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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q

For the quarterly period ended March 31, 2003

or

For the transition period from                      to

Commission file number 1-3507

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. Yes     [X]     No     [  ].

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

Common stock outstanding at April 30, 2003: 222,028,040 shares

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ROHM AND HAAS COMPANY AND SUBSIDIARIES
FORM 10-Q

INDEX

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PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Rohm and Haas Company and Subsidiaries
Consolidated Statements of Operations

See Notes to Consolidated Financial Statements

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Rohm and Haas Company and Subsidiaries
Consolidated Statements of Cash Flows

See Notes to Consolidated Financial Statements

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Rohm and Haas Company and Subsidiaries
Consolidated Balance Sheets

See Notes to Consolidated Financial Statements

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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 for the year ended December 31, 2002.

NOTE 2: NEW ACCOUNTING PRONOUNCEMENTS

•		Asset Retirement Obligations
		Effective January 1, 2003, we adopted Statement of Financial Accounting Standard (SFAS) No. 143, “Accounting for Asset Retirement Obligations.” This statement requires the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred. The liability is measured at discounted fair value and is adjusted to its present value in subsequent periods as accretion expense is recorded. The corresponding asset retirement costs are capitalized as part of the carrying value of the related long-lived assets and depreciated over the asset’s useful life. Our asset retirement obligations are primarily associated with the following: (1) the capping of certain wells, which are used in the manufacturing of Salt products, at the completion of their useful lives; and (2) the contractual requirement to remove or dismantle certain assets constructed on leased premises at the end of the lease term.
		The adoption of SFAS No. 143 resulted in a transition charge of $11 million ($8 million after-tax), reported as a Cumulative Effect of Accounting Change in the Consolidated Statement of Operations. At January 1, 2003 we recognized a liability of $14 million representing total asset retirement obligations, which is included in Other Liabilities in the Consolidated Balance Sheet. Additionally, the carrying values of the related long-lived assets were increased by $3 million, net of accumulated depreciation.
		In 2003, we will record a pre-tax charge to earnings of approximately $1 million to accrete the liability to present value and approximately $1 million for additional depreciation expense. These charges will continue through the asset retirement date.
		The disclosure requirements of SFAS No. 143 provide that the pro forma liability be presented upon adoption. Our pro forma asset retirement obligation would have been $13 million if SFAS No. 143 was adopted on January 1, 2002.
		The liability for certain asset retirement obligations cannot currently be measured as the retirement dates are not yet determinable. We will recognize the liability when sufficient information exists to estimate a range of potential retirement dates.
•		Debt Extinguishment and Lease Accounting
		In April 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” This statement amends SFAS No. 13, “Accounting for Leases,” and other existing authoritative pronouncements in order to make various technical corrections, clarify meanings, or describe their applicability under changed conditions and also limits the classification of debt extinguishments as extraordinary items. SFAS No. 145 is effective for years beginning after May 15, 2002. We adopted this statement effective January 1, 2003. For the three months ended March 31, 2002, we recorded losses on early extinguishment of debt of $7 million ($5 million after-tax). In accordance with this statement, we have now reclassified the $7 million pre-tax loss from extraordinary to continuing operations.

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•		Guarantor’s Accounting
		In November 2002, the FASB issued FASB Interpretation No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” (FIN 45). FIN 45 requires that the guarantor recognize, at the inception of certain guarantees, a liability for the fair value of the obligation undertaken in issuing such guarantees. FIN 45 also requires additional disclosure requirements about the guarantor’s obligations under certain guarantees that it has issued. The initial recognition and measurement provisions of this interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002 and the disclosure requirements were effective for financial statement periods ending after December 15, 2002. The adoption of this statement did not have a material impact on our financial statements.
•		Stock-Based Compensation
		In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure,” which amends SFAS No. 123, “Accounting for Stock-Based Compensation” to provide alternative methods of transition for a voluntary change to fair value based method of accounting for stock-based compensation. The statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements of the method of accounting for stock-based employee compensation and the effect of the methods used on reported results. While SFAS No. 148 does not require companies to account for employee stock options using the fair value method, the disclosure provisions of SFAS No. 148 are applicable to all companies with stock-based employee compensation, regardless of whether they account for that compensation using the fair value method of SFAS No. 123 or the intrinsic value method of APB Opinion No. 25, “Accounting for Stock Issued to Employees.” The transition guidance and annual and interim disclosure provisions of SFAS No. 148 were effective for fiscal years ending after December 15, 2002. We adopted the annual disclosure provisions as of December 31, 2002.
		Effective January 1, 2003, we prospectively adopted the fair value method of recording stock-based compensation as defined in SFAS No. 123. As a result, in 2003 we began to expense the fair value of stock options that were awarded to employees after the date of adoption. Prior to 2003, we did not recognize compensation expense for stock options. We expect the impact of adoption, under the prospective method, to increase stock-based compensation expense in 2003 by approximately $.01 per share, after-tax. Under the prospective method, the initial year impact is roughly one-third (based on our vesting policy) of the total estimated fair value of the 2003 grants. The annual impact of adopting this pronouncement will increase expense in subsequent years until a full “run rate” of expense is achieved. Results for prior years have not been restated.
		Additionally, in 2003 we made changes to our overall compensation program and increased the number of restricted stock grants awarded to employees. During the three months ended March 31, 2003, we issued approximately 1.1 million shares of restricted stock and restricted stock units to employees at a market value of $28.51 per share on date of grant. In accordance with SFAS No. 123 compensation expense will be recognized over the vesting period, which is typically five years.

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The disclosure requirements of SFAS No. 148 provide that pro forma net earnings (loss) and net earnings (loss) 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. Since we chose the prospective method of expensing stock options, the actual stock-based compensation expense recorded in the first quarter of 2003 is less than the amount calculated for this pro forma disclosure requirement.

*     Expense recognized in the first quarter of 2003 was less than $1 million

•		Variable Interest Entities
		In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities” (FIN 46). FIN 46 requires a variable interest to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity’s activities or entitled to receive a majority of the entity’s residual returns or both. The consolidation requirements apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to older entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. Management is currently assessing the impact of the new standard on our financial statements.
•		Derivative Instruments and Hedging Activities
		In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” to improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. The statement amends and clarifies financial accounting reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” The statement clarifies: 1) what circumstances a contract with an initial net investment meets the characteristic of a derivative; 2) when a derivative contains a financing component; and 3) amends the definition of an “underlying.” SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003. Management is currently assessing the impact of the new standard on our financial statements.

NOTE 3: SEGMENT INFORMATION

We operate six business segments: Coatings, Adhesives and Sealants, Electronic Materials, Performance Chemicals, Salt and Monomers as described below. The Coatings, Electronic Materials and Performance Chemicals business segments aggregate operating segments.

•		Coatings
		This segment is comprised of three businesses: Architectural and Functional Coatings; Powder Coatings; and Automotive Coatings. Architectural and Functional Coatings produces acrylic emulsions, additives and

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		colorants that are used to make industrial and decorative coatings, varnishes and specialty finishes. This business also provides similar technology for use in the paper industry, graphic arts applications, leather garments, fiber-filled materials and textile finishes. Automotive Coatings formulates paints for the plastic interior and exterior components of cars and trucks. Powder Coatings produces a comprehensive line of thermoset and thermoplastic coatings used on everything from backyard grills to kitchen cabinetry and industrial shelving.
•		Adhesives and Sealants
		This segment provides components as well as fully formulated adhesives and other products, based on a wide range of technologies, used to make carton sealing tapes, pressure-sensitive labels, flexible packaging, automotive components and other specialty laminates.
•		Electronic Materials
		This segment provides cutting-edge technology for use in telecommunications, consumer electronics and household appliances. Microelectronics provides an extensive assortment of critical imaging and non-imaging chemicals needed to reproduce complicated circuitry designs on integrated circuits. Rodel provides high-tech pads and slurries used to make ultra smooth and uniform layers on integrated circuits. The Printed Wiring Board business provides essential chemistry for use in the manufacture of high-density printed circuits and circuit boards, and the Electronic and Industrial Finishing business provides chemical processes used to metallize electronic components and devices.
•		Performance Chemicals
		This segment includes the sales and operating results of Plastics Additives, Process Chemicals (formed by combining Inorganic and Specialty Solutions and Ion Exchange Resins), Consumer and Industrial Specialties and other smaller business groups. These businesses provide products that serve a diverse set of markets, from consumer products, to additives used to manufacture plastic and vinyl products, to water treatment and purification processes for food and pharmaceutical markets, to newsprint processing.
•		Salt
		Some of the most recognized consumer brand names and product symbols are found here, including the leading brand of table salt in the United States – Morton Salt, with its little Umbrella 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, highway ice control, food processing, chemical/industrial use and agriculture.
•		Monomers
		This segment produces methyl methacrylate, acrylic acid and associated esters as well as specialty monomer products. Monomers serve as the building block for many of the acrylic technologies in our other business segments and are sold externally for applications such as superabsorbant polymers and acrylic sheet.

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NOTE 4: GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

The changes in the carrying amount of goodwill for the three months ended March 31, 2003, by business segment, are as follows:

Other Intangible Assets

Indefinite-lived Intangible Assets

The following table provides information regarding our indefinite-lived intangible assets, which all pertain to our Salt segment, as of March 31, 2003:

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

Finite-lived Intangible Assets

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

Amortization expense for finite-lived intangible assets was $17 million for the three months ended March 31, 2003 compared to $18 million for the three months ended March 31, 2002. Estimated amortization expense for 2003 and the five succeeding fiscal years will be approximately $67 million per year.

NOTE 5: ACQUISITIONS AND DIVESTITURES

In March 2003, we completed the sale of our dry film photoresist business to Eternal Chemical Company. As a result of this sale, we will close our North American and European dry film photoresist manufacturing operations. Eternal Chemical Company will manufacture its newly expanded dry film Photoresist product line under the Eternal company label. As part of the divestiture, we have entered into an agreement to distribute the entire Eternal dry film photoresist product line in North America and Europe, as well as to our existing customers in Asia.

In March 2003, we increased our ownership in Rodel at an additional cost of $4 million, retaining a 99% ownership. The additional cost was recorded as goodwill. Rodel is a leader in precision polishing technology serving the semiconductor, memory disk and glass polishing industries.

We completed the following significant acquisitions in 2002:

In September 2002, we acquired certain assets and liabilities of Ferro Corporation’s European powder coatings business for approximately $60 million. Ferro Corporation’s powder coatings business produces materials used mostly by manufacturers of metal products to finish materials like window frames and automotive wheels.

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

In December 2002, we acquired the global plastics additives business of our joint venture partner, Kureha Chemical for approximately $57 million. Included in the acquisition are the commercial operations throughout the Asia-

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Pacific region and other areas along with the manufacturing facilities and laboratories in Singapore, as well as technical service laboratories in Beijing. Additionally, we gained full control of manufacturing sites in Singapore and Grangemouth, Scotland, which were sites previously part of the joint venture. The acquisition effectively terminates our joint ventures with Kureha Chemical. We have not yet finalized the purchase price allocation for this acquisition.

NOTE 6: PROVISION FOR RESTRUCTURING AND ASSET IMPAIRMENTS

2003 Restructuring Activities

In March 2003, we recognized a net charge of $5 million for restructuring and asset impairments. This net charge was comprised of: 1) a provision for employee separation benefits associated with cost savings initiatives throughout several of our businesses of $11 million; 2) non-cash asset impairment charges identified by our streamlining activities of $3 million; 3) gains of $5 million from the sale of idle plants; and 4) a net gain of $4 million resulting from the sale of our dry film business to Eternal Chemical in March 2003. The net gain of $4 million includes the gain on sale of the dry film business, a provision of $7 million for employee separation benefits and asset impairment charges of $3 million.

Employee separation benefits primarily represent severance pay and other direct costs associated with the elimination of approximately 340 positions, the largest single component pertains to the sale of the dry film business. As of March 31, 2003, the entire $18 million provision recorded for severance and employee benefits was included in Accrued Liabilities in the Consolidated Balance Sheet. No employees have separated from the Company as of March 31, 2003; all initiatives will be complete within one year.

2002 Restructuring Activities

In 2002, we recognized $177 million for restructuring and asset impairments. This charge was comprised of $191 million for the impairment of certain long-lived assets and costs associated with workforce reductions. Offsetting this charge was $14 million of income resulting from pension settlement gains associated with individuals terminated from our pension plans and changes to estimates, both of which were in connection with our 2001 repositioning. The provision for severance, employee benefits and other costs was $33 million. As of March 31, 2003, $22 million was included in Accrued Liabilities in the Consolidated Balance Sheet and a roll forward of activity in the first quarter of 2003 is presented below.

2001 Restructuring Activities

In 2001, we launched a major repositioning initiative to enable several of our businesses to respond to structural changes in the global marketplace. In connection with these repositioning initiatives, we recognized a $330 million restructuring and asset impairment charge in the second quarter of 2001. Offsetting the charge of $330 million recorded in June 2001, was a pre-tax gain of $18 million from the recognition of settlement gains recorded for employees terminated from our pension plans in connection with restructuring activities and changes in estimates to restructuring liabilities established for the 2001 initiatives.

As of December 31, 2002, substantially all of the efforts were materially completed, with related demolition and dismantlement activity to be completed by the fourth quarter of 2003.

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As of March 31, 2003, the remaining restructuring reserves of $3 million are included in Accrued Liabilities in the Consolidated Balance Sheet. As of March 31, 2003, 36 positions of 1,560 identified remain to be eliminated. All remaining activities will be complete by December 31, 2003.

NOTE 7: CONTINGENT LIABILITIES, GUARANTEES AND COMMITMENT

Environmental

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

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

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

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

Whitmoyer Site

The Whitmoyer site, located in Jackson Township, Lebanon County, Pennsylvania, was the location of a veterinary pharmaceutical manufacturing facility. When Rohm and Haas acquired the site in 1964, it discovered arsenic contamination and we voluntarily undertook extensive remedial measures with the guidance of the Pennsylvania Department of Health. In 1978, we sold the site to Beecham, Inc., which in turn sold the site to Stafford Laboratories in 1982. GlaxoSmithKline is the successor entity to Beecham, Inc., and the only other solvent known PRP for this site. Remediation on the site has been completed except for ongoing groundwater remediation. In

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January 2003, the Company settled litigation with GlaxoSmithKline out of court and based on this settlement adjusted the accrual as of December 31, 2002 to reflect the agreed-upon allocation of the remediation costs.

Wood-Ridge Site

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

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

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

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

Moss Point

During 1996, the EPA notified Morton of possible irregularities in water discharge monitoring reports filed by its Moss Point, Mississippi plant in early 1995. Morton investigated and identified other environmental issues at the plant. Although at the date of acquisition Morton had accrued for some remediation and legal costs, we revised these accruals as part of the allocation of the purchase price of Morton based on our discussions with the authorities and on the information available as of June 30, 2000. In 2000, we reached agreement with the EPA, the Department of Justice and the State of Mississippi, resolving these historical environmental issues. The agreement received court approval in early 2001. The final settlement included payment of $20 million in civil penalties, which were paid in the first quarter of 2001, $2 million in criminal penalties, which were paid in the fourth quarter of 2000, and $16 million in various Supplemental Environmental Projects. The accruals established for this matter were sufficient to cover these and other related costs of the settlement. In December 2001, we closed the chemicals portion of the Moss Point facility and will be closing the electronic materials portion as part of the sale of the dry film business. In December 2002 a complaint was filed in Mississippi on behalf of over 700 plaintiffs against Morton International, Rohm and Haas, Joseph Magazzu and the Mississippi Department of Environmental Quality alleging personal injury and property damage caused by environmental contamination. Similar complaints were filed in March 2003 in Mississippi on behalf of additional plaintiffs. At this time, we see no basis for these claims and we will defend these cases vigorously.

Houston Plant

Our Houston plant is an approximately 900 acre facility located in Deer Park, Texas. The Texas Commission on Environmental Quality (TCEQ) issued a Resource Conservation and Recovery Act (RCRA) Part B Permit and a Compliance Plan calling for a RCRA Facility Investigation for certain Solid Waste Management Units (SWMU’s) and remediation of other units. Pursuant to the Compliance Plan and subsequent investigations, the facility continues to operate groundwater recovery systems at two units, has investigated and continues to monitor one unit,

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has submitted a Corrective Measures Study for another unit, and has submitted the Affected Property Assessment Report (APAR) concluding that no further action is required for four units. Final approval of the Corrective Measures Study and the APAR is pending TCEQ’s review.

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. Investigation of contamination of shallow soils and groundwater is nearly complete, with further investigation of deeper groundwater ongoing. Remediation systems for product and shallow groundwater recovery are in place and awaiting authorization from New Jersey Authorities to operate, and soil remediation measures are undergoing evaluation. An accrual was recorded for known remediation activities in September 2000, and revised in September 2002, to address information obtained during the ongoing site investigation.

Ringwood Plant

Following investigation after a railcar spill in 1984, a groundwater recovery system was voluntarily implemented at our Ringwood, Illinois facility. We expect to implement an upgrade to the existing system in early 2004. The ongoing groundwater remediation is being managed under the Illinois Environmental Protection Agency Voluntary Cleanup Program.

Goose Farm

A Morton predecessor company had a Trenton, New Jersey facility. Waste from this facility was disposed of at the Goose Farm site, located southeast of Trenton. In 1993, Morton began a soil flushing and groundwater pump and treat system to address groundwater contamination at Goose Farm. In combination with operation and maintenance activity, this effort is projected to continue through at least 2010.

Groundwater Treatment and Monitoring

Major remediation for certain sites, such as Kramer and Woodlands, has been completed. We continue; however, groundwater remediation and monitoring programs. Reserves for these costs have been established.

Other Environmental Matters

The amount charged to earnings pre-tax for environmental remediation was $4 million and $5 million for the three months ended March 31, 2003 and 2002, respectively. The reserves for remediation were $124 million and $123 million at March 31, 2003 and December 31, 2002, respectively, and are recorded as liabilities (current and long-term) in the Consolidated Balance Sheets. These reserves include amounts resulting from the allocation of the purchase price of Morton. We are pursuing lawsuits over insurance coverage for certain environmental liabilities. It is our practice to reflect environmental insurance recoveries in results of operations for the quarter in which the litigation is resolved through settlement or other appropriate legal processes. Resolutions typically resolve coverage for both past and future environmental spending.

In addition to accrued environmental liabilities, we have reasonably possible loss contingencies related to environmental matters of approximately $70 million at March 31, 2003 and December 31, 2002, respectively. We have reserved for the costs we believe are probable and estimable and other costs which have not met the definition of probable have been included in our disclosure of reasonably possible loss contingencies. Further, we have identified other sites, including our larger manufacturing facilities, where additional future environmental remediation may be required, but these loss contingencies cannot reasonably be estimated at this time. These matters involve significant unresolved issues, including the number of parties found liable at each site and their ability to pay, the outcome of negotiations with regulatory authorities, the alternative methods of remediation and the range of costs associated with those alternatives. We believe that these matters, when ultimately resolved, which may be over an extended period of time, will not have a material adverse effect on our consolidated financial position or consolidated cash flows, but could have a material adverse effect on consolidated results of operations or cash flows in any given period.

Other Litigation

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

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In addition, the Company has been served with seven private civil antitrust actions in U.S. District Court for the Eastern District of Pennsylvania, one in the Southern District of New York and one in State Court in Ohio. These actions have been brought against Rohm and Haas and other producers of plastics additives products by purchasers of these products and seek civil damages as a result of alleged violations of the antitrust laws. The named plaintiffs in each of these actions are seeking to sue on behalf of all similarly situated direct 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. Ohio state antitrust law provides for double damage indemnity. We do not believe these cases have merit and will defend them vigorously.

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

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

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

Indemnifications

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

NOTE 8: DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

As discussed in our Annual Report filed on Form 10-K with the SEC, we utilize derivative and non-derivative instruments to manage market risk arising out of changes in foreign exchange rates, interest rates and commodity prices, which could have a material impact on our earnings, cash flows and fair values of assets and liabilities. We have established policies governing use of derivative and nonderivative hedging instruments. We do not use derivative instruments for trading or speculative purposes, nor are we a party to any leveraged derivative instruments or any instruments of which the values are not available from independent third parties. We manage counter-party risk by entering into derivative contracts only with major financial institutions of investment grade credit rating and by limiting the amount of exposure to each financial institution.

A summary of the after-tax activity in Accumulated Other Comprehensive Income (Loss) relating to our use of derivative and nonderivative instruments qualifying as hedges is as follows:

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Accumulated Gain/(Loss) From Derivatives as a Component of Accumulated Other Comprehensive Income (Loss)

The accumulated loss of $67 million as of March 31, 2003 is comprised of: 1) a loss of $65 million from the hedge of net investments; 2) a $4 million loss from foreign currency cash flow hedges; and 3) a gain of $2 million from commodity hedges.

The accumulated gain of $48 million as of March 31, 2002 is comprised of: 1) a gain of $47 million from the hedge of net investments; and 2) a gain of $1 million from commodity hedges.

Additional information relating to our currency and commodity hedges, including the reclassification to earnings in the first quarter of 2003 and 2002 can be found below.

Currency Hedges

We enter into foreign exchange option and forward contracts to reduce the variability in the functional-currency-equivalent cash flows associated with foreign currency denominated forecasted transactions. These foreign exchange hedging contracts are designated as cash flow hedges to cover portions of our exposure over the next twelve-month period. As of March 31, 2003 and 2002, the total notional value of foreign currency cash flow hedging contracts in U.S. dollars was $228 million and $191 million, respectively.

Included in Accumulated Other Comprehensive Income (Loss) at March 31, 2003 is a $4 million loss, net of income taxes, which represents the effective portion of foreign currency cash flow hedges that will be reclassified to earnings in the following twelve-month period. The amount recorded within Accumulated Other Comprehensive Income (Loss) at March 31, 2002 was immaterial. The actual amounts to be charged to earnings in the following twelve-month period will differ from those amounts as a result of changing market conditions. During the three months ended March 31, 2003, a $1 million loss, net of income taxes, was reclassified to earnings out of Accumulated Other Comprehensive Income (Loss). A $3 million gain, net of income taxes, was reclassified to earnings out of Accumulated Other Comprehensive Income (Loss) during the three months ended March 31, 2002. There was no amount charged to earnings during 2002 and 2003 as an ineffective portion of changes in fair values of hedges. Both the effective and ineffective portions of cash flow hedges recorded in the Consolidated Statements of Operations are classified in Other Income, net.

We employ foreign exchange forward and swap contracts to reduce the exchange rate risk associated with recognized assets and liabilities denominated in non-functional currencies, including intercompany loans. These contracts generally require exchange of one foreign currency for another at a fixed rate at a future date. These contracts are designated as foreign currency fair value hedges with maturities generally less than twelve months. The carrying amounts of these contracts were adjusted to their market values at each balance sheet date and their related gains or losses are recorded in Other Income, net. Total foreign currency fair value hedges outstanding at March 31, 2003 and 2002 were $285 million and $315 million, respectively.

We utilize foreign exchange forward and currency collar contracts together with non-functional currency borrowings to hedge the foreign currency exposures of the net investments in foreign operating units in Europe and Japan. These transactions are designated as hedges of net investments. Accordingly, the effective portions of foreign exchange gains or losses are recorded as part of the Cumulative Translation Adjustment, which is part of Accumulated Other Comprehensive Income (Loss). At March 31, 2003 and 2002, the effective portion of changes in fair values of hedges, recorded within Accumulated Other Comprehensive Income (Loss) was a $65 million loss and a $47 million gain, after-tax, respectively. The amount that was considered ineffective on these net investment hedges was immaterial during the first quarter of 2003 but increased interest expense by $1 million during the first quarter of 2002. Total derivative and nonderivative positions designated as hedges of net investments outstanding at March 31, 2003 and 2002 were $867 million and $824 million, respectively.

Commodity Hedges

We use commodity swap, option, and collar contracts to reduce the effects of changing raw material prices. These contracts are designated and accounted for as cash flow hedges. Included in Accumulated Other Comprehensive Income (Loss) at March 31, 2003 and 2002 is a $2 million gain and a $1 million gain, net of income taxes, respectively, which represent the effective portion of cash flow hedges that will be reclassified to earnings in the following twenty-four month period. The actual amounts to be charged to earnings in the following twenty-four month period will differ from these amounts as a result of changing market conditions. For the three months ended March 31, 2003 and 2002, the amount charged to earnings out of Accumulated Other Comprehensive Income (Loss) was a $3 million gain and a $2 million loss, after-tax, respectively, which was recorded as a component of underlying Costs of Goods Sold. The notional value of commodity hedges outstanding at March 31, 2003 and 2002 was $58 million and $31 million, respectively

Interest Rate Hedges

We use interest swap agreements to optimize the worldwide financing costs by maintaining a desired level of floating rate debt. In 2001, we entered into interest swap agreements with a notional value of $950 million, which converted the fixed rate components of the $450 million notes due July 15, 2004 and the $500 million due July 15, 2009 to a floating rate based on 3 month LIBOR. Of these swap agreements, the $500 million notional value contracts maturing in 2009 and $75 million maturing in 2004 contain a credit clause where each counter-party has a right to settle at market price if the other party is downgraded below investment grade. These interest rate swap agreements are designated and accounted for as fair value hedges. The changes in fair values of interest swap agreements are marked to market through income together with the offsetting changes in fair value of underlying

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notes using the short cut method of measuring effectiveness. As a result, the carrying amount of these notes was increased by $91 million at March 31, 2003 as compared to $94 million at December 31, 2002 while the fair value of swaps was reported as Other Assets in the same amount. The swap agreements reduced interest expense by $10 million and $9 million during the three months ended March 31, 2003 and 2002, respectively.

No amounts were reclassified to earnings during the three months ended March 31, 2003 and 2002, in connection with forecasted transactions that were no longer considered probable of occurring.

As of March 31, 2003 and 2002, we maintain hedge positions of immaterial amounts that are effective as hedges from an economic perspective but do not qualify for hedge accounting under SFAS No. 133, as amended. Such hedges consist primarily of emerging market foreign currency option and forward contracts, and have been marked to market through income, with an immaterial impact on earnings.

NOTE 9: INVENTORIES

Inventories consist of the following:

NOTE 10: COMPREHENSIVE INCOME (LOSS)

The components of comprehensive income (loss) are as follows:

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NOTE 11: EARNINGS PER SHARE

The difference in common shares outstanding used in the calculation of basic and diluted earnings per common share is primarily due to the effect of stock options as reflected in the reconciliation that follows: