(273	)
Proceeds from exercise of stock options		55			63
Tax benefit of stock options		4			—
Net change in short-term borrowings		(55	)		75
Payment of dividends		(211	)		(186	)
Net cash flow used in financing activities		(648	)		(655	)
Effect of exchange rate changes on cash and cash equivalents		37			(48	)
Net decrease in cash and cash equivalents		(192	)		(172	)
Cash and cash equivalents at the beginning of the period		566			625
Cash and cash equivalents at the end of the period	$	374		$	453

See Notes to Consolidated Financial Statements

3

Rohm and Haas Company and Subsidiaries

Consolidated Balance Sheets

(in millions, except share data)	September 30,			December 31,
(unaudited)	2006			2005
Assets
Cash and cash equivalents	$	374		$	566
Restricted cash		3			4
Receivables, net		1,594			1,485
Inventories		916			798
Prepaid expenses and other current assets		285			310
Current assets of discontinued operation		49			50
Total current assets		3,221			3,213
Land, buildings and equipment, net of accumulated depreciation		2,595			2,642
Investments in and advances to affiliates		104			103
Goodwill		1,553			1,525
Other intangible assets, net of accumulated amortization		1,492			1,503
Other assets		455			476
Other assets of discontinued operation		272			273
Total Assets	$	9,692		$	9,735
Liabilities and Stockholders’ Equity
Liabilities
Short-term obligations	$	298		$	121
Trade and other payables		644			612
Accrued liabilities		847			808
Income taxes payable		121			193
Current liabilities of discontinued operation		9			10
Total current liabilities		1,919			1,744
Long-term debt		1,718			2,074
Employee benefits		670			651
Deferred income taxes		904			943
Other liabilities		229			241
Other liabilities of discontinued operation		79			54
Total Liabilities		5,519			5,707
Minority Interest		118			111
Commitments and contingencies
Stockholders’ Equity
Preferred stock; par value - $1.00; authorized - 25,000,000 shares; issued - no shares		—			—
Common stock; par value - $2.50; authorized - 400,000,000 shares; issued - 242,078,349 shares		605			605
Additional paid-in capital		2,209			2,152
Retained earnings		2,040			1,762
Treasury stock at cost (2006 - 23,819,872 shares; 2005 - 20,115,637 shares)		(635	)		(409	)
ESOP shares (2006 - 8,716,310 shares; 2005 - 9,220,434 shares)		(82	)		(88	)
Accumulated other comprehensive loss		(82	)		(105	)
Total Stockholders’ Equity		4,055			3,917
Total Liabilities and Stockholders’ Equity	$	9,692		$	9,735

See Notes to Consolidated Financial Statements

4

Rohm and Haas Company and Subsidiaries

Consolidated Statement of Stockholders’ Equity

For the nine months ended September 30, 2006

	Number of										Number of
	Shares of										Shares of									Accumulated
(in millions, except share amounts	Common					Additional					Treasury									Other			Total			Total
in thousands)	Stock			Common		Paid-in		Retained			Stock			Treasury						Comprehensive			Stockholders’			Comprehensive
(unaudited)	Outstanding			Stock		Capital		Earnings			Outstanding			Stock			ESOP			Income (Loss)			Equity			Income
Balance January 1, 2006		221,963		$	605	$	2,152	$	1,762			20,116		$	(409	)	$	(88	)	$	(105	)	$	3,917
Net earnings									559															559		$	559
Current period changes in fair value, net																					1			1			1
Reclassification to earnings, net																					(6	)		(6	)		(6	)
Cumulative translation adjustment, net																					27			27			27
Change in minimum pension liability, net																					1			1			1
Total comprehensive income																										$	582
Repurchase of common stock		(5,697	)									5,697			(264	)								(264	)
Common stock issued:
Stock-based compensation		1,993					57					(1,993	)		38									95
ESOP																		6						6
Tax benefit on ESOP									3															3
Common dividends ($1.28 per share(1))									(284	)														(284	)
Balance September 30, 2006		218,259		$	605	$	2,209	$	2,040			23,820		$	(635	)	$	(82	)	$	(82	)	$	4,055

⁽¹⁾ Dividends per share represent dividends paid of $0.95 per share during the nine months ended and the dividend of $0.33 declared on September 21, 2006 payable in the 4th quarter.

See Notes to Consolidated Financial Statements

5

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1:Basis of Presentation

The accompanying unaudited consolidated financial statements of Rohm and Haas Company and its subsidiaries (the “Company”) have been prepared on a basis consistent with accounting principles generally accepted in the United States of America and are in accordance with the Securities and Exchange Commission (“SEC”) regulations for interim financial reporting. In the opinion of management, the financial statements reflect all adjustments, which are of a normal and recurring nature, which are necessary to present fairly the financial position, results of operations, and cash flows for the interim periods. Certain prior year amounts have been reclassified to conform to the current year presentation.

These financial statements should be read in conjunction with the financial statements, accounting policies and the notes included in our annual report filed on Form 10-K with the SEC on March 2, 2006, for the year ended December 31, 2005. The interim results are not necessarily indicative of results for a full year.

In the second quarter of 2006, our Board of Directors approved a plan to sell ourAutomotive Coatingsbusiness, which was previously a business within our Coatings reporting segment. The held-for-sale and discontinued operations criteria set forth in Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”) were met. Therefore, the results of ourAutomotive Coatingsbusiness are presented as a discontinued operation in our Consolidated Financial Statements for all periods presented herein. On October 1, 2006, we completed the sale of our globalAutomotive Coatingsbusiness, excluding the business’ European operations. See Note 3 to the Consolidated Financial Statements.

Variable Interest Entities

We are the primary beneficiary of a joint venture deemed to be a variable interest entity. Each joint venture partner holds several equivalent variable interests, with the exception of a royalty agreement held exclusively between the joint venture and our Company. In addition, the entire output of the joint venture is sold to our Company for resale to third party customers. As the primary beneficiary, we have consolidated the joint venture’s assets, liabilities and results of operations in our consolidated financial statements. Creditors and other beneficial holders of the joint venture have no recourse to the general credit of our Company.

We also hold a variable interest in another joint venture, accounted for under the equity method of accounting. The variable interest relates to a cost-plus arrangement between the joint venture and each joint venture partner. We have determined that we are not the primary beneficiary and therefore have not consolidated the entity’s assets, liabilities and results of operations in our consolidated financial statements. The entity provides manufacturing services to us and the other joint venture partner, and has been in existence since 1999. As of September 30, 2006, our investment in the joint venture totals approximately $39 million, representing our maximum exposure to loss.

NOTE 2:New Accounting Pronouncements

Accounting for Planned Major Maintenance Activities

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Staff Position (FSP)AUG AIR-1, which addresses the accounting for planned major maintenance activities. The FASB believes that the accrue-in-advance method of accounting for planned major maintenance activities results in the recognition of liabilities that do not meet the definition of a liability in FASB Concepts Statement No. 6,“Elements of Financial Statements,”because it causes the recognition of a liability in a period prior to the occurrence of the transaction or event obligating the entity. This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods beginning January 1, 2007. We are currently evaluating the impact to our consolidated financial statements.

6

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement amends SFAS Nos. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in the statement of financial position, and to recognize annual changes in gains or losses, prior service costs, or other credits that have not been recognized as a component of net periodic pension cost, net of tax through comprehensive income. SFAS No. 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of its year-end statement of financial position, with limited exceptions. We are required to apply the recognition provisions of SFAS No. 158 and provide the required disclosures as of the end of the fiscal year ended December 31, 2006. The December 31, 2006 funded status of our plans will depend on actual benefits paid, the actual return on our plans’ assets for 2006 and the prevailing interest rates at year-end. We are currently evaluating the impact of adopting SFAS No. 158 on our consolidated balance sheets. The measurement provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008. Currently, all of our plans have a measurement date of December 31, with the exception of our Rohm and Haas Japan Plan and our Japan Acrylic Plan.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued in 2008. We are currently assessing the impact to our consolidated financial statements.

Quantifying Misstatements

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108,“Quantifying Misstatements.”In recent years, the SEC has voiced concerns over registrants’ exclusive reliance on either a balance sheet or income statement approach in quantifying financial statement misstatements. SAB No. 108 states that registrants should use both a balance sheet approach and income statement approach when quantifying and evaluating the materiality of a misstatement. The SAB also provides guidance on correcting errors under the dual approach as well as transition guidance for correcting previously immaterial errors that are now considered material based on the approach in the SAB. We will adopt SAB No. 108 as of December 31, 2006, and we do not believe it will have a material impact to our consolidated financial statements.

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued Financial Accounting Standards Board Interpretation (“FIN”) No. 48,“Accounting for Uncertainty in Income Taxes.”FIN No. 48 is an interpretation of SFAS No. 109,“Accounting for Income Taxes.”FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. This interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition of tax positions. The recognition threshold and measurement attribute is part of a two step tax position evaluation process prescribed in FIN No. 48. FIN No. 48 is effective after the beginning of an entity’s first fiscal year that begins after December 15, 2006. We will adopt FIN No. 48 as of January 1, 2007, and are currently evaluating the impact to our consolidated financial statements.

Presentation of Taxes Collected from a Customer and Remitted to Governmental Authorities in the Income Statement

In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation),” to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to this EITF are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006. We will adopt EITF 06-3 as of January 1, 2007, and are currently evaluating the impact to our consolidated financial statements.

7

Accounting for Servicing of Financial Assets

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets an Amendment of FASB Statement No. 140.”SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 156 is effective after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will adopt SFAS No. 156 as of January 1, 2007, and do not believe it will have a material impact to our consolidated financial statements.

Certain Hybrid Financial Instruments

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.”SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. In addition, SFAS No. 155 clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will adopt SFAS No. 155 as of January 1, 2007, and we will apply the provisions of SFAS No. 155 if and when required.

Non-monetary Transactions

In December 2005, the EITF issued EITF No. 04-13,“Accounting for Purchases and Sales of Inventory with the Same Counterparty”to clarify under what circumstances two or more transactions with the same counterparty (counterparties) should be viewed as a single non-monetary transaction within the scope of Accounting Principles Board (“APB”) Opinion No. 29,“Accounting for Nonmonetary Transactions.”In addition, EITF No. 04-13 clarifies whether there are any circumstances under which the transactions should be recognized at fair value if non-monetary transactions within the scope of APB No. 29 involve inventory. EITF No. 04-13 is effective for new arrangements entered into, or modifications or renewals of existing arrangements, in interim or annual periods beginning after March 15, 2006. The adoption of EITF No. 04-13 in the second quarter of 2006 did not have a material impact on our financial position, results of operations or cash flows.

Inventory Costs

In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43, Chapter 4”(“SFAS No. 151”). SFAS No. 151 amends Accounting Research Bulletin No. 43, Chapter 4, to clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges. In addition, SFAS No. 151 requires that allocation of fixed production overhead to inventory be based on the normal capacity of the production facilities. SFAS No. 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 did not have a material impact on our financial position, results of operations or cash flows.

Share-Based Compensation

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payments.” This statement revises SFAS No. 123, and supersedes APB Opinion No. 25, and its related implementation guidance. SFAS No. 123R requires companies to recognize expense over the employee’s requisite service period in the income statement for the grant-date fair value of awards of share-based payments including equity instruments and stock appreciation rights. SFAS No. 123R also clarifies and expands guidance in several areas, including measuring fair value, defining requisite service period, accounting for liability awards and accounting for tax benefits. We adopted SFAS No. 123R as of January 1, 2006. Due to the fact that all of our options issued prior to January 1, 2003, the date we adopted SFAS No. 123, were vested as of January 1, 2006, the adoption of SFAS No. 123R did not have a material impact on our financial position, results of operations or cash flows. SFAS No. 123R is discussed further in Note 7 to the Consolidated Financial Statements.

8

NOTE 3:Discontinued Operation

In the second quarter of 2006, we determined that the globalAutomotive Coatingsbusiness became an Asset Held for Sale and has been treated as a discontinued operation, and we have reflected this business as such in our financial statements for all periods presented. On October 1, 2006, we completed the sale of our globalAutomotive Coatingsbusiness, excluding that business’ European operations, which was previously a business within our Coatings reporting segment. Proceeds included $230 million, in cash, subject to working capital adjustments as defined in the sale agreement. In the fourth quarter of 2006, we expect to record a pre-tax gain of approximately $10 million. We expect to sell the EuropeanAutomotive Coatingsoperations within the next 9-12 months, dependent upon market conditions.

In accordance with EITF No. 93-17, “Recognition of Deferred Tax Assets for a Parent Company’s Excess Tax Basis in the Stock of a Subsidiary That is Accounted for as a Discontinued Operation,” we recorded certain tax/book basis differences resulting in the recognition of a deferred tax liability of $26 million for the nine months ended September 30, 2006, which is included in the income tax provision for the discontinued operation.

In accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we compared the fair value of our expected disposal asset groupings and determined the net carrying value of one asset group was impaired by approximately $7 million pre-tax, which is included in the loss from the discontinued operation for the second quarter of 2006.

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in millions)	2006			2005		2006			2005
Net sales from discontinued operation	$	23		$	27	$	72		$	85
(Loss) earnings from discontinued operation		—			1		(8	)		5
Income tax (provision) benefit		(3	)		5		(21	)		13
Net (loss) earnings from discontinued operation	$	(3	)	$	6	$	(29	)	$	18

The following table presents the major classes of assets and liabilities of our discontinued operation:

	September 30,		December 31,
(in millions)	2006		2005
Current assets of discontinued operation	$	49	$	50
Land, buildings and equipment, net		32		39
Investments in and advances to affiliates		51		43
Goodwill		76		76
Intangible assets		113		115
Other assets of discontinued operation		272		273
Total Assets of discontinued operation	$	321	$	323
Current liabilities of discontinued operation	$	9	$	10
Deferred income based taxes		77		52
Other long-term liabilities		2		2
Other liabilities of discontinued operation		79		54
Total Liabilities of discontinued operation	$	88	$	64

9

NOTE 4:Acquisitions

In the second quarter of 2006, we acquired the net assets of Floralife^®, Inc. (“Floralife”), a top global provider of post-harvest care products for the floral industry based in South Carolina for approximately $22 million. As part of the purchase price allocation, $14 million was allocated to intangible assets, primarily consisting of licensed technology and customer relationships, $3 million to net working capital, $3 million to fixed assets, $6 million to goodwill and $4 million to deferred tax liabilities. The intangible assets primarily consist of definite-lived intangible assets with useful lives ranging from 5 to 9 years. Prior to this acquisition, we had a royalty agreement with Floralife under which we paid Floralife for the use of certain technologies. The acquisition by Rohm and Haas will expand the portfolio of our AgroFresh™ business to include post-harvest flowers on a global basis. The proforma results of operations for Floralife for the three and nine month periods ended September 30, 2006 and 2005, respectively, are not material to the Rohm and Haas Consolidated Statements of Operations for those respective periods. The results of operations for Floralife are included in our Performance Chemicals business segment as of the second quarter of 2006.

NOTE 5:Segment Information

We operate six reportable segments: Coatings, Monomers, Performance Chemicals, Electronic Materials, Salt, and Adhesives and Sealants. The Coatings, Performance Chemicals and Electronic Materials reportable segments aggregate businesses. The reportable operating segments, how they are aggregated, and the types of products from which their revenues are derived are discussed below.

Ø	Coatings
	The Coatings segment is comprised of two businesses:Architectural and Functional CoatingsandPowder Coatings.Architectural and Functional Coatingsproduces acrylic emulsions and additives that are used to make industrial and decorative coatings, varnishes and specialty finishes. This business offers products that serve a wide variety of coatings markets: industrial markets for use on metal, wood and in traffic paint; the building industry for use in roofing materials, insulation and cement; and consumer markets for use in latex paints, paper, textiles and non-woven fibers, graphic arts and leather.Powder Coatingsproduces a comprehensive line of powder coatings that are sprayed in a solid form onto consumer and industrial products and parts. Our powder coatings are used on a wide variety of products, ranging from door handles to patio and deck furniture, to windshield wipers, televisions and industrial shelving. The results of theAutomotive Coatingsbusiness which were previously reported in the Coatings segment are now shown as a discontinued operation. More information is provided in Note 3 to the Consolidated Financial Statements.
Ø	Monomers
	The Monomers segment produces methyl methacrylate, acrylic acid and associated esters as well as specialty monomer products. These monomers serve as the building blocks for many of the acrylic technologies in our other business segments and are sold externally for applications such as super absorbent polymers and acrylic sheet.
Ø	Performance Chemicals
	The Performance Chemicals segment includes the sales and operating results ofPlastics Additives,Process Chemicals,Consumer and Industrial Specialtiesand other smaller businesses. These businesses provide products and technologies that serve a diverse set of markets, such as consumer products, additives used to manufacture plastic and vinyl products, water treatment and purification processes for food and pharmaceutical markets, and newsprint processing.

10

Ø	Electronic Materials
	The Electronic Materials segment provides cutting-edge technology for use in telecommunications, consumer electronics and household appliances. TheCircuit Board Technologiesbusiness develops and delivers the technology, materials and fabrication services for increasingly powerful, high-density circuit boards in computers, cell phones, automobiles and many other electronic devices. OurPackaging and Finishing Technologiesbusiness develops and delivers innovative materials and processes that boost the performance of a diverse range of electronic, optoelectronic and industrial packaging and finishing applications. TheSemiconductor Technologiesbusiness develops and supplies integrated products and technologies on a global basis enabling our customers to drive leading-edge semiconductor design to boost performance of semiconductor devices powered by smaller and faster chips. This business also develops and delivers materials used for chemical mechanical planarization, the process used to create the flawless surfaces required to allow manufacturers to make faster and more powerful integrated circuits and electronic substrates.
Ø	Salt
	The Salt segment includes some of the most recognized consumer brand names and product symbols, including the leading brand of table salt in the United States — Morton Salt, with the “little Salt Girl,” and Windsor Salt, Canada’s leading brand. Even though the consumer salt business is best known, this segment extends well beyond this market and includes salt used for water conditioning, ice control, food processing and chemical/industrial purposes.
Ø	Adhesives and Sealants
	The Adhesives and Sealants segment provides a vast array of formulated, value-adding products derived from a broad range of chemistries and technologies, including our world-class acrylic technology. This segment offers various products including packaging, pressure sensitive, construction, and transportation adhesives.

The table below presents net sales by reportable segment. Segment eliminations are presented for intercompany sales between reportable segments.

Net Sales by Business Segment and Region

	Three Months Ended						Nine Months Ended
(in millions)	September 30,						September 30,
	2006			2005			2006			2005
Business Segment
Coatings	$	700		$	664		$	2,087		$	1,972
Monomers		500			422			1,472			1,394
Performance Chemicals		447			423			1,333			1,252
Electronic Materials		402			351			1,169			979
Salt		174			163			597			632
Adhesives and Sealants		179			175			547			554
Elimination of Intersegment Sales		(337	)		(271	)		(1,001	)		(885	)
Total net sales	$	2,065		$	1,927		$	6,204		$	5,898
Customer Location
North America	$	1,042		$	990		$	3,206		$	3,078
Europe		507			484			1,520			1,528
Asia-Pacific		427			378			1,232			1,068
Latin America		89			75			246			224
Total net sales	$	2,065		$	1,927		$	6,204		$	5,898

11

Net Earnings (Loss) from Continuing Operations by Business Segment⁽¹⁾

	Three Months Ended						Nine Months Ended
(in millions)	September 30,						September 30,
	2006			2005			2006			2005
Business Segment
Coatings	$	64		$	74		$	187		$	191
Monomers		42			30			158			142
Performance Chemicals		42			44			124			124
Electronic Materials		62			49			173			112
Salt		4			(1	)		23			27
Adhesives and Sealants		15			10			42			26
Corporate(2)		(40	)		(43	)		(119	)		(134	)
Total net earnings from continuing operations	$	189		$	163		$	588		$	488

(1)	Earnings (loss) for all segments except Corporate are tax effected using our overall consolidated effective tax rate excluding certain discrete items.
(2)	Corporate includes certain corporate governance costs, interest income and expense, environmental remediation expense, insurance recoveries, exploratory research and development expense, balance sheet currency translation gains and losses, any unallocated portion of shared services and certain discrete period tax items.

On October 9, 2006, we announced plans to reorganize our business which will result in six reportable segments. OurElectronic MaterialsandSaltreportable segments remain largely unchanged. The new reportable segments will includePrimary Materials, Paint and Coating Materials, Packaging and Building MaterialsandPerformance Materials. Primary Materialswill include our existing Monomers reportable segment and the polyacrylic acid business of Consumer and Industrial Specialties. Paint and Coatings Materialswill include the architectural and industrial coatings business of our current Coatings reportable segment, as well as other coatings-related polymer lines from other parts of the Rohm and Haas portfolio.Packaging and Building Materials will include the existing Adhesives and Sealants reportable segment, the Plastics Additives business, as well as the graphic arts, paper, leather, textile and non-woven products of today’s Architectural and Functional Coatings reportable segment.Performance Materialswill include the ion exchange and sodium borohydride technologies of the Process Chemicals business, the biocides and personal care related segments of the Consumer and Industrial Specialties business, the AgroFresh™ business, the Powder Coatings business of our current Coatings reportable segment, and other niche technologies.

We will continue to evaluate and manage the businesses under the current reporting structure through December 31, 2006. The new segments will be effective January 1, 2007, after we finalize organizational changes and reconfigure financial systems for budgeting and reporting purposes.

12

NOTE 6:Restructuring and Asset Impairments

Severance and employee benefit costs associated with restructuring initiatives are primarily accounted for in accordance with SFAS No. 112, “Employers’ Accounting for Postemployment Benefits.” Asset impairment charges are accounted for in accordance with SFAS No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets.”The following net restructuring and asset impairment charges were recorded for the three and nine months ended September 30, 2006 and 2005, respectively as detailed below:

Pre-Tax

	Three Months Ended					Nine Months Ended
(in millions)	September 30,					September 30,
	2006		2005			2006		2005
Severance and employee benefits	$	4	$	(6	)	$	5	$	(13	)
Other, including contract lease termination penalties		2		—			2		1
Asset impairments, net of gains		—		4			3		39
Total (income) expense	$	6	$	(2	)	$	10	$	27

Restructuring and Asset Impairment by Business Segment

Pre-Tax

	Three Months Ended					Nine Months Ended
(in millions)	September 30,					September 30,
	2006		2005			2006			2005
Business Segment
Coatings	$	3	$	—		$	7		$	10
Monomers		—		—			—			—
Performance Chemicals		—		(1	)		—			(2	)
Electronic Materials		—		(1	)		(1	)		2
Salt		1		—			1			—
Adhesives and Sealants		—		5			1			29
Corporate		2		(5	)		2			(12	)
Total (income) expense	$	6	$	(2	)	$	10		$	27

13

Restructuring by Initiative

				Contract and
				Lease
	Severance and			Termination
	Employee			and
	Benefits			Other Costs			Total
2006 Initiatives:
Initial Charge	$	8		$	—		$	8
Payments		(1	)		—			(1	)
Changes in estimate		(1	)		—			(1	)
September 30, 2006 ending balance		6			—			6
2005 Initiatives:
Initial Charge	$	36		$	1		$	37
Payments		(3	)		(1	)		(4	)
Changes in estimate		—			—			—
December 31, 2005 ending balance		33			—			33
Payments		(10	)		—			(10	)
Changes in estimate		(1	)		2			1
September 30, 2006 ending balance		22			2			24
2004 Initiatives:
Initial Charge	$	33		$	1		$	34
Payments		(3	)		—			(3	)
Changes in estimate		(3	)		—			(3	)
December 31, 2004 ending balance		27			1			28
Payments		(19	)		—			(19	)
Changes in estimate		(5	)		(1	)		(6	)
December 31, 2005 ending balance		3			—			3
Payments		(2	)		—			(2	)
Changes in estimate		(1	)		—			(1	)
September 30, 2006 ending balance		—			—			—
Balance at September 30, 2006	$	28		$	2		$	30

The balance at September 30, 2006, recorded for severance and employee benefits, is included in accrued liabilities in our Consolidated Balance Sheet. The restructuring reserve balances presented are considered adequate to cover committed restructuring actions. Our restructuring initiatives are generally completed in 12 to 18 months.

Restructuring Initiatives

2006 Initiatives

For the three months ended September 30, 2006, we recorded approximately $4 million of expense for severance and associated employee benefits associated with the elimination of 69 positions, primarily in our Coatings and Salt segments, and our North American support services. The staffing reductions related to our manufacturing operations are a direct result of changes in the execution of existing processes and productivity improvements, while support services reductions are made possible as we continue to capitalize on the enhancements achieved through the implementation of our Enterprise Resource Planning system.

For the nine months ended September 30, 2006, we recorded approximately $8 million of expense for severance and associated employee benefits primarily related to the restructuring of our global Graphics Arts andArchitectural and Functional Coatingsbusinesses within our Coatings segment, our Salt Segment, and our North American support services, that affected 106 positions in total. This charge was offset by $1 million of favorable adjustments to adequately reflect changes in estimates of remaining obligations related to severance payments within our global Graphic Arts business initiative announced in the first quarter of 2006. The remaining restructuring reserve balances are considered adequate to cover committed restructuring actions.

14

Of the 106 positions identified under total 2006 restructuring initiatives, 22 positions have been eliminated as of September 30, 2006.

2005 Initiatives

For the three months ended September 30, 2005, no new restructuring initiatives were announced.

For the nine months ended September 30, 2005, our management approved restructuring initiatives to close our Wytheville, VAPowder Coatingsplant and to consolidate our North AmericanPowder Coatingsoperations, in addition to approving smaller reduction in force efforts within our Electronic Materials segment andPlastics Additivesbusiness. We recorded total restructuring charges of $3 million for severance and associated employee benefits affecting 120 positions. In addition, we recorded $1 million for contract and lease terminations. Cash payments related to these initiatives will be paid out over the next 12 months.

In the first nine months of 2006, we reversed $1 million of severance and employee benefit charges related to total 2005 initiatives. In addition, we recorded $2 million for contract lease obligations associated with a restructuring initiative announced in the fourth quarter of 2005.

Of the 590 positions identified under total 2005 restructuring initiatives, 349 positions have been eliminated as of September 30, 2006.

2004 Initiatives

For the first nine months of 2006 and 2005, we reversed $1 million and $5 million, respectively of severance and employee benefit charges relating to total 2004 restructuring initiatives. All severance payments contemplated by these initiatives are materially complete.

Of the initial 500 positions identified, we reduced the total number of positions to be affected by these initiatives by 122 to 378 positions in total. As of September 30, 2006, 376 positions have been eliminated.

Prior Year Initiatives

For the first nine months of 2005, we reversed $11 million of severance and employee benefit charges related to initiatives from 2003 or earlier.

Asset Impairments

2006

For the three months ended September 30, 2006, no asset impairments were recognized.

For the nine months ended September 30, 2006, we recognized approximately $3 million, net of fixed asset impairment charges associated with the restructuring of our global Graphic Arts business within our Coatings segment. This charge was offset by several sales of previously impaired assets.

We recorded a $7 million asset impairment related to our discontinued operation. See Note 3 to the Consolidated Financial Statements for more information.

2005

For the three months ended September 30, 2005, $8 million of asset impairments were recognized for the impairment of certain intangible and fixed assets related to certain product lines within our Adhesives and Sealants segment. These product lines have suffered dramatic declines in both volume and profitability due to recent increases in raw material costs, coupled with aggressive pricing competition. We determined that the significant volume declines in all of these product lines were not recoverable and warranted impairment. The fair value was calculated based upon current business conditions, using cash flow analyses. Offsetting the third quarter of 2005 charge was a reversal of $4 million in estimated fixed asset impairment charges recorded in the second quarter of 2005, which were finalized during the third quarter.

For the nine months ended September 30, 2005, $39 million, net of asset impairments were recognized for the impairment of certain intangible and fixed assets. Of the total, $29 million, net was recognized for the impairment

15

of certain intangible and fixed assets related to certain product lines within our Adhesives and Sealants segment in the second and third quarters of 2005. In addition, we recognized $9 million of charges related to fixed assets associated with the closing of our Wytheville, VA Powder Coatings plant in the second quarter of 2005, and $2 million in the first quarter of 2005 for the impairment of intangible and fixed assets related to our Electronic Materials segment. The gains on sales in the second quarter of 2005 of previously impaired assets offset the total impairment charge by $1 million.

NOTE 7:Share-Based Compensation

We have various share-based compensation plans for employees, executives and directors. The majority of our share-based compensation awards are granted in restricted stock and restricted stock units (“restricted stock”), and non-qualified stock options. For the three and nine months ended September 30, 2006, we recognized approximately $9 million and $36 million, respectively, of pre-tax expense related to share-based compensation, and a related income tax benefit of $3 million and $13 million, respectively. Approximately $2 million and $7 million of the total expense was related to liability awards in the three and nine months ended September 30, 2006, respectively. For the three and nine months ended September 30, 2005, we recognized approximately $7 million and $42 million, respectively, of expense related to share-based compensation, and a related income tax benefit of $3 million and $15 million, respectively. Approximately $0.4 million and $2 million of the total expense was related to liability awards in the three and nine months ended September 30, 2005, respectively.

Of the total expense recorded in 2006, approximately $26 million was a component of selling and administrative expense, $6 million was a component of cost of sales, and $4 million was a component of research and development. The amount of compensation cost capitalized was not material.

During the first quarter of 2005, we became aware of a provision of SFAS No. 123,“Accounting for Stock-Based Compensation,”which resulted in an acceleration of our share-based compensation for retirement eligible employees where our plans provide for immediate vesting of share-based compensation upon their retirement. This resulted in a one-time adjustment of approximately $12 million pre-tax, which related to prior periods.

Effective January 1, 2006, we adopted the provisions of SFAS No. 123R, “Share-Based Payment.” SFAS No. 123R, which is a revision of SFAS No. 123, requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based upon their fair values. Because we adopted the fair value method of recording stock-based compensation as defined in SFAS No. 123 on January 1, 2003, all options granted prior to January 1, 2003 were fully vested as of January 1, 2006. Therefore, the adoption of SFAS No. 123R did not materially impact our consolidated results of operations. However, we are required to comply with the following provisions of SFAS No. 123R, which also did not materially impact our consolidated results:

• Forfeiture rate — SFAS No. 123R requires the recognition of expense only for awards that will eventually vest. The provision requires pre-vesting forfeitures to be estimated at the time of grant and modified, if necessary, if actual forfeitures differ from estimated forfeitures. Our forfeiture rates were based upon historical share-based compensation cancellations through December 31, 2005. The estimated forfeiture rates resulted in an immaterial adjustment to current unvested awards.

• Tax benefits — SFAS No. 123R requires tax benefits resulting from share-based compensation in excess of compensation cost recognized to be classified as financing cash flows in the Consolidated Statements of Cash Flows. Prior to the adoption of SFAS No. 123R, tax benefits resulting from share-based compensation were classified as operating cash flows.

• Tax windfall pool — SFAS No. 123R requires companies to calculate a cumulative pool of tax windfalls, offset by tax shortfalls, using historical data from the original implementation date of SFAS No. 123. We have calculated a tax windfall pool as of September 30, 2006. Therefore, any future tax shortfalls related to share-based compensation should be charged against additional paid-in capital up to the amount of our windfall pool.

Stock Options

Our stock options generally vest over three years, with one-third vesting each year. We recognize expense for our stock options using the straight-line method over the requisite service period. Our options generally expire ten years after the grant date. The total value of compensation expense for stock options is equal to the fair value of the award

16

on the grant date. We calculate the fair value of stock options utilizing the Black-Scholes option-pricing model. Total pre-tax compensation expense recognized in the Consolidated Statement of Operations for stock options was $1 million and $2 million in the three months ended September 30, 2006 and 2005, respectively, and $9 million and $14 million in the nine months ended September 30, 2006 and 2005, respectively.

A summary of our stock options as of September 30, 2006, is presented below:

						Weighted-
						Average
						Remaining		Aggregate
				Weighted-Average		Contractual		Intrinsic Value
	Shares (000s)			Exercise Price		Term		(000s)
Outstanding at December 31, 2005		8,424		$	36.73
Granted		791			50.37
Forfeited		(69	)		46.42
Exercised		(1,617	)		34.00			$	25,402
Outstanding at September 30, 2006		7,529			38.60		5.54		65,876
Options exercisable at September 30, 2006		6,165		$	36.44		4.81	$	67,276

In the nine months ended September 30, 2006, the weighted average value of options granted was $12.73 compared to $13.84 in 2005.

As of September 30, 2006, there was $8 million of unrecognized compensation cost related to unvested stock options, which is expected to be recognized over a weighted-average period of approximately 1.8 years.

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 nine months ended September 30, 2006:

	2006			2005
Volatility		28.83			30.47
Risk-free interest rate		4.67			4.08
Dividend yield		3.26	%		1.83	%
Expected life (in years)		6			5

• The volatility rate is based upon historical stock price over the expected life of the option.

• The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the option.

• The dividend yield rate was based upon historical information as well as estimated future dividend payouts.

• The expected life is based upon the “simplified” method, which is defined in Staff Accounting Bulletin No. 107.

Restricted Stock

Our restricted stock primarily cliff-vests over three to five years. We recognize expense for our restricted stock using the straight-line method over the requisite service period. The total value of compensation expense for restricted stock is equal to the average of the high and low price of Rohm and Haas Company shares on the date of grant. Total pre-tax compensation expense recognized in the Consolidated Statement of Operations for restricted stock was $5 million and $4 million in the three months ended September 30, 2006 and 2005, respectively, and $17 million and $25 million in the nine months ended September 30, 2006 and 2005, respectively.

17

A summary of our restricted stock as of September 30, 2006, is presented below:

				Weighted-
	Shares			Average		Fair Value
	(000s)			Fair Value		(000’s)
Nonvested at December 31, 2005		2,199		$	37.25
Granted		591			50.28
Forfeited		(103	)		40.00
Vested		(64	)		36.34	$	2,341
Nonvested at September 30, 2006		2,623			40.10

As of September 30, 2006, there was $45 million of unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of approximately 2.3 years.

Long-term Performance Share Plan (“LTPSP”)

We grant executives share-based liability awards (amounts settled in cash) and equity awards whose vesting is contingent upon meeting various performance and market-based goals, including return on net assets and our company stock performance against peers. We calculate the fair value of the market based component of the equity award using a lattice model. Shares related to our long-term incentive plan vest over a period of 3 years. Total pre-tax compensation expense recognized in the Consolidated Statement of Operations for our LTPSP was $3 million and $1 million in the three months ended September 30, 2006 and 2005, respectively, and $10 million and approximately $3 million in the nine months ended September 30, 2006 and 2005, respectively.

As of September 30, 2006, there was $16 million of total unrecognized compensation cost related to nonvested share-based compensation awards granted under our performance plan. That cost is expected to be recognized over a period of approximately 1.3 years.

Financial Accounting Standards Board Statement No. 148 (“SFAS No. 148”)

The disclosure requirements of SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which allowed us to adopt SFAS No. 123 prospectively, provide that the pro forma net earnings and net earnings per share be presented as if the fair value based method had been applied to all awards granted to employees, not just awards granted after the date of adoption. All of our options issued prior to January 1, 2003, the date we adopted SFAS No. 123, fully vested in the first quarter of 2005. Therefore, our share-based employee compensation expense from the second quarter of 2005 going forward is equal to the total share-based employee compensation expense determined under the fair value-based method.

NOTE 8:Comprehensive Income

The components of comprehensive income are as follows:

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in millions)	2006			2005		2006			2005
Net earnings	$	186		$	169	$	559		$	506
Other comprehensive income from continuing operations:
Current period changes in fair value of derivative instruments qualifying as hedges, net of $0, ($1), ($1) and ($7) of income taxes, respectively		—			2		1			13
Reclassification to earnings of derivative instruments qualifying as hedges, net of $2, ($1), $3 and $0 of income taxes, respectively		(3	)		2		(6	)		—
Cumulative translation adjustment, net of ($9), ($11), ($2) and ($12) of income taxes, respectively		(5	)		21		27			13
Minimum pension liability, net of $0, $0, $0 and $0 of income taxes, respectively		—			—		1			—
Total comprehensive income	$	178		$	194	$	582		$	532

18

NOTE 9:Earnings from Continuing Operations per Share

The difference in common shares outstanding used in the calculation of basic and diluted earnings from continuing operations per common share is primarily due to the effect of stock options and non-vested restricted stock as reflected in the reconciliations that follow:

	Three Months Ended September 30,							Nine Months Ended September 30,
	Earnings							Earnings
	from							from
	continuing							continuing
	operations		Shares		Per Share			operations		Shares		Per Share
(in millions, except per share amount)	(Numerator)		(Denominator)		Amount			(Numerator)		(Denominator)		Amount
2006
Net earnings from continuing operations available to stockholders (Basic)	$	189		217.6	$	0.87		$	588		219.5	$	2.68
Dilutive effect of options and non-vested restricted stock(1)		—		2.0		(0.01	)		—		2.2		(0.03	)
Diluted earnings from continuing operations per share	$	189		219.6	$	0.86		$	588		221.7	$	2.65
2005
Net earnings from continuing operations available to stockholders (Basic)	$	163		220.9	$	0.74		$	488		222.4	$	2.19
Dilutive effect of options and non-vested restricted stock(1)		—		1.9		(0.01	)		—		2.2		(0.02	)
Diluted earnings from continuing operations per share	$	163		222.8	$	0.73		$	488		224.6	$	2.17

(1) For the three months ended September 30, 2006 and 2005, 1.4 million shares and 0.7 million shares, respectively, 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 nine months ended September 30, 2006 and 2005, 1 million shares and 0.7 million shares, respectively, were excluded.

NOTE 10:Retirement Benefits

We sponsor and contribute to pension plans that provide defined benefits to U.S. and non-U.S. employees. Pension benefits earned are generally based on years of service and compensation during active employment. 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. Most retirees are required to contribute toward the cost of such coverage. We also provide health care and life insurance benefits to some non-U.S. retirees, primarily in France and Canada.

The following disclosures include amounts for both the U.S. and significant foreign pension plans (primarily Canada, Germany, Japan, and the United Kingdom) and other postretirement benefits.

19

Estimated Components of Net Periodic Cost

	Pension Benefits												Other Postretirement Benefits
	Three Months Ended						Nine Months Ended						Three Months Ended					Nine Months Ended
	September 30,						September 30,						September 30,					September 30,
(in millions)	2006			2005			2006			2005			2006		2005			2006			2005
Service cost	$	19		$	20		$	58		$	58		$	1	$	2		$	4		$	5
Interest cost		35			36			102			104			6		7			19			20
Expected return on plan assets		(40	)		(38	)		(119	)		(111	)		—		—			(1	)		—
Amortization of initial net asset		—			—			—			(1	)		—		—			—			—
Amortization of prior service cost		—			2			2			4			—		(1	)		(1	)		(2	)
Amortization of net loss		11			9			32			31			1		—			1			1
Net periodic benefit cost	$	25		$	29		$	75		$	85		$	8	$	8		$	22		$	24

Employer Contributions

During the three and nine months ended September 30, 2006, we contributed approximately $21 million and $76 million, respectively, to our qualified and non-qualified pension plans and postretirement benefit plans. The year-to-date amount includes $17 million contributed to our Canadian pension trust in April 2006. We anticipate making full-year contributions of approximately $246 million this year, which consist of $137 million for our U.S. qualified pension plans, $47 million to our foreign qualified pension plans, $11 million to our non-qualified pension plans, and $51 million to our postretirement benefit plans. Of this amount, $137 million and $12 million represent voluntary tax-deductible contributions to our U.S. qualified pension plan and our U.S. postretirement benefit trust, respectively.

NOTE 11:Inventories

Inventories consist of the following:

(in millions)	September 30, 2006		December 31, 2005
Finished products and work in process	$	742	$	638
Raw materials		130		118
Supplies		44		42
Total	$	916	$	798

NOTE 12:Goodwill and Other Intangible Assets

Goodwill

The changes in the carrying amount of goodwill for the nine months ended September 30, 2006, by business segment, are as follows:

											Adhesives
					Performance		Electronic				and
(in millions)	Coatings		Monomers		Chemicals		Materials		Salt		Sealants		Total
Balance as of January 1, 2006	$	212	$	29	$	156	$	362	$	328	$	438	$	1,525
Goodwill related to acquisitions(1)		—		—		6		7		—		—		13
Currency effects(2)		4		—		6		—		1		4		15
Balance as of September 30, 2006	$	216	$	29	$	168	$	369	$	329	$	442	$	1,553

(1)	Goodwill related to acquisitions is due to the following: $7 million Electronic Materials — buyback of additional shares of CMPT, and $6 million related to the acquisition of Floralife®, Inc.
(2)	Certain goodwill amounts are denominated in foreign currencies and are translated using the appropriate U.S. dollar exchange rate.

20

SFAS No. 142 Impairment Review

In accordance with the provisions of SFAS No. 142,“Goodwill and Other Intangible Assets,”we are required to perform, at a reporting unit level, an impairment review of goodwill and indefinite-lived intangible assets on an annual basis, and between annual tests if events occur or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Our annual impairment review is as of May 31 of each year.

The first step of the goodwill impairment test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test must be performed to measure the amount of impairment loss, if any. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss shall be recognized in an amount equal to that excess.

During the second quarter of 2006, we completed our 2006 annual FAS 142 impairment review and determined that goodwill and indefinite-lived intangible assets were not impaired as of this date. For purposes of this review, we primarily utilized discounted cash flow analyses for estimating the fair value of the reporting units.

Intangible Assets

SFAS No. 142 established two broad categories of intangible assets: finite-lived intangible assets, which are subject to amortization; and indefinite-lived intangible assets, which are not subject to amortization.

The following table provides information regarding our intangible assets:

	September 30, 2006							December 31, 2005
	Gross							Gross
	Carrying		Accumulated					Carrying		Accumulated
(in millions)	Amount		Amortization			Net		Amount		Amortization			Net
Finite-lived Intangibles:
Customer list	$	880	$	(164	)	$	716	$	865	$	(144	)	$	721
Trade name		140		(29	)		111		138		(26	)		112
Developed technology		396		(169	)		227		383		(149	)		234
Patents, license agreements and other		162		(103	)		59		160		(99	)		61
		1,578		(465	)		1,113		1,546		(418	)		1,128
Indefinite-lived Intangibles:
Trade name		330		(23	)		307		328		(23	)		305
Strategic location(1)		77		(5	)		72		75		(5	)		70
		407		(28	)		379		403		(28	)		375
Total	$	1,985	$	(493	)	$	1,492	$	1,949	$	(446	)	$	1,503

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

Certain of our intangible assets are denominated in foreign currencies and are translated using the appropriate U.S. dollar exchange rate. For the nine months ended September 30, 2006, the currency translation adjustment recorded to the gross carrying amount and accumulated amortization was $22 million and ($5) million, respectively.

Finite-lived intangible assets increased by $14 million as a result of our acquisition of Floralife^®, Inc. in April of 2006.

Finite-lived intangible assets are amortized over their estimated useful lives and are reviewed for impairment whenever changes in circumstances indicate the carrying value may not be recoverable in accordance with SFAS

21

No. 144,“Accounting for the Impairment or Disposal of Long-Lived Assets”.Amortization expense for finite-lived intangible assets was $15 million and $42 million for the three and nine months ended September 30, 2006 respectively, which is virtually unchanged from the respective periods in 2005. Future amortization expense is estimated to be $55 million for the year 2006 and for each of the subsequent four years.

In addition, in accordance with SFAS No. 144, we recorded a $2 million impairment related to the intangible assets of our discontinued operation. See Note 3 to the Consolidated Financial Statements for more information.

NOTE 13:Contingent Liabilities, Guarantees and Commitments

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, where remediation costs have been or may be incurred under the Federal Comprehensive Environmental Response, Compensation and Liability Act (“CERCLA”) and similar state statutes. In some of these matters 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 potentially responsible parties (“PRPs”) to pay costs apportioned to them and current laws and regulations. We assess the accruals quarterly and update these 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.

Remediation Reserves and Reasonably Possible Amounts

Reserves for environmental remediation that we believe to be probable and estimable are recorded appropriately as current and long-term liabilities in the Consolidated Balance Sheets. The reserves for remediation were $148 million at September 30, 2006 and $147 million at December 31, 2005. The amounts charged to pre-tax earnings for environmental remediation and related charges were $11 million and $19 million for the three and nine months ended September 30, 2006, and $18 million and $35 million for the three and nine months ended September 30, 2005, respectively, and are primarily recorded as cost of goods sold in the Consolidated Statements of Operations.

In addition to accrued environmental liabilities, there are costs which have not met the definition of probable, and accordingly, are not recorded in the Consolidated Balance Sheets. We have identified reasonably possible loss contingencies related to environmental matters of approximately $117 million and $110 million at September 30, 2006 and December 31, 2005, respectively.

Further, we have identified other sites where future environmental remediation may be required, but these loss contingencies cannot be reasonably 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 interpretation of applicable laws and regulations, the outcome of negotiations with regulatory authorities, and alternative methods of remediation.

Except as noted below, 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, but could have a material adverse effect on consolidated results of operations or cash flows in any given period.

Our significant sites are described in more detail below:

•

Wood-Ridge/Berry’s Creek

The Wood-Ridge, New Jersey site (“Site”), and Berry’s Creek, which runs past this Site, are areas of environmental significance to the Company. The Site is the location of a former mercury processing plant acquired many years ago by a company later acquired by Morton International, Inc. (“Morton”). Morton and Velsicol Chemical Corporation (“Velsicol”) have been held jointly and severally liable for the cost of remediation of the Site. We have submitted a feasibility study of various remedial alternatives, and we expect the New Jersey Department of Environmental Protection, in consultation with EPA Region 2, to select a remedy

22

	for the Site in 2006. Our exposure at the Site will depend, in part, on the results of attempts to obtain contributions from others believed to share responsibility, and, in part, on the remedy selected for the Site. Velsicol’s liabilities for Site response costs will be addressed through a bankruptcy trust fund established under a court-approved settlement among Velsicol, Fruit-of-the-Loom, Inc. (its indemnitor) and other parties, including the government.
	With regard to Berry’s Creek, and the surrounding wetlands, EPA has issued letters to 158 PRPs for performance of a broad scope investigation of risks posed by contamination in Berry’s Creek. Performance of this study is expected to take at least six years to complete. The PRPs are in the process of forming a representative group to negotiate with the EPA. Today, there is much uncertainty as to what will be required to address Berry’s Creek, but investigation and cleanup costs, as well as potential resource damage assessments, could be very high and our share of these costs could possibly 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. An agreement with the EPA, the Department of Justice and the State of Mississippi, resolving these historical environmental issues received court approval in early 2001. The accruals established for this matter were sufficient to cover the costs of the settlement. All operations at this Moss Point facility have now been terminated. Environmental investigation and interim remedial measures are proceeding pursuant to the court approved agreement.
	In December 2002, a complaint was filed in Mississippi on behalf of over 700 plaintiffs against Morton, Rohm and Haas, Joseph Magazzu, a former Morton employee, and the Mississippi Department of Environmental Quality alleging personal injury and property damage caused by environmental contamination. On April 7, 2005, this complaint was dismissed, without prejudice, with respect to all the plaintiffs. Similar complaints were filed in Mississippi on behalf of approximately 1,800 other plaintiffs; however, all but about 40 of these plaintiffs failed to comply with a court ruling that required plaintiffs to provide basic information on their claims to avoid dismissal. The remaining plaintiffs are individual plaintiffs since Mississippi procedural rules do not permit class actions. At this time, we see no basis for the claims of any of the plaintiffs and we are vigorously defending against them.
•	Paterson
	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. We removed contaminated soil from the site and constructed an on-site remediation system for residual soil and groundwater contamination. Off-site investigation of contamination is ongoing.
•	Martin Aaron Superfund Site
	Rohm and Haas is a PRP at this Camden, New Jersey former drum recycling site. We are participating in a PRP group which is working on cost allocation issues, identifying additional PRPs, and commenting on EPA technical reports. U.S. EPA Region 2 has issued a Record of Decision (“ROD”) specifying a remedy consisting of groundwater pump and treat following soil excavation, and requesting that the PRPs conduct the remedy and reimburse it for past costs. The New Jersey Department of Environmental Protection (“NJDEP”) has recently presented a past cost and Natural Resource Damages claim to the PRP Group. The PRP Group is negotiating a Consent Decree with EPA and NJDEP.
•	Groundwater Treatment and Monitoring
	Major remediation for certain sites, such as Kramer, Whitmoyer, Woodlands and Goose Farm has been completed. We are continuing groundwater remediation and monitoring programs. Reserves for these costs have been established.
•	Manufacturing Sites
	We also have accruals for enforcement and corrective action programs under governmental environmental laws at several of our manufacturing sites. The more significant of these accruals for corrective action, in addition to

23

those presented above, have been recorded for the following sites: Bristol, Pennsylvania; Philadelphia, Pennsylvania; Houston, Texas; Louisville, Kentucky; Ringwood, Illinois; Apizaco, Mexico; Jacarei, Brazil; Jarrow, U.K.; Lauterbourg, France; and Mozzanica, Italy. We have resolved an enforcement action by the EPA arising out of an environmental inspection in 2000 at our Houston facility in 2006 by agreeing to pay a penalty and to perform a supplemental environmental project at a combined cost of approximately $1 million.

On February 15, 2006, two employees at our Cincinnati, Ohio specialty chemical plant were hospitalized as a result of exposure during routine maintenance activities to what has been determined to be hydrogen sulfide(H₂S) gas. One employee subsequently died. Two other employees, members of the plant’s emergency response team, were treated at a local hospital and released that same day. We implemented corrective and preventive measures. In June of 2006, we resolved Occupational Health and Safety Administration citations by agreeing to implement abatement measures and also to pay $18,500 in penalties.

Insurance Recoveries

We have actively pursued lawsuits over insurance coverage for certain environmental liabilities. It is our practice to reflect environmental insurance recoveries in the results of operations for the quarter in which the litigation is resolved through settlement or other appropriate legal processes. These resolutions typically resolve coverage for both past and future environmental spending and involve the “buy back” of the policies and have been included in cost of goods sold.

Self-Insurance

We maintain deductibles for general liability, business interruption and property damage to owned, leased and rented property. These deductibles could be material to our earnings, but they should not be material to our overall financial position. We carry substantial excess general liability, property and business interruption insurance above our deductibles. In addition, we meet all statutory requirements for automobile liability and workers’ compensation.

Other Litigation

In April 2006 and thereafter, lawsuits were filed against Rohm and Haas claiming that the Company’s Ringwood, Illinois plant contaminated groundwater and air that allegedly reached properties a mile south of the plant site. Also sued were the owner of a plant site neighboring our facility and a company which leases a portion of our facility. An action brought in federal court in Philadelphia, Pennsylvania, seeks certification of a class comprised of the owners and residents of about 500 homes in McCullom Lake Village, seeking medical monitoring and compensation for alleged property value diminution, among other things. In addition, lawsuits were filed in the Philadelphia Court of Common Pleas by twelve individuals who claim that contamination from the plants has resulted in brain cancer. We believe that these lawsuits are without merit and we intend to defend them vigorously.

Rohm and Haas, Minnesota Mining and Manufacturing Company (3M) and Hercules, Inc. have been engaged in remediation of the Woodland Sites (“Sites”), two waste disposal locations in the New Jersey Pinelands, under various NJDEP orders since the early 1990s. Remediation is complete at one site and substantially complete at the other. In February 2006, a lawsuit was filed in state court in Burlington County, New Jersey by NJDEP and the Administrator of the New Jersey Spill Compensation Fund against these three companies and others for alleged natural resource damages relating to the Sites. In June 2006, after the lawsuit was served, the defendants filed a notice of removal of the action to the federal court in Camden, New Jersey. This lawsuit presents significant legal and public policy issues, including the fundamental issue of whether there are any “damages”, and the Company intends to defend it vigorously.

In January 2006 and thereafter, civil lawsuits were filed against Rohm and Haas and other chemical companies in U. S. federal court, alleging violation of antitrust laws in the production and sale of methyl methacrylate (“MMA”) and polymethylmethacrylates (“PMMA”). The various plaintiffs sought to represent a class of direct or indirect purchasers of MMA or PMMA in the United States from January 1, 1995 through December 31, 2003. The lawsuits referred to an investigation of certain chemical producers by the European Commission in which Rohm and Haas was not involved in any way. However, in September 2006, both the direct purchasers and the indirect purchasers filed amended complaints in which Rohm and Haas was not named as a defendant, and therefore the Company is no longer a party to these lawsuits. Although Rohm and Haas remains a defendant in a similar lawsuit filed in Canada, the Company believes the Canadian lawsuit is without merit as to Rohm and Haas, and intends to defend it vigorously.

24

In late January 2006, Morton Salt was served with a Grand Jury subpoena in connection with an investigation by the Department of Justice into possible antitrust law violations in the “industrial salt” business. Neither Morton Salt, nor any Morton Salt employee has been charged with any wrongdoing. We are cooperating fully with the governmental investigation.

On December 22, 2005, a federal judge in Indiana issued a decision purporting to grant a class of participants in the Rohm and Haas pension plan the right to a cost-of-living adjustment (“COLA”) as part of the retirement benefit for those who elect a lump sum benefit. The decision contravenes the plain language of the plan, which clearly and expressly excludes a discretionary COLA for participants who elect a lump sum. We feel strongly that our plan fully complies with applicable law and therefore the judge’s decision is contrary to law. The judge has certified the question, enabling us to take an immediate appeal to the Seventh Circuit Court of Appeals and the Seventh Circuit has agreed to hear the appeal. We are awaiting a briefing schedule from that court. Were the decision to stand, the pension trust could be required to pay a COLA benefit to those plan participants who elected a lump sum benefit during the class period.

In August 2005, three actions were filed in the Philadelphia Court of Common Pleas relating to brain cancer incidence among employees who worked at our Spring House, Pennsylvania research facility. Two actions which are now stayed pending the outcome of parallel workers’ compensation proceedings, were filed on behalf of individuals; the third is a class-action complaint which seeks a medical monitoring program for about 6,000 current and former Spring House employees. The plaintiffs allege that the number of brain cancer cases exceeds normal occurrence rates and allege that the cancers were caused by workplace chemical exposure. Our ongoing epidemiological studies have not found an association between anything in the Spring House workplace and brain cancer. The Company believes that these actions have no merit and is actively defending against them. In April 2006, the court dismissed the medical monitoring case as barred by Pennsylvania Workers’ Compensation Law and later stayed the case. The dismissal is now on appeal, and the plaintiff is pursuing a Workers’ Compensation Petition seeking medical monitoring on his behalf and on behalf of others similarly situated.

In February 2003, the United States Department of Justice and antitrust enforcement agencies in the European Union, Canada and Japan initiated investigations into possible antitrust violations in the plastics additives industry. In April 2006, we were notified that the grand jury investigation in the United States had been terminated and no further actions would be taken against any parties. In August of 2006, Rohm and Haas was informed by the Canadian Competition Bureau that it was terminating its investigation having found insufficient evidence to warrant a referral to the Attorney General of Canada. We have responded to all inquiries from the European Union and have had no further contact from this agency since 2003. We previously reported that the Japanese Fair Trade Commission brought proceedings against named Japanese plastics additives producers but did not initiate action against Rohm and Haas and no further action is expected.

In civil litigation on plastics additives matters, we are a party to nine private federal court civil antitrust actions that have been consolidated in the U.S. District Court for the Eastern District of Pennsylvania, including one that originally had been filed in State Court in Ohio and another involving an individual direct purchaser claim that was filed in federal court in Ohio. These actions have been brought against Rohm and Haas and other producers of plastics additives products by direct purchasers of these products and seek civil damages as a result of alleged violations of the antitrust laws. The named plaintiffs in all but one of these actions are seeking to sue on behalf of all similarly situated purchasers of plastics additives products. Federal law provides that persons who have been injured by violations of Federal antitrust law may recover three times their actual damages plus attorneys’ fees. Recently, the court certified six subclasses premised on the types of plastics additives product that have been identified in the litigation. The court’s certification decision is under appeal. In addition, in August 2005, a new indirect purchaser class action antitrust complaint was filed in the U.S. District Court for the Eastern District of Pennsylvania, consolidating all but one of the indirect purchaser cases that previously had been filed in various state courts, including Tennessee, Vermont, Nebraska, Arizona, Kansas and Ohio. The court has dismissed from the consolidated action the claims arising from the states of Nebraska, Kansas and Ohio, and allowed the claims from Arizona, Tennessee and Vermont to continue. The only remaining state court indirect action is the one filed in California. Our internal investigation has revealed no wrongdoing. We believe these cases are without merit as to Rohm and Haas, and we continue to vigorously defend against these actions.

25

As a result of the bankruptcy of asbestos producers, plaintiffs’ attorneys have focused on peripheral defendants, including our company, which had asbestos on its premises. Historically, these premises cases have been dismissed or settled for minimal amounts because of the minimal likelihood of exposure at our facilities. We have reserved amounts for premises asbestos cases that we currently believe are probable and estimable.

There are also 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 workers’ 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 asbestos-related matters in 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 Friction Division claims, including defense costs, will be well below our insurance limits.

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 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 company assets are held as collateral for these indemnifications and no specific liabilities have been established for such guarantees.

NOTE 14:Subsequent Events

On October 1, 2006, we completed the sale of the global Automotive Coatings business, excluding Europe. See Note 3 for further information.

On October 9, 2006, we announced plans to reorganize our business which will result in changes to our reporting segments effective January 1, 2007. See Note 5 for further information.

On October 12, 2006, we announced that we would form a joint venture with Chemical Specialties Inc. (CSI), which is owned by Rockwood Holdings, Inc. We expect to pay CSI $75 million to help create the venture, which will provide wood treatment technologies and services. The new venture will link the wood biocide business of Rohm and Haas and the wood protection business of CSI. The joint venture will begin operation in January 2007.

26

ITEM 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following commentary should be read in conjunction with the Consolidated Financial Statements and the accompanying Notes to Consolidated Financial Statements for the year ended December 31, 2005, and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) included in our 2005 annual report filed on Form 10-K with the Securities and Exchange Commission (“SEC”) on March 2, 2006.

Within the following discussion, unless otherwise stated, “three month period” and “nine month period” refers to the three and nine months ended September 30, 2006, and “prior period” refers to comparisons with the corresponding period in the previous year.

Forward-Looking Information

This document contains forward-looking information so that investors will have a better understanding of our future prospects and make informed investment decisions. Forward-looking statements within the context of the Private Securities Litigation Reform Act of 1995 include statements anticipating future growth in sales, cost of sales, earnings, selling and administrative expense, research and development expense and cash flows. Words such as “anticipates,” “estimates,” “expects,” “projects,” “intends,” “plans,” “believes,” and similar language to describe prospects for future operations or financial condition identify such forward-looking statements. Forward-looking statements are based on management’s assessment of current trends and circumstances, which may be susceptible to uncertainty, change or any other unforeseen development. Results could differ materially depending on such factors as changes in business climate, economic and competitive uncertainties, the cost of raw materials, natural gas, and other energy sources and the ability to achieve price increases to offset such cost increases, foreign exchange rates, interest rates, acquisitions or divestitures, risks in developing new products and technologies, the impact of new accounting standards, assessments for asset impairments, the impact of tax and other legislation and regulation in the jurisdictions in which we operate, changes in business strategies, manufacturing outages or the unanticipated costs of complying with environmental and safety regulations. As appropriate, additional factors are described in our 2005 annual report filed on Form 10-K with the SEC on March 2, 2006. We are under no obligation to update or alter our forward-looking statements, as a result of new information, future events or otherwise.

Company Overview

We are a global specialty materials company that began almost 100 years ago when a chemist, Otto Rohm, and a businessman, Otto Haas, decided to form a partnership to make a unique chemical product for the leather industry. That once tiny firm, now known as Rohm and Haas Company, reported sales of approximately $7.9 billion in 2005 on a portfolio of global businesses including specialty chemicals, electronic materials and salt. Today, we leverage science and technology to design materials and processes that enable our customers’ products to work. We serve a broad segment of dynamic markets, the largest of which include: building and construction, electronics, food and retail, household and personal care, industrial processes, packaging, transportation and water. To serve these markets, we have significant operations with approximately 100 manufacturing and 35 research facilities in 27 countries with approximately 16,500 employees. The results of ourAutomotive Coatingsbusiness are presented as a discontinued operation in our Statements of Operations for all periods presented. See Note 3 to the consolidated financial statements.

27

Annual Net Sales(in millions)⁽¹⁾

Annual Net Sales by Region(in millions)

(1) Results do not include our Automotive Coatings business, which is presented as a discontinued operation.

Industry Dynamics

Over the past decade, the global chemical industry has grown faster than the overall Gross Domestic Product. Projections for the next several years suggest this will likely continue. We expect the highest growth rates over the next ten years will be in the Asia-Pacific region.

The specialty materials industry is highly competitive. In some sectors, global value chain dynamics have placed specialty materials producers between the large global petrochemical producers and the large down stream retailers. In addition, the varying regional growth rates, the instant access to vast amounts of information, and highly efficient commercial transactions enabled by the internet are testing the historical industry business models. We believe growth opportunities exist for companies with the right business portfolio of value-added products, a global presence, and the flexibility to cope with the changing macro-industry trends.

28

Our Strategic Focus

Our focus is to grow both revenues and earnings through organic growth, as well as bolt-on acquisitions and to deploy our strong cash position in a balanced approach to add value for our stockholders, while managing the company within the highest ethical standards. We are tuned to the changing global dynamics that impact the environment in which we operate; the trends in consumer demand and preferences; the shifting global demand and demographics; greater emphasis on environmentally compatible products and renewable resources, and increasing global competition.

Organic Growth

We are committed to increasing sales and profitability in our existing segments through:

• Innovation— focusing our research investment on development of new products and new technologies and opportunities, particularly in the areas of our world class acrylic and electronic material technologies, as well as microbial protection.

• Marketing & Sales— focusing our energies on the fastest growing market segments, cultivating our name recognition in the marketplace while differentiating ourselves from our competitors, and using influencing strategies in downstream markets to expand growth opportunities.

• Geographic reach— leveraging our geographic footprint to take advantage of market demand and capitalizing on our presence in the high growth Asia-Pacific region and emerging markets of Central and Eastern Europe while continuing to balance and pace our human resources and infrastructure investment to grow in key markets in North America, Western Europe and Latin America.

• Growth through efficiency— leveraging our state-of-the-art information technology infrastructure, through improved standardization and simplification of work processes, the ongoing realignment of our global manufacturing footprint to meet customer demand, as well as highly efficient and functionally excellent administrative support services. The goal is to lower our selling and administrative expenses as a percentage of sales as we continue to grow, while also improving our asset utilization rates and productive use of capital.

Cash Generation

We generated $925 million and $947 million in cash from operating activities during 2004 and 2005, respectively, and we expect to generate approximately $1.1 billion during 2006. We plan to deploy this cash to enhance stockholder value through higher dividends, strategic investments in our core businesses and technologies, and share repurchases, as appropriate.

Corporate Governance

Our company was built upon a strong foundation of core values, which continue today. These values are the bedrock of our success. We strive to operate at the highest levels of integrity and ethics and, in support of this, require that all employees, as well as the members of our Board of Directors, receive compliance training and annually certify their compliance with our internal Code of Business Conduct and Ethics. Our core values are best summarized as:

• Ethical and legal behavior at all times;

• Integrity in all business interactions; and

• Trust by doing what we promise.

Our Board of Directors devotes substantial time in reviewing our business practices with regard to the norms of institutional integrity. Our Board is comprised of 13 directors, of whom 12 are non-employees. The Audit, Nominating and Governance, and Executive Compensation committees of the Board are all entirely composed of independent directors.

29

Summary of Financial Results

In the third quarter of 2006, we reported sales of $2,065 million, a 7% increase over $1,927 million reported in the third quarter of 2005, reflecting higher demand and higher selling prices to offset continued high raw material costs. Gross profit of $602 million in the quarter was 6% higher than the same period in 2005, the result of increased selling prices, higher demand, lower environmental expense, and the absence of prior year charges for a temporary Monomer production outage, partially offset by higher raw materials and freight costs. Gross profit margin in the quarter was 29.2%, compared to 29.6% in the prior year period. Selling and administrative expenses increased 6% versus the third quarter of 2005, largely reflecting increased spending to support marketing and business development. Research and development expense for the quarter was $71 million, up 8% from the prior year period, reflecting increased spending to support growth projects in the Electronic Materials, Coatings and Performance Chemicals segments. Income tax expense for the quarter was $69 million reflecting an effective tax rate of 26.4% versus 31.6% in the prior period. The lower tax rate from the prior period was mainly due to the favorable settlement of tax contingencies as well as lower taxes on foreign earnings permanently reinvested abroad. In the third quarter of 2006, we reported earnings from continuing operations of $189 million, or $0.86 per share, as compared to $163 million, or $0.73 per share in the third quarter of 2005.

In the third quarter of 2006, high raw material prices had a material impact on our consolidated results of operations. We use a broad range of raw materials across our operations, and the raw materials used vary widely among many of our businesses. In most cases, these raw materials are purchased from multiple sources under short-term and long-term supply contracts. It is difficult to predict the extent and duration of higher prices. For 2006, although the supply/demand balance is tight, we expect the supply of raw materials to be adequate to meet our demand. If the overall supply for certain raw materials becomes limited, obtaining alternative suppliers in the quantities we require could be difficult. We are attempting to mitigate the impact of escalating raw material and energy costs primarily by increasing selling prices, exercising control over discretionary spending, and utilizing swap, option and collar contracts.

Critical Accounting Estimates

Our Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). The preparation of these financial statements requires us 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. Management considers an accounting estimate to be critical to the preparation of our financial statements when:

• the estimate is complex in nature or requires a high degree of judgment, and

• the use of different estimates and assumptions could have a material impact on the Consolidated Financial Statements.

Management has discussed the development and selection of our critical accounting estimates and related disclosures with the Audit Committee of our Board of Directors. Those estimates critical to the preparation of our Consolidated Financial Statements are listed below.

Ø Litigation and Environmental Reserves

We are involved in litigation in the ordinary course of business including employee matters, 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. In accordance with GAAP, we are required to assess these matters to: 1) determine if a liability is probable; and 2) record such a liability when the financial exposure can be reasonably estimated. The determination and estimation of these liabilities are critical to the preparation of our financial statements.

In reviewing such matters, we consider a broad range of information, including the claims, demands, settlement offers received from governmental authorities or private parties, estimates performed by independent third parties, identification of other responsible parties and an assessment of their ability to contribute as well as our prior experience, to determine if a liability is probable and if the value is estimable. If both of these conditions are met, we record a liability. If we believe that no best estimate exists, we accrue the minimum in a range of possible losses, and disclose any material, reasonably possible, additional losses. If we determine a liability to be only reasonably possible, we consider the same information to estimate the possible exposure and disclose any material potential liability.

30

Our most significant reserves are those which have been established for remediation and restoration costs associated with environmental damage. As of September 30, 2006, we have $148 million reserved for environmental-related costs. We conduct studies and site surveys to determine the extent of environmental damage and necessary remediation. With the expertise of our environmental engineers and legal counsel, we determine our best estimates for remediation and restoration costs. These estimates are based on forecasts of future costs for remediation and change periodically as additional and better information becomes available. Changes to assumptions and considerations used to calculate remediation reserves could materially affect our results of operations or financial position. If we determine that the scope of remediation is broader than originally planned, discover new contamination, discover previously unknown sites or become subject to related personal injury or property damage claims, our estimates and assumptions could materially change.

We believe the current assumptions and other considerations used to estimate reserves for both our environmental and other legal liabilities are appropriate. These estimates are based in large part on information currently available and the current laws and regulations governing these matters. If additional information becomes available or there are changes to the laws or regulations or actual experience differs from the assumptions and considerations used in estimating our reserves, the resulting change could have a material impact on the results of our operations, financial position or cash flows.

Ø Income Taxes

The objective of accounting for income taxes is to recognize the amount of taxes payable or refundable for the current year and deferred tax liabilities and assets for the future tax consequences of events that have been recognized in our financial statements or tax returns.

In the determination of our current year tax provision, we have provided deferred income taxes on income from foreign subsidiaries which have not been reinvested abroad permanently because such earnings are taxable upon remittance to the United States. For foreign subsidiaries where earnings are permanently reinvested outside the United States, no accrual of United States income taxes has been provided. In addition, we operate within multiple taxing jurisdictions and are subject to audit within these jurisdictions. We record accruals for the estimated outcomes of these audits. We adjust these accruals, if necessary, upon the completion of tax audits or changes in tax law. Since significant judgment is required to assess the future tax consequences of events that have been recognized in our financial statements or tax returns, the ultimate resolution of these events could result in adjustments to our financial statements and such adjustments could be material. Therefore, we consider such estimates to be critical to the preparation of our financial statements.

We believe that the current assumptions and other considerations used to estimate the current year accrued and deferred tax positions are appropriate. However, if the actual outcome of future tax consequences differs from our estimates and assumptions, the resulting change to the provision for income taxes could have a material impact on our results of operations, financial position or cash flows.

Ø Restructuring

When appropriate, we record charges relating to efforts to strategically reposition our manufacturing footprint and support service functions. To the extent that exact amounts are not determinable, we have established reserves for such initiatives by calculating our best estimate of employee termination costs utilizing detailed restructuring plans approved by management. Reserve calculations are based upon various factors including an employee’s length of service, contract provisions, salary level and health care benefit choices. We believe the estimates and assumptions used to calculate these restructuring provisions are appropriate, and although significant changes are not anticipated, actual costs could differ from the assumptions and considerations used in estimating reserves should changes be made in the nature or timing of our restructuring plans. The resulting change could have a material impact on our results of operations or financial position.

Ø Long-Lived Assets

Our long-lived assets include land, buildings and 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 whenever changes in circumstances indicate the carrying value may not be recoverable. Such circumstances would include a

31

significant decrease in the market price of a long-lived asset, a significant adverse change in the manner in which 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. In addition, changes in the expected useful life of these long-lived assets may also be an impairment indicator. As a result, future decisions to change our manufacturing footprint or exit certain businesses could result in material impairment charges.

When such events or changes occur, we estimate the future cash flows expected to result from the assets’ use and, if applicable, the eventual disposition of the assets. The key variables that we must estimate include assumptions regarding sales volume, selling prices, raw material prices, labor and other employee benefit costs, capital additions and other economic factors. These variables require significant management judgment and include inherent uncertainties since they are forecasting future events. If such assets are considered impaired, they are written down to fair value, as appropriate.

Goodwill and indefinite-lived intangible assets are reviewed annually, or more frequently if changes in circumstances indicate the carrying value may not be recoverable. To test for recoverability, we typically utilize discounted estimated future cash flows to measure fair value for each reporting unit. This calculation is highly sensitive to both the estimated future cash flows of each reporting unit and the discount rate assumed in these calculations. These components are discussed below:

•	Estimated future cash flows
	The key variables that we must estimate to determine future cash flows include assumptions for sales volume, selling prices, raw material prices, labor and other employee benefit costs, capital additions and other economic or market-related factors. Significant management judgment is involved in estimating these variables, and they include inherent uncertainties since they are forecasting future events. For example, unanticipated changes in competition, customer sourcing requirements and product maturity would all have a significant impact on these estimates.
•	Discount rate
	We employ a Weighted Average Cost of Capital (“WACC”) approach to determine our discount rate for goodwill recoverability testing. Our WACC calculation includes factors such as the risk free rate of return, cost of debt and expected equity premiums. The factors in this calculation are largely external to our company, and therefore are beyond our control. The average WACC utilized in our annual test of goodwill recoverability in May 2006 was 10.14%, which was based upon average business enterprise value. A 1% increase in the WACC will result in an approximate 12% decrease in the computed fair value of our reporting units. A 1% decrease in the WACC will result in an approximate 16% increase in the computed fair value of our reporting units. The following table summarizes the major factors that influenced the rate:

	2006			2005
Risk free rate of return		5.3	%		4.5	%
Cost of debt		7.0	%		5.9	%
Market risk premium		4.0	%		4.0	%

The increase in risk free rate of return and cost of debt is due to the overall increase in U.S. long-term interest rates between the dates of our annual impairment testing in May 2005 and May 2006.

In the second quarter of 2006, we completed our 2006 annual FAS 142 impairment review and determined that goodwill and indefinite-lived intangible assets were not impaired as of May 31, 2006. We believe the current assumptions and other considerations used in the above estimates are reasonable and appropriate. A material adverse change in the estimated future cash flows of our business or significant increases in the WACC rate could result in the fair value falling below the book value of its net assets. This could result in a material impairment charge.

The fair values of our long-term investments are dependent on the financial performance and solvency of the entities in which we invest, as well as the volatility inherent in their external markets. In assessing potential impairment for

32

these investments, we will consider these factors as well as the forecasted financial performance of these investment entities. If these forecasts are not met, we may have to record impairment charges.

Ø Pension and Other Employee Benefits

Certain assumptions are used to measure plan obligations and related assets of company-sponsored defined benefit pension plans, post-retirement benefits, post-employment benefits (e.g., medical, disability) and other employee liabilities. Plan obligations and annual expense calculations are based on a number of key assumptions. These assumptions include the weighted-average discount rate at which obligations can be effectively settled, the anticipated rate of future increases in compensation levels, the expected long-term rate of return on assets, increases or trends in health care costs and estimated mortality. We use independent actuaries to assist us in preparing these calculations and determining these assumptions. We believe that the current assumptions used to estimate plan obligations and annual expense are appropriate in the current economic environment. However, if economic conditions change, we may be inclined to change some of our assumptions, and the resulting change could have a material impact on the consolidated statements of operations and on the balance sheets. The weighted-average discount rate and the estimated return on plan assets used in our determination of pension expense is as follows:

	2006						2005
	U.S.			Non-U.S.			U.S.			Non-U.S.
Discount rate		5.70	%		4.85	%		5.80	%		5.49	%
Estimated return on plan assets		8.50	%		7.12	%		8.50	%		7.37	%

The following illustrates the annual impact on pension expense of a 100 basis point increase or decrease from the assumptions used to determine the net cost for the year ending December 31, 2005:

													Combined
	Weighted-Average Discount						Estimated Return on						Increase/(Decrease)
	Rate						Plan Assets						Pension Expense
(in millions)	U.S.			Non-U.S.			U.S.			Non-U.S.			U.S.			Non-U.S.
100 basis point increase	$	(27	)	$	(12	)	$	(13	)	$	(5	)	$	(40	)	$	(17	)
100 basis point decrease		29			10			13			5			42			15

The annual impact on other postretirement employee benefits expense of a 100 basis point increase or decrease from the discount rate used to determine the net cost for the year ended December 31, 2005 is immaterial.

Ø Share-Based Compensation

We account for share-based compensation in accordance with the fair value recognition provisions of SFAS No. 123R,“Share-Based Payment”.Prior to January 1, 2006, we accounted for share-based compensation in accordance with SFAS No. 123, “Accounting for Stock-Based Compensation”.Under the fair value recognition provisions of SFAS No. 123R, share-based compensation cost is measured at the grant date based on the value of the award and is recognized as expense over the vesting period. Determining the fair value of share-based awards at the grant date requires judgment, including estimation of the expected term of stock options, the expected volatility of our stock, expected dividends, and risk-free interest rates. If actual results differ significantly from these estimates, share-based compensation expense and our results of operations could be materially impacted.

33

SEPTEMBER 30, 2006 VERSUS SEPTEMBER 30, 2005 — CONSOLIDATED

Net Sales and Gross Profit

In the three months ended September 30, 2006, we reported consolidated net sales of $2,065 million, an increase of 7% or $138 million from prior period net sales of $1,927 million. In the nine months ended September 30, 2006, we reported consolidated net sales of $6,204 million, an increase of 5% or $306 million from prior period net sales of $5,898 million. These increases are primarily driven by higher demand and higher selling prices.

The primary drivers of the sales change between September 30, 2006 and 2005 are presented below:

	Three months ended			Nine months ended
Sales Change September 30, 2006 from 2005	%			%
Volume/mix		4	%		4	%
Selling price		2	%		2	%
Currency		1	%		(1	%)
Total change		7	%		5	%

Our gross profit for the third quarter of 2006 was $602 million, an increase of 6% or $32 million from $570 million in the third quarter of 2005. Our gross profit for the nine months ended September 30, 2006 was $1,873 million, an increase of 7% or $115 million from $1,758 million in the prior year period. These increases were due largely to higher demand along with a favorable product mix, and higher selling prices, partially offset by higher raw material and freight costs. Gross profit margin decreased to 29.2% from 29.6% in the third quarter of 2005 and increased to 30.2% from 29.8% in the nine months ended September 30, 2005.

Selling and Administrative Expense

In the third quarter of 2006, selling and administrative expenses were $247 million, an increase of 6% or $13 million from $234 million in the prior year period. In the nine months ended September 30, 2006, selling and administrative expenses were $745 million, 2% or $15 million higher than $730 million in the prior year period. The increase in the quarter largely reflects increased spending to support marketing and growth initiatives. In addition, effective September 29, 2006, our vacation policy changed for certain U.S. employees. This change resulted in a $4 million decrease to selling and administrative expenses for the three and nine months ended September 30, 2006.

Research and Development Expense

Research and development expenses for the third quarter of 2006 were $71 million, an increase of 8% or $5 million from $66 million in the third quarter of 2005. In the nine months ended September 30, 2006, research and development expenses were $213 million, an increase of 10% or $19 million from $194 million in the prior year period, reflecting increased spending to support growth projects. The most significant increases were in the Electronic Materials, Performance Chemicals and Coatings segments. In addition, effective September 29, 2006, our vacation policy changed for certain U.S. employees. This change resulted in a $2 million decrease to research and development expenses for the three and nine months ended September 30, 2006.

Interest Expense

Interest expense for the third quarter of 2006 was $21 million, a decrease of 25%, or $7 million from $28 million in the prior year period primarily due to lower levels of debt and a lower overall effective interest rate. Interest expense for the nine months ended September 30, 2006 was $73 million, a decrease of 21%, or $19 million from $92 million in the prior year period primarily due to lower levels of debt and a lower overall effective interest rate. During the third quarter of 2006, we early retired the remaining $94 million of our 7.40% notes due in 2009 and 8.25 billion of Japanese Yen-denominated variable rate notes (approximately $70 million at September 30, 2006). During 2005, we retired $400 million in U.S. notes and exchanged Euro 240 million (approximately $284 million at December 31, 2005) in Euro-denominated notes for a more favorable effective interest rate and an extended term.

Amortization of Finite-lived Intangible Assets

Amortization of finite-lived assets was $15 million for the current quarter and $14 million for the prior year period. The slight increase is primarily due to underlying currency movements. Amortization of finite-lived intangible assets was $42 million for the nine months ended September 30, 2006 and 2005, respectively.

34

Restructuring and Asset Impairments

In the third quarter of 2006, we recorded approximately $4 million of expense for severance and associated employee benefit charges, associated with the elimination of 69 positions, primarily in our Coatings and Salt segments, and our North American support services. The staffing reductions relate to our manufacturing operations and are a direct result of changes in execution of existing processes and productivity improvements, while our support services reductions are made possible as we continue to capitalize on the enhancements achieved through the implementation of our Enterprise Resource Planning system. In addition, we recorded $2 million for contract and lease termination costs related to a restructuring initiative announced in the fourth quarter of 2005.

For the three months ended September 30, 2005, net income was favorably impacted by a net $6 million of changes in estimates related to restructuring reserves. These changes in estimates to prior period reserves are largely related to our North American support services restructuring announced in the fourth quarter of 2003, and the completion of several smaller reduction in force initiatives announced throughout 2003 and 2004. The reversals were necessary to adequately reflect more accurate estimates of remaining obligations related to severance and other employee benefit costs. In some cases employees have been redeployed, while in other cases the employees affected by the workforce reductions were able to fill positions left vacant through natural attrition.

For the three months ended September 30, 2005, $8 million of asset impairments were recognized for the impairment of certain intangible assets within our Adhesives and Sealants business to their fair value. The impairment was due to significant declines in both volume and profitability. Offsetting this charge was a reversal of $4 million in estimated fixed asset impairment charges recorded in the second quarter of 2005 which were finalized during the third quarter.

For the nine months ended September 30, 2006, we recorded approximately $8 million of expense for severance and associated employee benefits primarily related to the restructuring of our global Graphics Arts and Architectural and Functional Coatings businesses within our Coatings segment, our Salt Segment, and our North American support services, that affected 106 positions in total. This charge was offset by $1 million of favorable adjustments to adequately reflect more accurate estimates of remaining obligations related to severance payments within our global Graphic Arts business initiative announced in the first quarter of 2006. We also reversed $1 million of severance and employee benefit charges and recorded a charge of $2 million for contract and lease termination costs related to 2005 initiatives.

For the nine months ended September 30, 2006, we recognized approximately $3 million, net of fixed asset impairment charges associated with the restructuring of our global Graphic Arts business within our Coatings segment. This charge was offset by several sales of previously impaired assets.

For the nine months ended September 30, 2005, net income was favorably impacted by a net $13 million of changes in estimates related to restructuring reserves. Included in this amount is $3 million of expense for severance and associated employee benefits affecting 120 positions, which was primarily associated with the planned closure of our Wytheville, VA Powder Coatings plant and the consolidation of our North American Powder Coatings operations, and smaller reduction in force efforts within our Electronic Materials segment and Plastics Additives business. Offsetting this charge were favorable adjustments of $16 million to reduce prior years restructuring reserves. These changes in estimates are largely related to our North American support services restructuring announced in the fourth quarter of 2003, and the completion of several smaller reductions in force initiatives announced throughout 2003 and 2004. The reversals were necessary to adequately reflect more accurate estimates of remaining obligations related to severance and other employee benefit costs. In some cases employees have been redeployed, while in other cases the employees affected by the workforce reductions were able to fill positions left vacant through natural attrition.

For the nine months ended September 30, 2005, $29 million of asset impairment charges were recognized for the impairment of intangible and fixed assets related to certain product lines within our Adhesives and Sealants business. In addition, we recognized $9 million of charges related to fixed assets associated with the closing of our Wytheville, VA Powder Coatings plant in the second quarter of 2005, and $2 million in the first of 2005 quarter for the impairment of intangible and fixed assets related to our Electronic Materials segment. Gains on sales of previously impaired assets offset the total impairment charge by $1 million.

35

Share of Affiliate Earnings, net

Affiliate net earnings for the three months ended September 30, 2006 and 2005 were $2 million and $3 million, respectively. For the nine months ended September 30, 2006 and 2005, affiliate earnings increased to $7 million from $6 million. The increase was primarily due to increased earnings from an equity affiliate in our Electronic Materials reporting segment.

Other (Income), net

Other income for the three and nine months ended September 30, 2006, was $17 million and $33 million, respectively, higher than the $11 million and $23 million, respectively in the prior year periods.

The increases were primarily due to higher investment income including interest related to higher short-term interest rates and increased average investments in money market funds.

Effective Tax Rate

We recorded a provision for income tax expense of $69 million for the third quarter of 2006, reflecting an effective tax rate from continuing operations before minority interest of 26.4% compared to a 31.6% effective rate for earnings in 2005. The decrease in the rate is mainly due to the settlement of tax contingencies as well as lower taxes on foreign earnings permanently reinvested abroad.

We recorded a provision for income tax expense of $232 million for the nine months ended September 30, 2006, reflecting an effective tax rate from continuing operations before minority interest of 28.0% compared to a 27.7% effective rate for earnings in the prior year period. The increase in the effective tax rate was primarily due to net tax reserve and valuation allowance reversals of $28 million recorded in the second quarter 2005 resulting from the favorable resolution of prior period tax contingencies due to the completion of prior years’ tax audits as well as lower taxes on foreign earnings permanently reinvested abroad.

Minority Interest

In the third quarter of 2006, we reported minority interest of $3 million, as compared to $4 million in 2005. In the nine months ended September 30, 2006, we reported minority interest of $10 million, as compared to $7 million in the prior year period. The majority of our minority interest relates to a consolidated joint venture recorded in our Electronic Materials segment.

Loss from Discontinued Operation

As discussed in Note 3 to the Consolidated Financial Statements, in the second quarter of 2006, our Board of Directors approved a plan to sell our globalAutomotive Coatingsbusiness within our Coatings business segment. The results of the business for all periods presented are reported as a discontinued operation.

In the three and nine months ended September 30, 2006, we reported a loss of $3 million, or $0.01 per share and $29 million or $0.13 per share, related to our discontinued operation, as compared to a gain of $6 million or $0.03 per share and $18 million or $0.08 per share in the three and nine months ended September 30, 2005, respectively. The 2006 loss includes $31 million after-tax, attributable to the recognition of certain deferred tax liabilities as well as the impairment of certain intangible and fixed assets, triggered by the decision to sell the business, offset by $2 million in after-tax income from theAutomotive Coatingsoperations. The three and nine months ended September 30, 2005, respectively, includes $2 million in after-tax income and $3 million in after-tax income from theAutomotive Coatingsoperations as well as $4 million and $14 million in benefits related to certain tax credits.

36

SEPTEMBER 30, 2006 VERSUS SEPTEMBER 30, 2005 — BY BUSINESS SEGMENT

     Net Sales by Business Segment and Region

	Three Months Ended						Nine Months Ended
(in millions)	September 30,						September 30,
	2006			2005			2006			2005
Business Segment
Coatings	$	700		$	664		$	2,087		$	1,972
Monomers		500			422			1,472			1,394
Performance Chemicals		447			423			1,333			1,252
Electronic Materials		402			351			1,169			979
Salt		174			163			597			632
Adhesives and Sealants		179			175			547			554
Elimination of Intersegment Sales		(337	)		(271	)		(1,001	)		(885	)
Total net sales	$	2,065		$	1,927		$	6,204		$	5,898
Customer Location
North America	$	1,042		$	990		$	3,206		$	3,078
Europe		507			484			1,520			1,528
Asia-Pacific		427			378			1,232			1,068
Latin America		89			75			246			224
Total net sales	$	2,065		$	1,927		$	6,204		$	5,898

     Net Earnings (Loss) from Continuing Operations by Business Segment⁽¹⁾

	Three Months Ended						Nine Months Ended
(in millions)	September 30,						September 30,
	2006			2005			2006			2005
Business Segment
Coatings	$	64		$	74		$	187		$	191
Monomers		42			30			158			142
Performance Chemicals		42			44			124			124
Electronic Materials		62			49			173			112
Salt		4			(1	)		23			27
Adhesives and Sealants		15			10			42			26
Corporate(2)		(40	)		(43	)		(119	)		(134	)
Total net earnings from continuing operations	$	189		$	163		$	588		$	488

(1)	Earnings (loss) for all segments except Corporate were tax effected using our overall consolidated effective tax rate excluding certain discrete items.
(2)	Corporate includes certain corporate governance costs, interest income and expense, environmental remediation expense, insurance recoveries, exploratory research and development expense, balance sheet currency translation gains and losses, any unallocated portion of shared services and certain discrete tax items.

37

Provision for Restructuring and Asset Impairment by Business Segment

Pre-Tax

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in millions)	2006		2005			2006			2005
Business Segment
Coatings	$	3	$	—		$	7		$	10
Monomers		—		—			—			—
Performance Chemicals		—		(1	)		—			(2	)
Electronic Materials		—		(1	)		(1	)		2
Salt		1		—			1			—
Adhesives and Sealants		—		5			1			29
Corporate		2		(5	)		2			(12	)
Total	$	6	$	(2	)	$	10		$	27

After-Tax

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
(in millions)	2006		2005			2006			2005
Business Segment
Coatings	$	2	$	—		$	4		$	7
Monomers		—		—			—			—
Performance Chemicals		—		—			—			(1	)
Electronic Materials		—		(1	)		(1	)		1
Salt		1		—			1			—
Adhesives and Sealants		—		3			1			19
Corporate		1		(3	)		—			(9	)
Total	$	4	$	(1	)	$	5		$	17

38

Coatings

Third Quarter and Year-to-Date Net Sales(in millions)

Net sales for the Coatings business group were $700 million, an increase of 5%, or $36 million, from 2005 third quarter net sales of $664 million. The sales increase was driven by higher selling prices, continued penetration in emerging markets, and favorable currencies.Architectural and Functional Coatings, which account for the majority of total Coatings sales, delivered 6% growth in sales over the prior year through a combination of the factors noted above. Growth in the decorative coatings segment reflects both continued growth of our technologically differentiated low VOC emulsions as well as emerging market penetration. Growth in demand in China, India, Turkey and Latin America continues to demonstrate broad adoption of our core technologies in decorative coatings.Powder Coatingssales increased 3% versus the prior year, driven primarily by higher selling prices and the favorable impact of stronger European currencies which more than offset the unfavorable impact of lower demand. The lower demand reflects ongoing portfolio adjustments to improve product mix and business profit margins.

Third quarter earnings for the Coatings business were $64 million, including $2 million, after-tax, in restructuring charges, versus $74 million in earnings in 2005. The favorable impacts of higher selling prices and currencies were more than offset by the significant run-up in raw material costs along with increased spending in marketing and research to fund growth initiatives.

In the nine months ended September 2006, net sales for the Coatings business group were $2,087 million, an increase of 6%, or $115 million, from 2005 net sales of $1,972 million. Strong volume growth in North America and emerging markets, higher selling prices and better product mix drove the sales increase, which was partially offset by unfavorable currencies.Architectural and Functional Coatings, which account for the majority of total Coatings sales, delivered 6% growth in sales over the prior year through a combination of the factors noted above. The decorative coatings segment posted 8% growth in sales for the period. In North America, we have observed strong demand in the do-it-yourself markets with significant growth in our differentiated low-VOC emulsion products for paint applications. In the emerging markets, including China, India, and Turkey, we have continued to improve sales through effective execution of our market penetration strategies.Powder Coatingssales were up 2%

39

over the prior year reflecting selling price increases and improved product mix, on flat demand, partially offset by the impact of weaker European currencies.

Earnings of $187 million in 2006 were down from $191 million in 2005. Included in the 2006 earnings is a $4 million, after-tax, charge for restructuring and other one-time costs related to the Graphic Arts business, while the 2005 earnings reflect a $7 million, after-tax, charge for restructuring and asset impairments related to thePowder Coatingsbusiness. Overall, the favorable impacts of higher selling prices, stronger volumes, and a better product mix were more than offset by higher raw material, energy, operating and research costs.

Monomers

Third Quarter and Year-to-Date Net Sales(in millions)

Third quarter 2006 net sales from Monomers were $500 million, an increase of $78 million, or 18%, from prior period net sales of $422 million. The net sales results for Monomers include sales to our internal downstream monomer-consuming businesses, primarilyArchitectural and Functional Coatings, Adhesives and Sealants, and Performance Chemicals, along with sales to third party customers. Sales to third party customers increased 8% to $163 million in the third quarter of 2006 from $151 million in the prior period, primarily due to higher volumes. Sales to downstream Rohm and Haas specialty businesses were 24% higher, due primarily to higher selling prices which were driven by higher raw material costs along with higher volumes.

	Three Months Ended
(in millions)	September 30,
	2006			2005
Total Sales	$	500		$	422
Elimination of Intersegment Sales		(337	)		(271	)
Third Party Sales	$	163		$	151

Earnings of $42 million for the third quarter of 2006 increased from $30 million in the prior period. Prior period results included $12 million, after-tax, in costs associated with unplanned plant outages in our Deer Park facility, including a precautionary shut down in anticipation of Hurricane Rita. The quarter’s earnings reflect the favorable

40

impacts of higher volume, improved operations and lower energy costs, partially offset by higher raw materials and lower selling prices to third party customers. In the quarter, approximately 60% of Monomers earnings were generated by sales to the downstream businesses, as compared to approximately 25% last year.

For the nine months ended September 2006, net sales from Monomers were $1,472 million, an increase of $78 million, or 6%, from prior period net sales of $1,394 million. The net sales results for Monomers include sales to our internal downstream monomer-consuming businesses, primarilyArchitectural and Functional Coatings, Adhesives and Sealants, and Performance Chemicals, along with sales to third party customers. Sales to third party customers decreased 7% to $471 million in 2006 from $509 million in the prior period, primarily due to lower volumes and lower selling prices. Sales to downstream Rohm and Haas specialty businesses were 13% higher, due primarily to higher selling prices and slightly higher volumes.

	Nine Months Ended
(in millions)	September 30,
	2006			2005
Total Sales	$	1,472		$	1,394
Elimination of Intersegment Sales		(1,001	)		(885	)
Third Party Sales	$	471		$	509

Earnings of $158 million for the nine months ended September 2006 increased $16 million from $142 million in the prior period. The current period results reflect lower sales volumes and selling prices to third party customers as well as higher raw material and energy costs overall. Prior period results included $27 million, after-tax, of expenses associated with unplanned plant outages at our Deer Park facility. During the first nine months of 2006, approximately 59% of Monomers earnings were generated by sales to the downstream businesses, as compared to approximately 38% last year.

Performance Chemicals

Third Quarter and Year-to-Date Net Sales(in millions)

41

In the third quarter of 2006, net sales from Performance Chemicals were $447 million, an increase of 6%, or $24 million, from 2005 net sales of $423 million. The increase was driven by improved demand, slightly higher selling prices, and a favorable impact of currencies. Sales inPlastics Additivesincreased 3% from the prior period, driven by higher pricing and slightly favorable currencies, partially offset by modestly lower demand. Despite some slowing of demand in North America, the business continued to enjoy stronger demand in the packaging and building & construction segments in the emerging markets of China and Latin America. Net sales forConsumer and Industrial Specialtiesincreased 6% versus the prior period, reflecting strong demand and favorable currencies, partially offset by lower selling prices. Demand was strong for both biocides and specialty products across most regions. Net sales forProcess Chemicalswere up 4% compared to the third quarter of 2005, reflecting strength in ion exchange resins particularly in Asia, higher selling prices, and the favorable impact of currencies

Performance Chemicals earnings for the third quarter of 2006 were $42 million versus earnings of $44 million in the prior year, reflecting higher raw material costs and increased spending to support business development and new products, which more than offset the favorable impact of improved pricing.

For the first nine months of 2006, net sales from Performance Chemicals were $1,333 million, an increase of 6%, or $81 million, from 2005 net sales of $1,252 million. The increase was driven by improved demand and higher selling prices, partially offset by the unfavorable impact of currencies. Net sales inPlastics Additivesincreased 8% from the prior period, driven by strong demand and higher pricing, partially offset by unfavorable currencies. Demand was strong in the Building and Construction markets in Europe and Latin America, as well as the Packaging segment in China. Net sales forConsumer and Industrial Specialtiesincreased 2% versus the prior period, reflecting higher demand partially offset by the unfavorable impact of currencies. The business enjoyed healthy growth in biocides in all regions, while dispersant volumes were down globally with the majority of the shortfall in Europe. Net sales forProcess Chemicalswere up 6% compared to the first nine months of 2005, reflecting strength in ion exchange resins and sodium borohydride in key markets, and higher selling prices, which more than offset the unfavorable impact of currencies.

Performance Chemicals earnings for the first nine months of 2006 were $124 million flat, versus the earnings in the prior year, as the favorable impacts of strong demand and higher pricing were offset by increased raw material and energy costs, higher spending to support business development and new product introductions, and the unfavorable impact of currencies.

42

Electronic Materials

Third Quarter and Year-to-Date Net Sales(in millions)

Net sales for the Electronic Materials business reached $402 million in the third quarter of 2006, up 15%, or $51 million, versus sales of $351 million in 2005. This performance establishes the fifth consecutive quarterly record for the business. Demand was strong across all businesses, especially in Asia-Pacific where sales were up 15% over 2005. The business continues to deliver innovative technologies to meet the needs of this dynamic market. Sales in advanced technology product lines were up 19% versus the third quarter of 2005, while overall sales were up 2% sequentially versus a very strong second quarter of 2006.

Sales fromSemiconductor Technologiesgrew 16% for the quarter, driven by strength in demand for CMP pads and slurries in all regions, along with strong sales of our advanced photoresists and related products, in all regions. TheCircuit Board Technologiesbusiness was up 8% versus the third quarter of 2005, as continued strength in the Asia-Pacific region, up 14% versus the same period a year ago, more than offset decreased demand in both North America and Europe.Packaging and Finishing Technologiessales growth of 17% was driven by both Asia (up 3%) and North America, where the major driver was revenues generated from the pass-through of precious metal prices. Process sales (which exclude precious metal pass-through sales) were essentially flat in the quarter.

Record earnings of $62 million were up significantly from the $49 million earned in the third quarter of 2005, reflecting increased sales of advanced technology products and continued discipline in cost management. Last year’s third quarter earnings included a $1 million, after-tax, gain from the reversal of restructuring reserves.

Net sales for the first nine months of 2006 for the Electronic Materials business reached $1,169 million, up 19%, or $190 million, versus net sales of $979 million in the first nine months of 2005. Demand was strong across all businesses, especially in Asia Pacific and North America. Year-to-date sales in advanced technology product lines were up 27% versus the prior period.

Sales forSemiconductor Technologiesgrew 21% for the first nine months, reflecting continued strength in sales of CMP pads and slurries in all regions along with strong sales of our advanced photoresists and related products both in Asia Pacific and North America. TheCircuit Board Technologiesbusiness grew 8% overall in the first nine

43

months of 2006, mainly driven by strength in the Asia Pacific region.Packaging and Finishing Technologiessales growth of 26% was driven by both Asia Pacific and North America, with precious metal pass-through sales up significantly due to higher previous metal prices. Process sales (which exclude precious metal pass-through sales) grew 5% year over year.

Earnings of $173 million were up significantly from the $112 million earned in the first nine months of 2005, reflecting increased sales of advanced technology products and continued discipline in cost management. Earnings for the first nine months of 2006 include a $1 million after-tax gain from the reversal of restructuring reserves; 2005 earnings for the same period included $1 million, after-tax, for restructuring charges.

We expect the overall market environment for the Electronics industry to remain robust over the next several months, particularly in Asia, and will continue to monitor conditions carefully.

Salt

Third Quarter and Year-to-Date Net Sales(in millions)

Third quarter 2006 net sales from Salt were $174 million, an increase of 7% from net sales of $163 million in 2005. Improved pricing and mix, along with the favorable impact of currency, more than offset a slight decline in demand. The change in demand is principally related to lower shipments of highway de-icing salt.

Earnings for the quarter of $4 million, which include $1 million, after-tax, in restructuring charges, were up $5 million compared with the loss of $1 million reported in 2005. The improvement is primarily a result of higher selling prices and a shift in sales mix toward higher margin products which more than offset increases in distribution and other production costs. In addition, 2005 earnings were unfavorably impacted by hurricane-related costs of $1 million, after-tax.

For the nine months ended September 2006, net sales from Salt were $597 million, a decrease of 6% versus the prior period net sales of $632 million. The decrease reflects a significant drop in ice control volumes in the first quarter of 2006 as a result of mild weather conditions which significantly lowered demand for highway de-icing salt.

44

Higher selling prices, favorable mix, and a favorable currency impact partially offset the decline in ice control volume.

Earnings for the first nine months of 2006 of $23 million, which include $1 million, after-tax, in restructuring charges, have decreased by $4 million compared to earnings of $27 million in 2005. The unfavorable impact reflects the decline in ice control volumes and higher production, material, and distribution costs which more than offset the favorable impacts of higher selling prices and product mix.

Adhesives and Sealants

Third Quarter and Year-to-Date Net Sales(in millions)

In the third quarter of 2006, net sales for Adhesives and Sealants were $179 million, an increase of 2%, or $4 million, from net sales of $175 million in 2005. Slightly higher pricing and more favorable currencies drove the sales gain for the quarter. Growth in demand for the core business segments balanced off the negative impact of prior portfolio management initiatives.

Earnings of $15 million were up versus $10 million in the third quarter of 2005. Prior year results included a non-cash impairment charge of $3 million, after-tax. Excluding the impairment charge noted above, earnings increased by $2 million, reflecting the impact of higher selling prices and favorable currencies partially offset by higher raw material costs.

In the first three quarters of 2006, net sales for Adhesives and Sealants were $547 million, a decrease of 1%, or $7 million, from net sales of $554 million in 2005. The decrease reflects the impacts of lower demand and unfavorable currencies partially offset by higher pricing. The overall lower demand reflects prior portfolio management initiatives, along with lower demand for some acrylic products that benefited from a tight monomer supply environment in the prior year.

Earnings of $42 million, which include $1 million, after-tax, in restructuring charges, were up $16 million versus earnings of $26 million in the first nine months of 2005. The increase is primarily due to the absence of $19 million, after-tax charge in 2005, related to the impairment of the synthetic leather business, offset by higher operating costs, unfavorable currencies and lower demand partially offset by higher selling prices.

45

Corporate

Third Quarter and Year-to-Date After-Tax Expenses(in millions)

Corporate expense of $40 million, after-tax, for the quarter was down from $43 million, after-tax, in the third quarter of 2005. The change reflects lower interest expense and environmental accruals plus higher interest income, partially offset by increases to fund special initiatives and higher restructuring charges.

Corporate expense of $119 million, after-tax, for the nine months ended September 2006 was down from $134 million, after-tax, for the comparable period in 2005. The change reflects lower interest expense, environmental accruals and charges for stock-based compensation, plus higher interest income, partially offset by increases to fund special initiatives, higher restructuring charges, and the absence of favorable tax reserve and valuation allowance adjustments recognized in 2005.

46

LIQUIDITY AND CAPITAL RESOURCES

Overview

One of our key financial policies is to maintain a strong balance sheet with debt levels well-covered by our cash flows. As of September 30, 2006, our company’s debt ratio (total debt in proportion to total debt plus stockholders’ equity) was 33%, down from 36% as of December 31, 2005, and cash from operating activities for the rolling twelve months ended September 30, 2006 was approximately 48% of our quarter-end debt (cash from operating activities in proportion to total debt). Over the next several years, we expect to pursue growth strategies and provide cash returns to our stockholders without unduly stressing these ratios. We intend to enhance stockholder value through higher dividends, strategic investments in our core businesses and technologies, and share repurchases as appropriate, specifically to:

• Continue to pay higher cash dividends to our stockholders. Dividend payouts have increased at an average 10% compound annual growth rate since 1978.

• Reinvest in core businesses through our capital expenditure program to drive profitable growth and enhance stockholder value. We will also consider selected acquisitions or alliances in targeted areas.

• Repurchase our common stock. In December 2004, our Board of Directors authorized the repurchase of up to $1 billion of our common stock through 2008, with the timing of the purchases depending on market conditions and other priorities for cash. As of September 30, 2006, we repurchased $537 million of our stock or 11.7 million shares.

In the nine months ended September 30, 2006, our primary source of cash was from operating activities. Our principal uses of cash were debt reduction, capital expenditures, dividends and share repurchases. These are summarized in the table below:

	Nine Months ended
	September 30,
(in millions)	2006			2005
Cash provided by operations	$	682		$	666
Net debt reduction		(232	)		(259	)
Capital expenditures		(236	)		(195	)
Dividends		(211	)		(186	)
Share repurchases		(264	)		(273	)
Stock option exercise proceeds		55			63

Our cash flow statement includes the combined results of our continued and discontinued operations for all periods presented.

Cash Provided by Operations

For the nine months ended September 30, 2006, cash from operating activities exceeded the prior-year period by $16 million; as cash from higher earnings, lower working capital needs and lower financing costs in the current year period more than offset higher income tax payments.

The cash flow we generate from operating activities is typically concentrated in the second half of the year due to working capital patterns in some of our core businesses, such as Coatings, as well as the timing of certain annual payments such as employee bonuses, interest on debt and property taxes, which are concentrated in the first half of the year. With our strong nine month performance, we expect 2006 cash from operating activities to approximate $1.1 billion. Maintaining strong operating cash flow through earnings and working capital management continues to be an important objective.

47

Pension Plan and Postretirement Benefit Plan Funding and Liability

During 2005, we voluntarily increased U.S. pension and other postretirement employee benefit plan funding to the maximum tax-deductible amounts, $125 million and $12 million, respectively. Similarly, we expect to fund our U.S. pension and postretirement employee benefit plans for $137 million and $12 million, respectively, before year end. This amount slightly exceeds the actual funding shortfall between the market value of assets in our US pension trusts and the Projected Benefit Obligations at December 31, 2005, based on our most recent actuarial valuation. It is uncertain whether a funding shortfall will exist at December 31, 2006, as the year-end funding status will depend not only on this additional funding, but also the actual benefits paid, actual return on plan assets, and prevailing interest rates at year-end.

Total contributions made during 2005, excluding the voluntary contributions described above, were $93 million, consisting of $42 million for our foreign qualified pension plans, $39 million for our postretirement benefit plans, and $12 million for our non-qualified pension plans. Over half of the $42 million used to fund our foreign qualified pension trusts was used to fund shortfalls in our United Kingdom pension trust. In 2006, excluding the fourth quarter voluntary contribution, we expect to contribute approximately $97 million to our international pension trusts, non-qualified pension trust and other postretirement plans as required. As of September 30, 2006, we have contributed $76 million to these plans. Funding requirements for subsequent years are uncertain and will significantly depend on changes in assumptions used to calculate plan funding levels, the actual return on plan assets, changes in the employee groups covered by the plan, and any legislative or regulatory changes affecting plan funding requirements. For tax planning, financial planning, cash flow management or cost reduction purposes, we may increase, accelerate, decrease or delay contributions to the plan to the extent permitted by law.

Capital Expenditures

We intend to manage our capital expenditures to take advantage of growth and productivity improvement opportunities as well as to fund ongoing environmental protection and plant infrastructure requirements. We have a well-defined review procedure for the authorization of capital projects. Capital expenditures through the first nine months of 2006 are above the prior year period expenditures primarily due to higher spending for our China Research and Development Center, the CMPT plant in Taiwan, and projects within the Coatings segment, partially offset by lower Monomers spending due to the timing of maintenance on our Houston Plant. Projected capital expenditures for fiscal year 2006 of approximately $425 million, compared to $333 million in fiscal year 2005, are expected to be in line with depreciation expense.

Dividends

Common stock dividends have been paid each year since 1927. The payout has increased at an average 10% compound annual growth rate since 1978.

2006						2005
	Amount						Amount
	(Per		Amount				(Per		Amount
Date of dividend	common		(In			Date of dividend	common		(In
payment	share)		millions)		Record Date	payment	share)		millions)		Record Date
March 1, 2006	$	0.29	$	65	February 17, 2006	March 1, 2005	$	0.25	$	57	February 18, 2005
June 1, 2006		0.33		73	May 12, 2006	June 1, 2005		0.29		65	May 13, 2005
September 1, 2006		0.33		73	August 11, 2006	September 1, 2005		0.29		64	August 12, 2005
						December 1, 2005		0.29		64	November 4, 2005

On September 21, 2006, the board declared a dividend of $0.33 per share payable on December 1, 2006, to shareholders of record on November 3, 2006.

Share Repurchase Program

In December 2004, our Board of Directors authorized the repurchase of up to $1 billion of our common stock through 2008, with the timing of the purchases depending on market conditions and other priorities for cash. During the second and third quarters, we used $264 million of available cash to repurchase 5.7 million of our outstanding

48

shares. As of September 30, 2006, we had repurchased $537 million of our stock or 11.7 million shares under the current authorization.

Liquidity and Debt

As of September 30, 2006, we had $377 million in cash, including restricted cash, and $2,016 million in debt compared with $570 million and $2,195 million, respectively, at December 31, 2005. A summary of our cash and debt balances is provided below:

	September 30,		December 31,
(in millions)	2006		2005
Short-term obligations	$	298	$	121
Long-term debt		1,718		2,074
Total debt	$	2,016	$	2,195
Cash and cash equivalents	$	374	$	566
Restricted cash		3		4
Total	$	377	$	570

Debt

During the third quarter of 2006, we completed the early retirement of the remaining $94 million of 7.4% notes scheduled to mature on July 15, 2009. The retirement which was completed in three stages beginning in March, 2005, resulted in a loss of $17 million in the prior year period and immaterial gains during the second and third quarters of 2006. In September of 2006, we retired 8.25 billion of Yen-denominated variable rate notes (approximately $70 million at September 30, 2006). At the current debt level, we expect interest expense to run approximately $22 million per quarter, an effective rate of approximately 4.4 percent on total debt.

At September 30, 2006, we had no commercial paper outstanding. Our short-term debt was primarily composed of local bank borrowings and the current portion of long-term debt for our 6.0% Euro-denominated notes due in March 2007. During 2006, our primary source of short-term liquidity has been cash from operating activities. We expect this to continue with commercial paper and bank borrowings needed to support local working capital needs from time to time. In December 2005, we entered into a $500 million revolving credit facility with a syndicated group of banks. This facility is committed until December 2010 and is not contingent upon our credit rating. As of September 30, 2006, we have not drawn down any funds against this facility. We are in the process of extending this facility through December 2011.

Moody’s and Standard and Poor’s currently rate our senior unsecured long-term debt A-3 and A minus, respectively, with stable outlooks; and our short-term commercial paper, P2 and A2, respectively. In general, we believe these ratings are consistent with the objectives of our long-term financial policies.

Use of Derivative Instruments to Manage Market Risk

We use derivative instruments to reduce uncertainties arising from conducting our business in a variety of currencies, financing at long- and short-term interest rates and pricing our raw materials at market prices. The policies and procedures applicable to our use of these derivative instruments are disclosed in Items 7a and 8 (Notes 1 and 5) of our 2005 Form 10-K.

During the nine months ended September 30, 2006, $6 million net cash was paid for derivative instruments, and the market value of our derivative instruments depreciated $34 million after-tax. During the same period, derivative instruments lowered interest expense and increased our effective cost of natural gas above spot prices. Overall derivatives reduced earnings per share for the nine months ended September 30, 2006, by just under one cent per share.

49

During the remainder of this year, we expect to finance and manage financial prices under business and economic conditions characterized by sufficient cash reserves; a weak dollar; a flat U.S. yield curve; and U.S. natural gas prices pressured by record U.S. storage levels. Our objectives are to preserve our earnings from potentially weaker local currencies, maintain or reduce our effective interest rate despite rising market rates, and capture opportunities to increase protection against further natural gas price spikes.

Trading Activities

We do not have any trading activity that involves non-exchange traded contracts accounted for at fair value.

Unconsolidated Entities

All significant entities are consolidated. Any unconsolidated entities are de minimis in nature and there are no significant contractual requirements to fund losses of unconsolidated entities. See Note 1 to the Consolidated Financial Statements for our treatment of Variable Interest Entities.

Environmental Matters and Litigation

Our chemical operations, as those of other chemical manufacturers, involve the use and disposal of substances regulated under environmental protection laws. Our environmental policies and practices are designed to ensure compliance with existing laws and regulations and to minimize the risk of harm to the environment.

The company has participated in the remediation of waste disposal and manufacturing sites as required under the Superfund and related laws. Remediation is well underway or has been completed at many sites. Nevertheless, the company continues to face government enforcement actions, as well as private actions, related to past manufacturing and disposal and continues to focus on achieving cost-effective remediation where required.

Accruals

We have provided for costs to remediate former manufacturing and waste disposal sites, including Superfund sites, as well as our company 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 these or similar sites, the liability of other parties, the ability of other Potentially Responsible Parties (“PRPs”) to pay costs apportioned to them and current laws and regulations. Reserves for environmental remediation that we believe to be probable and estimable are recorded appropriately as current and long-term liabilities in the Consolidated Balance Sheets. The reserves for remediation were $148 million at September 30, 2006 and $147 million at December 31, 2005. The amounts charged to pre-tax earnings for environmental remediation and related charges were $11 million and $19 million for the three and nine months ended September 30, 2006, and $18 million and $35 million for the three and nine months ended September 30, 2005, respectively, and are primarily recorded as cost of goods sold in the Consolidated Statements of Operations.

The Wood-Ridge, New Jersey site (“Site”), and Berry’s Creek, which runs past this Site, are areas of environmental significance to the company. The Site is the location of a former mercury processing plant acquired many years ago by a company later acquired by Morton International, Inc. (“Morton”). Morton and Velsicol Chemical Corporation (“Velsicol”) have been held jointly and severally liable for the cost of remediation of the Site. We have submitted a feasibility study of various remedial alternatives, and we expect New Jersey Department of Environmental Protection, in consultation with EPA Region 2, to select a remedy for the Site in 2006. Our exposure at the Site will depend, in part, on the results of attempts to obtain contributions from others believed to share responsibility, and, in part, on the remedy selected for the Site. Velsicol’s liabilities for Site response costs will be addressed through a bankruptcy trust fund established under a court-approved settlement among Velsicol, Fruit-of-the-Loom, Inc. (its indemnitor) and other parties, including the government.

With regard to Berry’s Creek, and the surrounding wetlands, EPA has issued letters to 158 PRPs for performance of a broad scope investigation of risks posed by contamination in Berry’s Creek. Performance of this study is expected to take at least six years to complete. The PRPs are in the process of forming a representative group to negotiate with EPA. Today, there is much uncertainty as to what will be required to address Berry’s Creek, but investigation and cleanup costs, as well as potential resource damage assessments, could be very high and our share of these costs could possibly be material to the results of our operations, cash flows and consolidated financial position.

50

Our other significant environmental matters are described in Note 13 to the Consolidated Financial Statements.

In addition to accrued environmental liabilities, there are costs which have not met the definition of probable, and accordingly, are not recorded in the Consolidated Balance Sheets. We have identified reasonably possible loss contingencies related to environmental matters of approximately $117 million and $110 million at September 30, 2006 and December 31, 2005, respectively.

Climate Change

There is an increasing global focus on issues related to climate change and particularly on ways to limit and control the emission of greenhouse gases, which are believed to be associated with climate change. Some initiatives on these topics are already well along in Europe, Canada and other countries and related legislation has been introduced, but not passed, in the U.S.

The Kyoto Protocol to the United Nations Framework Convention on Climate Change was adopted in 2005 in many countries. For instance, the European Union has a mandatory Emissions Trading Scheme to implement its objectives under the Kyoto Protocol. Four of our European locations currently exceed the threshold for participation in the EU Emissions Trading Scheme pursuant to the Kyoto Protocol and are currently implementing the requirements established by their respective countries. We are very much aware of the importance of these issues and the importance of addressing greenhouse gas emissions.

Due to the nature of our business, we have emissions of CO₂ primarily from combustion sources, although we also have some minor process by-product CO₂ emissions. Our emissions of other greenhouse gases are infrequent and minimal as compared to CO₂ emissions. We have therefore focused on ways to increase energy efficiency and curb increases in greenhouse gas emissions resulting from growth in production in addition to lowering the energy usage of existing operations. Although the general lack of specific legislation prevents any accurate estimates of the long term impact on the Company, any legislation that limits CO₂ emissions may create a potential restriction to business growth by capping consumption of traditional energy sources available to all consumers of energy, including Rohm and Haas. Capping consumption could result in: increased energy cost, additional capital investment to lower energy intensity and rationed usage with the need to purchase greenhouse gas emission credits. We will continue to follow these climate change issues, work to improve the energy efficiencies of our operations, work to minimize any negative impacts on company operations and seek technological breakthroughs in energy supply and efficiency.

Litigation

We are involved in various kinds of litigation, principally in the United States. We strive to resolve litigation where we can through negotiation and other alternative dispute resolution methods such as mediation. Otherwise, we vigorously defend lawsuits in the Courts. Significant litigation is described in Note 13 to the Consolidated Financial Statements.

ACCOUNTING PRONOUNCEMENTS ISSUED BUT NOT YET ADOPTED

Accounting for Planned Major Maintenance Activities

In September 2006, the Financial and Accounting Standards Board (“FASB”) issued Staff Position (FSP)AUG AIR-1, which addresses the accounting for planned major maintenance activities. The FASB believes that the accrue-in-advance method of accounting for planned major maintenance activities results in the recognition of liabilities that do not meet the definition of a liability in FASB Concepts Statement No. 6,“Elements of Financial Statements,”because it causes the recognition of a liability in a period prior to the occurrence of the transaction or event obligating the entity. This FSP prohibits the use of the accrue-in-advance method of accounting for planned major maintenance activities in annual and interim financial reporting periods beginning January 1, 2007. We are currently evaluating the impact to our consolidated financial statements.

Employers’ Accounting for Defined Benefit Pension and Other Postretirement Benefit Plans

In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” This statement amends SFAS Nos. 87, 88, 106 and 132(R). SFAS No. 158 requires employers to recognize the overfunded or underfunded status of a defined benefit plan as an asset or liability in the statement of financial position, and to recognize annual changes in gains or losses, prior service costs, or other credits that have not been

51

recognized as a component of net periodic pension cost, net of tax through comprehensive income. SFAS No. 158 also requires an employer to measure defined benefit plan assets and obligations as of the date of its year-end statement of financial position, with limited exceptions. We are required to apply the recognition provisions of SFAS No. 158 and provide the required disclosures as of the end of the fiscal year ended December 31, 2006. The December 31, 2006 funded status of our plans will depend on actual benefits paid, the actual return on our plans’ assets for 2006 and the prevailing interest rates at year-end. We are currently evaluating the impact of adopting SFAS No. 158 on our consolidated balance sheets. The measurement provision of SFAS No. 158 is effective for fiscal years ending after December 15, 2008. Currently, all of our plans have a measurement date of December 31, with the exception of our Rohm and Haas Japan Plan and our Japan Acrylic Plan.

Fair Value Measurements

In September 2006, the FASB issued SFAS No. 157,“Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. This Statement is effective for financial statements issued in 2008. We are currently assessing the impact to our consolidated financial statements.

Quantifying Misstatements

In September 2006, the Securities and Exchange Commission (“SEC”) issued Staff Accounting Bulletin (“SAB”) No. 108,“Quantifying Misstatements.”In recent years, the SEC has voiced concerns over registrants’ exclusive reliance on either a balance sheet or income statement approach in quantifying financial statement misstatements. SAB No. 108 states that registrants should use both a balance sheet approach and income statement approach when quantifying and evaluating the materiality of a misstatement. The SAB also provides guidance on correcting errors under the dual approach as well as transition guidance for correcting previously immaterial errors that are now considered material based on the approach in the SAB. We will adopt SAB No. 108 as of December 31, 2006, and we do not believe it will have a material impact to our consolidated financial statements.

Accounting for Uncertainty in Income Taxes

In July 2006, the FASB issued Financial Accounting Standards Board Interpretation (“FIN”) No. 48,“Accounting for Uncertainty in Income Taxes.”FIN No. 48 is an interpretation of SFAS No. 109,“Accounting for Income Taxes.”FIN No. 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in an enterprise’s tax return. This interpretation also provides guidance on the derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition of tax positions. The recognition threshold and measurement attribute is part of a two step tax position evaluation process prescribed in FIN No. 48. FIN No. 48 is effective after the beginning of an entity’s first fiscal year that begins after December 15, 2006. We will adopt FIN No. 48 as of January 1, 2007, and are currently evaluating the impact to our consolidated financial statements.

Presentation of Taxes Collected from a Customer and Remitted to Governmental Authorities in the Income Statement

In June 2006, the Emerging Issues Task Force (“EITF”) issued EITF 06-3, “How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross versus Net Presentation),”to clarify diversity in practice on the presentation of different types of taxes in the financial statements. The Task Force concluded that, for taxes within the scope of the issue, a company may adopt a policy of presenting taxes either gross within revenue or net. That is, it may include charges to customers for taxes within revenues and the charge for the taxes from the taxing authority within cost of sales, or, alternatively, it may net the charge to the customer and the charge from the taxing authority. If taxes subject to this EITF are significant, a company is required to disclose its accounting policy for presenting taxes and the amounts of such taxes that are recognized on a gross basis. The guidance in this consensus is effective for the first interim reporting period beginning after December 15, 2006. We will adopt EITF 06-3 as of January 1, 2007, and are currently evaluating the impact to our consolidated financial statements.

Accounting for Servicing of Financial Assets

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets an Amendment of FASB Statement No. 140.”SFAS No. 156 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 156 is effective after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will adopt SFAS No. 156 as of January 1, 2007, and do not believe it will have a material impact to our consolidated financial statements.

52

Certain Hybrid Financial Instruments

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments.”SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.” SFAS No. 155 permits fair value remeasurement for any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation; clarifies which interest-only strips and principal-only strips are not subject to the requirements of SFAS No. 133, and establishes a requirement to evaluate interests in securitized financial assets to identify interests that are freestanding derivatives or that are hybrid financial instruments that contain an embedded derivative requiring bifurcation. In addition, SFAS No. 155 clarifies that concentrations of credit risk in the form of subordination are not embedded derivatives and amends SFAS No. 140 to eliminate the prohibition on a qualifying special purpose entity from holding a derivative financial instrument that pertains to a beneficial interest other than another derivative financial instrument. SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006. We will adopt SFAS No. 155 as of January 1, 2007, and we will apply the provisions of SFAS No. 155 if and when required.

ITEM 3.Quantitative and Qualitative Disclosures about Market Risk

Management’s discussion of market risk is incorporated herein by reference to Item 7a of the Form 10-K for the year ended December 31, 2005, filed with the Securities and Exchange Commission on March 2, 2006.

ITEM 4.Controls and Procedures

a)	Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
	Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the Exchange Act). Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report. Our principal executive officer and our principal financial officer have signed their certifications as required by the Sarbanes-Oxley Act of 2002.
b)	Changes in Internal Controls over Financial Reporting
	There have been no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2006 that have materially affected, or are likely to materially effect, our internal control over financial reporting.

53

PART II — OTHER INFORMATION

ITEM 1.Legal Proceedings

For information related to Legal Proceedings, see Note 13:Contingent Liabilities, Guarantees and Commitmentsin the accompanying Notes to Consolidated Financial Statements.

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds

The following table provides information relating to our purchases of our common stock during the quarter ended September 30, 2006:

						Total Number of Shares		Approximate Dollar Value
	Total Number		Average Price			Purchased as Part of		of Shares that May Yet Be
	of Shares		Paid per			Publicly Announced		Purchased Under the Plans or
Period	Purchased(1)		Share(1)			Plans or Programs(2)		Programs(2)
July 1, 2006 – July 31, 2006		520,838	$	0	(3)		520,838	$	560,191,860
August 1, 2006 – August 31, 2006		1,350,000		44.81			1,350,000		499,698,885
September 1, 2006 – September 30, 2006		835,400		44.46			826,400		462,961,817
Total		2,706,238					2,697,238		462,961,817

Notes:
(1)	9,000 shares were purchased as a result of employee stock option exercises (stock swaps).
(2)	In December 2004, our Board of Directors authorized the repurchase of up to $1 billion of our common stock through 2008, with the timing of the purchases depending on market conditions and other priorities for cash. As of September 30, 2006, $537 million of the $1 billion has been used to repurchase 11.7 million shares of our stock.
(3)	In May 2006, we entered into an agreement, pursuant to which we purchased 3 million shares from a financial institution. The initial purchase price for the shares was $167 million in the aggregate including a brokerage fee. We received approximately 0.5 million additional shares when this agreement concluded in July of 2006. The average price for the total 3.5 million shares is $47.71.

54

ITEM 6.Exhibits

(31.1)	Certification Pursuant to Rule 13a-14(a)/15d-14(a).
(31.2)	Certification Pursuant to Rule 13a-14(a)/15d-14(a).
(32)	Certification Furnished Pursuant to 18 U.S.C. Section 1350 Adopted Pursuant to Section 906 Sarbanes-Oxley Act of 2002. The exhibit attached to this Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.

55

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	/s/Jacques M. Croisetiere
	Jacques M. Croisetiere
	Vice President and Chief Financial Officer
DATE: October 26, 2006	ROHM AND HAAS COMPANY
	(Registrant)

56