The following discussion should be read in connection with the information contained in the Consolidated Financial Statements and Notes thereto. All references to individual Notes refer to Notes to the Consolidated Financial Statements. Within the following discussion, unless otherwise stated, "quarter" and "nine-month period" refer to the third quarter of 2008 and the nine months ended September 30, 2008. All comparisons are with the corresponding period in the previous year, unless otherwise stated. All dollar amount references and tables are in millions.

Business Overview

Business Profile - Market and Geographic Concentration

Hercules (the "Company") is a global solutions provider of specialty chemicals, services and applied chemistry expertise primarily for water-based products and water-borne systems. The Company serves a number of markets including pulp and paper, the regulated industries of food, pharmaceuticals and personal care, paints and adhesives, construction materials and energy.

More than 50% of the Company's revenues are generated outside of North America. Net sales by region expressed as a percentage of total net sales for the three and nine months ended September 30, 2008 and 2007 were:

                   Three Months Ended           Nine Months Ended
                      September 30,               September 30,
                  2008            2007          2008           2007
North America          45 %            47 %          46 %         47 %
Europe                 34 %            35 %          36 %         36 %
Asia Pacific           13 %            12 %          12 %         11 %
Latin America           8 %             6 %           6 %          6 %
Consolidated          100 %           100 %         100 %        100 %

Business Segments

The Company operates through two reportable segments: Paper Technologies and Ventures ("PTV") and the Aqualon Group ("Aqualon"). PTV includes the following business units: Paper Technologies and the Ventures business which includes Pulping chemicals, Water treatment chemicals, Lubricants, and Building and Converted products. Aqualon includes the following business units: Coatings and Construction, Regulated Industries, and Energy and Specialties.

Net sales for the three and nine months ended September 30, 2008 and 2007 as a percent of total net sales, by segment, were:

                                     Three Months Ended           Nine Months Ended
                                        September 30,               September 30,
                                    2008            2007          2008           2007
Paper Technologies and Ventures          52 %            53 %          52 %         54 %
Aqualon Group                            48 %            47 %          48 %         46 %
    Consolidated                        100 %           100 %         100 %        100 %

Key Developments

The following financial reporting developments had an impact on the Company's results of operations and financial position as well as the overall presentation of financial information: (1) the entry into a definitive merger agreement with Ashland Inc., (2) change in method of accounting for qualified U.S. and U.K. defined-benefit pension plans (3) the acquisition of Logos Quimica Ltda., (4) settlement of the Vertac response cost matter and (5) the adoption of Statement of Financial Accounting Standards No. 157, "Fair Value Measurements" ("SFAS 157"). A discussion of these developments is provided as follows.

Entry into a Definitive Merger Agreement with Ashland Inc.

On July 11, 2008, the Company announced that it had entered into a definitive merger agreement (the "Agreement") with Ashland under which Ashland would acquire all of the outstanding shares of the Company for $18.60 in cash and 0.093 of a share of Ashland common stock for each share of the Company's common stock. The merger is conditioned upon, among other things, the approval of the Company's stockholders, the receipt of regulatory approvals and other closing conditions. Necessary regulatory approvals required for the transaction to close have been received from both domestic and international authorities. Assuming the satisfaction of the remaining conditions, the transaction is expected to close during November of 2008. Additional information is provided in Note 18 to the Consolidated Financial Statements, the definitive proxy statement/prospectus filed by the Company with the SEC on October 3, 2008 and in a registration statement on Form S-4 filed by Ashland with the SEC.

Change in Method of Accounting for U.S. and U.K. Defined Benefit Pension Plans

Effective January 1, 2008, the Company changed its method of accounting for its qualified defined-benefit pension plans in the U.S. and U.K. with respect to: (a) the basis for the determination of the "market-related value" of plan assets from a smoothed value to the "fair value" and (b) a reduction in the amortization period for gains and losses in excess of the "corridor" from a period representing the average remaining service period of active employees to immediate recognition in the subsequent year. The change has been applied on a retrospective basis to all prior periods including those that ended during 2007. The Consolidated Financial Statements and Notes thereto as well as the disclosures included in the discussions of Results of Operations that follow have been adjusted accordingly. Additional detail regarding the change in accounting method is provided in Note 6 to the Consolidated Financial Statements.

Acquisition of Logos Quimica Ltda.

At the end of the second quarter of 2008, the Company acquired Logos Quimica Ltda. ("Logos Quimica"), a Brazil-based specialty chemicals company. The total transaction value is approximately 34 million Brazilian Reais or $21.3 million. A total of 31.5 million Reais or $18.1 million has been paid through the end of the third quarter. The pulp products business of Logos Quimica is being integrated into the Ventures component of PTV and the remaining small portion of Logos Quimica is being integrated into the Aqualon segment to market products into the coatings industry. Additional information is provided in Note 3 to the Consolidated Financial Statements.

Settlement of Vertac Response Cost Matter.

The Company reached an agreement with the U.S. Government with respect to response costs associated with the Vertac site for $14.5 million (see Note 8 to the Consolidated Financial Statements).

Adoption of SFAS 157

The Company adopted SFAS 157 effective January 1, 2008. SFAS 157 provides for expanded disclosures of assets and liabilities that are recognized or disclosed at fair value on a recurring basis. The Company has identified its derivative financial instruments used to facilitate its foreign currency exchange rate risks associated with certain transactions as well as its Euro-denominated net investment in certain subsidiaries as within the scope of the initial application of SFAS 157. The expanded disclosures required by SFAS 157 are provided in Note 17 to the Consolidated Financial Statements.

Critical Accounting Estimates

Reference is made to the Company's Annual Report on Form 10-K for the year ended December 31, 2007 as well as a Current Report on Form 8-K filed on July 30, 2008 for a complete description of the Company's critical accounting estimates. However, the following development is discussed below with respect to its applicability during the three and nine months ended September 30, 2008 and future periods.

Pension and Other Postretirement Benefits

In connection with the recently implemented change in the plan investment methodology to a liability-driven investment ("LDI") strategy for the Company's U.S. and U.K. defined-benefit pension plans, the Company's plan asset risk profile has changed significantly. In particular, the LDI strategy is designed to substantially neutralize the interest rate risk associated with fluctuations in the discount rate that determines the fair value of the projected benefit obligation as well as minimize the impact of asset value volatility. Under this strategy, approximately 85% of the plan's assets have been invested in interest rate-sensitive debt instruments. This investment strategy is designed to reduce ongoing funding requirements for a fully-funded plan to a level that approximates that plan's annual service cost.

As a result of the LDI strategy discussed above, a 100-basis point decrease or increase in the discount rate would have an unfavorable or favorable impact of $165 million on the projected benefit obligation of the qualified U.S. defined-benefit pension plan, which is the Company's most significant plan. However, this change should be offset to a large extent by a commensurate movement in the plan assets.